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Student Loan Forgiveness: Everything You Need to Know

Student Loan Forgiveness: Everything You Need to Know

October 26, 2022
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On Aug. 24, 2022, President Biden announced an unprecedented plan to eliminate student loan debt for millions of borrowers.1 This plan forgives up to $20,000 in federal student loan debt for qualified borrowers, including those holding Parent Plus loans.

Here are some of the most common questions about this student loan forgiveness plan and some of the additional benefits to be extended to borrowers who still have student loans after forgiveness is processed. 

What Forgiveness Does the Plan Provide?

This student loan plan cancels up to $10,000 in federal student loan debt for individual borrowers who had an adjusted gross income (AGI) of less than $125,000 in 2020 or 2021 or borrowers who file jointly and whose households had an AGI of less than $250,000 in 2020 or 2021.

Borrowers meeting these income limits who received Pell Grants in college are eligible to have up to $20,000 in federal student loan debt canceled. 

How Many Students Benefit From This Plan?

Though there are no detailed estimates, the Wall Street Journal reports that the plan benefits “the majority” of over 43 million people who hold a total of $1.6 trillion in federal student loan debt, completely wiping out student loan debt for about 15 million borrowers.2 

What Else Does the Plan Provide? 

Along with the forgiveness of federal student loans, Biden’s plan continues to extend the payment and interest-rate pause on these loans through Dec. 31, 2022. The White House’s announcement indicated that this would be the last such extension offered. The plan also imposes new limits on income-based repayment (IBR) calculations. 

Is Loan Forgiveness Taxable?

This loan forgiveness is not federally taxable, but some state laws may allow them to tax the forgiven amount as imputed income to the borrower. Consult with a tax or financial professional to see the impact on your 2022 state income tax return.

Does Forgiveness Apply Retroactively?

Unfortunately, if you have already paid off your federal student loans, you do not receive any benefit from the $10,000 to $20,000 loan forgiveness. 

Are Parent Plus Loans Eligible for Forgiveness? 

Yes! Not only does this forgiveness impact those who took out loans for their education as an undergraduate, but it also provides forgiveness for Parent Plus and Grad Plus loans taken out by parents on behalf of their student children.

What is currently unclear is whether the $20,000 Pell Grant forgiveness applies to Parent Plus loans when the student—but not the parent—received a Pell Grant. 

What Do Borrowers Need to Do? 

The U.S. Department of Education is still analyzing its processes and plans to provide more information on applying for forgiveness in the fall and winter of 2022. The Department has confirmed that it plans to release more details before January 2023, when borrowers’ payments resume.

Until this guidance is official, do not fall victim to any companies’ attempts to apply for forgiveness on your behalf, as these are likely scams. Also, be sure that the Department of Education and your student loan servicer have up-to-date and accurate contact information for you. Further guidance may come by email, snail mail, or both.

Footnotes

FACT SHEET: President Biden Announces Student Loan Relief for Borrowers Who Need It Most, The White House,
https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/24/fact-sheet-president-biden-announces-student-loan-relief-for-borrowers-who-need-it-most/

2 Student-Loan Forgiveness: Who Qualifies for Biden’s Plan, and What It Means for Borrowers, The Wall Street Journal, https://www.wsj.com/articles/bidens-student-loan-forgiveness-plan-who-qualifies-and-how-much-debt-will-be-canceled-11661362340?mod=rss_markets_main


Important Disclosures

Content in this material is for educational and general information only and not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by WriterAccess.

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