On August 24, President Biden announced major changes to federal student loans. These new rules only apply to federal student loans and not private loans.
Key points we know from the announcement:
- Loan payments that were scheduled to restart after August 31 have been automatically postponed through December 31.
- Up to $10,000 of federal loans will be cancelled for borrowers making less than $125,000 for individual and $250,000 for married couples or heads of household. For those with Pell Grants, up to $20,000 of loan cancellation is available. The cancellation amount is capped by the amount of student loan debt.
- An additional income-driven repayment plan will become available, reducing future loan payments from 10% of discretionary income to 5% of discretionary income. Also, the amount of income considered discretionary will be reduced. Discretionary income is currently the amount that exceeds 150% of the federal poverty guideline. This is changing to the amount exceeding 225% of the federal poverty guideline. Also, for borrowers with an “original loan balance of $12,000 or less,” the balance will be forgiven after 10 years, even if they don’t qualify for PSLF. Finally, if your monthly payment does not cover your loan interest, unpaid interest will not accrue.
- For 8 million borrowers, loan cancellation will be automatic based on income data the government already has about the borrower. For everyone else, an application will become available in coming weeks. To receive an alert when the application is open, sign up here.
- The temporary changes to the public service loan forgiveness program are still available through October 31, 2022. Anyone who made monthly payments, but those payments were not considered qualifying payments for various reasons like being enrolled in a non-qualifying repayment plan, can have their record updated and corrected. Complete the Temporary Expanded PSLF form here.
Key points we don’t know:
- What is considered income for the $125,000 individual / $250,000 married? Is it adjusted gross income, which can be manipulated with pretax contributions to IRAs, 401(k)s, and 403(b)s, gross income before any above the line deductions or some other income definition?
- If you file taxes as married filing separately, do you combine your income for purposes of $250,000 married threshold? This may not matter in Wisconsin since spouses equalize their income when filing separately. But in other states, each spouse reports their own income so they may qualify under the individual limit, but not the married limit.
- If you switch to the new income-driven repayment plan, will your unpaid interest capitalize (be added to principal) as it does when you switch between existing plans?
- Is the “original loan balance of $12,000 or less” determined as each individual loan, the total of loans when repayment starts or the balance at the end of 10 years? What about consolidation loans that exceed $12,000, but are made up of loans under $12,000?
What other questions need to be answered? Join the conversation thread here.*
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Mark Ziety, CFP®, AIF®
WisMed Financial, Inc. part of the Wisconsin Medical Society.
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