Major Student Loan Relief Announced

On August 24, 2022, after months of rumors and hearsay, President Biden officially announced the broadest student loan debt relief initiative yet.

Federal Student Loan Forgiveness

The U.S. Department of Education will provide debt cancellation for up to $10,000 for federal loan borrowers, and up to $20,000 in debt cancellation for Pell Grant recipients. The relief is capped at the amount of outstanding federal student loan debt.

To be eligible, the borrower’s annual income must be less than $125,000 or under $250,000 for married couples or heads of households.

This debt cancellation is not considered taxable income federally thanks to legislation passed during the pandemic that made student loan forgiveness tax-free through 2025. Some states may tax this debt cancellation, however, so it is important to verify with your state or your CPA. New Jersey is not one of them.

Extension of COVID-19 Student Loan Pause

The announcement comes one week before federal student loan repayments and interest were set to restart after nearly a 30-month reprieve. Instead, the repayment pause and 0% interest are extended through December 31, 2022. Federal loan providers must provide adequate notice to borrowers before repayments begin in January 2023.

The Department of Education will also have an online application for forgiveness up and running prior to the end of the pause.

Next Steps: What do you have to do?

For most borrowers, both the debt cancellation and the extension are automatic. Nearly 8 million borrowers already have their income data accessible by the Department of Education. For those who do not know if the Department of Education would have your income data, an application will be launched in the coming weeks.

New Updates to the Federal Student Loan System

While forgiveness and the latest repayment extension are making the most headlines, President Biden also announced new measures that can help sustain manageable student loan payments for low- and middle-income borrowers in the future. This includes:

A 5% cap on income-driven repayment plans for federal undergraduate loans, down from 10%.
Balances forgiven after 10 years of payment, down from 20 years ($12,000 or less).
Raise the threshold of non-discretionary income which is protected from repayment.
Cover the borrower’s unpaid monthly interest so the balance does not grow as long as monthly payments are paid.