Everything To Know About Student Loan Forgiveness for September 2022

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The student loan forgiveness plan announced last week by the Biden administration provides sweeping relief to federal student loan borrowers in the form of both canceled debt and an extension of the payment pause put into effect more than two years ago.

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The announcement came on Aug. 24, just a week before the payment pause was set to end. Many cheered the relief it will provide to millions of borrowers, while others said it is unfair to borrowers who have already paid their loans in full.

Here’s a roundup of what you need to know about student loan forgiveness as we head into September.

The Basics

The Biden plan extends the payment pause through the end of the year, with no repayments for any borrowers due until after Dec. 31, 2022. It will also cancel $10,000 worth of debt for any individual holders of federal student loans who earn less than $125,000 a year, or for married couples filing jointly who earn less than $250,000 a year.

An additional $10,000 will be canceled for borrowers who received Federal Pell Grants, which are provided by the U.S. Department of Education to students in financial need. 

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Parent Plus Loans Included

Student loan forgiveness also applies to Parent Plus loans, according to a tweet from Washington Post reporter Jeff Stein. These loans are issued directly to parents of students rather than to the students themselves. The Parent Plus program was not mentioned in a White House fact sheet accompanying the forgiveness plan, so more details are expected to be released in the coming weeks.

Unlike most student loans that impose a limit on the amount of undergraduate debt a student can borrow, Parent Plus loans provide the full cost of attendance, including tuition, room and board, books and personal expenses.

Other Loans Will Be Cut in Half

Also included in the plan is a Department of Education proposal that would cut monthly payments in half for undergraduate loans, raise the amount of income that would be protected from repayment, forgive some loan balances 10 years earlier than current rules allow and simplify the process of enrolling in certain payment plans.

Under this proposal, the Education Department would do the following:

  • Reduce the amount borrowers must pay each month to 5% of discretionary income from 10% previously.
  • Raise the amount of income that is considered non-discretionary and therefore protected from repayment, guaranteeing that no borrower earning under 225% of the federal poverty level would have to make a student loan payment. The current federal poverty level is roughly the annual equivalent of a $15 minimum wage for a single borrower.
  • Forgive loan balances after 10 years of payments — down from 20 years previously — for borrowers with original loan balances of $12,000 or less.
  • Cover the borrower’s unpaid monthly interest for as long as they make their monthly payments.
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The Application Process

Details on exactly how to apply for forgiveness remain unclear less than a week after the announcement. However, the White House fact sheet said that the Education Department will “work quickly and efficiently to set up a simple application process for borrowers to claim relief. The application will be available no later than when the pause on federal student loan repayments terminates at the end of the year.”

While you wait for more details and instructions on the application process, there are certain steps you should take. First, verify your income according to your 2020 and 2021 tax returns to make sure you meet the eligibility threshold concerning earnings. As mentioned previously, only borrowers who earn under $125,000 per year (or $250,000 for a married couple filing taxes jointly) can apply for federal student loan cancellation.

If you are a Pell Grant recipient, you can access pertinent records by logging into your Free Application for Federal Student Aid account. Make sure your FAFSA profile information is up-to-date, and keep your loan documentation and tax returns for the last two years handy.

You also should sign up for federal student loan borrower updates through the Department of Education so you’ll be notified when any new information is available.

What If You Are Still in School?

Loan forgiveness is not restricted to former students — borrowers who are still in school also qualify. Per the White House fact sheet, current students with loans “are eligible for this debt relief.” Borrowers who are dependent students will be eligible for relief based on their parents’ income, rather than their own income. Eligibility for independent students using their own income to pay for college will be based on that income.

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Don’t Expect Any More Extensions

The most recent extension has been framed as the last of its kind, with payments set to start at the beginning of 2023. For many families, the temporary reprieve has been more than a COVID-era benefit — it has also taken some of the pressure off paying an unmanageable bill. Ending the extension could lead to significant financial hardship for some borrowers.

A survey conducted by U.S. News & World Report found that four in 10 respondents said they can’t afford their student loan payments. About one-fifth (22%) carry balances of $30,000 to $40,000, while10% have balances above $50,000.

New Tech Aims To Help Out

Spinwheel, a consumer debt management platform that lets companies embed debt solutions in their applications, launched Spinwheel CARES on Aug. 24 to help Americans prepare for the potential end of the payment pause.

“This is welcome news for many borrowers but will fall short of many expectations,” Tomás Campos, CEO and co-founder of Spinwheel, told GOBankingRates. “At the same time, one-time cancellation fails to address underlying issues: Rising costs, difficult-to-manage payments, and little transparency in the servicing market. Our hope is that this will at least provide the certainty that encourages government and industry to come together to address this in a way that fosters responsible innovation in the space.”

Beware of Scams

The new student loan debt relief plan might be welcome news to borrowers, but it also creates a “perfect storm” for scam artists, according to Zulfikar Ramzan, the chief scientist at consumer cybersecurity firm Aura.

New scams appeared immediately after Biden’s announcement — mainly in the form of fraudsters posing as government officials or student loan officers and offering to help borrowers retrieve the $10,000 or $20,000 in loan forgiveness.

“Within hours, people started getting phone calls. We’ve been seeing very early signs of activity that we are monitoring closely,” Ramzan said. “Scammers have had a banner year because there’s so many opportunities to go after people. And in that way there’s no rest for the weary, so with the announcement regarding student loan debt relief we’ve immediately seen scammers take advantage.”

Student Loan Forgiveness and Taxes

The Biden student loan forgiveness plans isn’t expected to trigger any income tax consequences on federal returns, CNBC reported. That’s mainly because the American Rescue Plan of 2021 made student loan forgiveness tax-free through 2025 — and the Biden forgiveness plan is covered under that law, according to the White House fact sheet.

State taxes are a different story. The Tax Foundation, an independent tax policy nonprofit, noted in a column last week that some states might consider student loan debt forgiveness a taxable event, meaning borrowers would have to pay state income taxes on the canceled debt. The organization said 13 states “have the potential” to tax cancelled student loan debt, though the final number “could be significantly smaller” if states make legislative changes or determine that debt forgiveness can be excluded.

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The 13 states cited are Arkansas, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Mississippi, New York, Pennsylvania, South Carolina, Virginia, West Virginia and Wisconsin. The maximum likely state income tax liability ranges from $307 in Pennsylvania to $1,100 in Hawaii, with most states in the $500-$700 range.

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About the Author

Vance Cariaga is a London-based writer, editor and journalist who previously held staff positions at Investor’s Business Daily, The Charlotte Business Journal and The Charlotte Observer. His work also appeared in Charlotte Magazine, Street & Smith’s Sports Business Journal and Business North Carolina magazine. He holds a B.A. in English from Appalachian State University and studied journalism at the University of South Carolina. His reporting earned awards from the North Carolina Press Association, the Green Eyeshade Awards and AlterNet. In addition to journalism, he has worked in banking, accounting and restaurant management. A native of North Carolina who also writes fiction, Vance’s short story, “Saint Christopher,” placed second in the 2019 Writer’s Digest Short Short Story Competition. Two of his short stories appear in With One Eye on the Cows, an anthology published by Ad Hoc Fiction in 2019. His debut novel, Voodoo Hideaway, was published in 2021 by Atmosphere Press.
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