By: Sean Gallagher, CFP®
U.S. college tuition costs have skyrocketed over the last few decades, leading to an unprecedented number of students needing to finance the burden through student loans. As of August 2022, student loan borrowers owed a collective nearly $1,750,000,000,000 in federal and private student loan debt, with the average borrower owing $28,950*. One in seven Americans has outstanding student loan debt*, which is remarkable considering most borrowers have taken out the balance of their loans by their 20s. There's no denying that this mountain of debt represents a significant challenge for many U.S. citizens to overcome.
On August 24th, 2022, the Biden-Harris Administration announced a student debt relief plan to assist those with outstanding federal student loan debt. While the initial announcement has come with much criticism, including multiple legal challenges, applications for debt relief are still moving along on schedule.
Some highlights of the student debt relief plan include:
1) Final Extension of Repayment Pause – the pause on repayments of federally held student loans has been extended until December 31st, 2022. Beginning in January 2023, borrowers must make their federal student loan payments for the first time since March 2020.
2) Debt Relief – the administration will provide up to $20,000 of debt relief for Pell Grant recipients and up to $10,000 for non-Pell Grant recipients. The eligibility is based on income* below $125,000 for Individuals* or $250,000 for households*. Borrowers cannot receive more forgiveness than their current outstanding debt.
According to Megan Walter, a policy analyst for the National Association of Student Financial Aid Administrators, current students, and borrowers who have federally held undergraduate, graduate, and Parent PLUS loans distributed on or before June 30th, 2022, are eligible for the relief.
To check if your loans qualify for forgiveness, visit StudentAid.gov, sign in with your FSA ID, then go to the "My Aid" tab to search for your loan details.
3) Enhancements To Income-Based Repayment Plans – the creation of a new income-driven repayment plan that will reduce future monthly payments for borrowers. The plan would:
a. Require borrowers to pay no more than 5% of their discretionary income on undergraduate loans. This was previously 10% for most repayment plans.
b. Raise the amount considered non-discretionary income, which is protected from repayment.
c. Forgive loan balances after ten years of payments for borrowers with loan balances of $12,000 or less. This was previously 20 years.
d. Cover a borrower's unpaid monthly interest so that no borrower's loan balance will ever grow as long as they make their monthly payments.
Unless they opt out, the administration will automatically apply debt relief to nearly eight million borrowers. However, borrowers whose income data the U.S. Department of Education doesn't have will need to complete a simple online application in October. The administration released the official debt relief applications on October 17th and borrowers are encouraged to complete the application here. The application takes about a minute, and borrowers can expect relief within six weeks. Borrowers will have until December 31st, 2023, to submit the application.
The Department of Education recommends borrowers create an FSA ID on studentaid.gov, if not done so already, and update contact information for their account both there and on the loan servicer's website. By visiting here, borrowers can sign up to receive email or text notifications for any news on the student loan relief plan.
Beware of Scams
The U.S. Department of Education advises all borrowers to beware of scams related to the student debt relief plan. In particular, do not pay or provide any financial information to anyone that contacts you. The Department of Education will never call you asking for your FSA ID or account information. When in doubt, hang up the phone and call your student loan servicer directly.
Public Student Loan Forgiveness Program Deadline Reminder
In addition to the new program, borrowers employed by non-profits, the military, or federal, state, tribal, or local government may be eligible for complete student loan forgiveness through the Public Service Loan Forgiveness (PSLF) program. The temporary changes to this program expire on 10/31/22. To learn more about the restrictions and to apply for this PSLF program, visit here.
HIGHLAND is happy to provide guidance on your student loan repayment options and your eligibility for forgiveness.
*1 Federal Reserve Bank of St. Louis
*2 The Institute for College Access and Success Student aid
*3 Studentaid.gov
*4 Adjusted Gross Income on your 2020 or 2021 federal tax returns.
*5 Single or married, filing taxes separately.
*6 Married, filing jointly, or head of household tax filers.
Sean Gallagher is a CERTIFIED FINANCIAL PLANNER™ at HIGHLAND Financial Advisors, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, and investment management. Sean graduated from Virginia Tech’s financial planning program in 2018 and successfully passed the CFP® national exam in 2019. As a Financial Planner at HIGHLAND Financial Advisors, Sean works on developing comprehensive financial plans and investment management for all clients.