Student Loan Forgiveness Best Practices

Frank Yozwiak

Key Takeaways:
  • Federal student debt cancellation up to $10,000 ($20,000 for Pell grant recipients)
  • Cancellation limited by income ($125,000 single, $250,000 for married couples)
  • Limited PSLF Waiver ends October 31, 2022; review your eligibility

 

 

This past Wednesday, the President announced a student debt cancellation plan. Unfortunately for borrowers hopeful to log in to their Nelnet accounts and see their loans evaporated, this announcement will likely draw legal appeals and delays relating to the details of how loans might be forgiven. Nonetheless, if you or a loved one have student loans, we have some best practices to avoid missed opportunities.

 

Current Debt Cancellation Plan
  • Covers Federal student loans
  • Up to $10,000 for non-Pell grant recipients
  • Up to $20,000 for Pell grant recipients
  • Canceled debt will not be considered taxable income
  • Income limits of $125,000 for individuals, $250,000 for married couples

 

Best Practice 1: Hold off on refinancing federal student loans
  • The debate about broad student loan forgiveness has become more mainstream over the last few years and we have added that possibility to our calculus when we advise on a refinancing decision. To recommend a refinance, we want to make sure that the borrower will never be eligible for Public Service Loan Forgiveness (discussed below), will never utilize an income-based repayment plan, and will see significant interest savings by refinancing privately. Few borrowers check all three of those boxes. With possible partial debt cancellation looming, we would have borrowers pause that decision, at least up to the $10,000 (or $20,000 for Pell grant recipients) that could be forgiven if the current plan comes to fruition. As a side note, the amount of debt forgiven each year is usually considered taxable income for federal income tax purposes. However, this plan in its current iteration says these debt cancellations will not be considered federal taxable income – details are unclear at this time for state tax consequences.

 

Best Practice 2: Consider pausing extra principal payments toward federal student loans
  • Federal loans have been in a 0% interest repayment pause since March 2020, and the pause has been extended through December 2022. Each month during that time has counted as a qualifying payment for borrowers on an income-based repayment plan. For those borrowers making principal payments on their last $10,000 (or $20,000 for Pell grant recipients), we advise adopting a wait-and-see approach. Specifically, with behavioral finance concepts in mind, consider the benefits of pausing overpayments through the end of the year, and saving (not spending) the cash that would otherwise go toward the loans.

 

Best Practice 3: Monitor your taxable income if forgiveness is likely
  • The current debt cancellation plan mentions income limits of $150,000 for single borrowers and $250,000 for married couples. While this plan was short on details, we can assume the only available measure to apply this limit will be Adjusted Gross Income on your tax return. If you are close to these lines, AGI can be limited by pretax retirement contributions to 401(k)’s and IRA’s. This limit may also affect your choice to file single vs married filing jointly. Let us know if we help you think through these options.

 

Best Practice 4: Review your eligibility for Public Service Loan Forgiveness
  • Public Service Loan Forgiveness is a program that offers tax-free loan forgiveness to borrowers who make 10 years of qualifying payments while employed in the nonprofit and government sectors, including teaching hospitals. We are in the middle of a one-year waiver period where the requirements for this program are much easier to achieve and have seen clients receive unexpected six-figure forgiveness years ahead of schedule. If you think you may qualify, reach out to us, or review the PSLF Help Tool at https://studentaid.gov/pslf/.

 

 

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