President Biden announced an Executive Action on Wednesday, August 24, 2022, canceling up to $10,000 of Student Loan Debt (or up to $20,000 if there are Pell Grants) for some Americans.
Now that the news is out, what should accumulators know to best boost their balance sheet?
1 – Not Everyone Will Qualify
The forgiveness of up to $10,000 in student loans is being reserved for Americans who make under a certain annual income. Individuals need to make less than $125,000 per year, and for married couples or heads of households, the limit is $250,000. We don’t know if there will be a phase-out for people who will just miss the income limit. A phase-out of the benefit could allow taxpayers just shy of the cutoff the chance to still be included in this historic moment.
2 – Eligibility is Unclear
We already know that individuals must make under $125,000 per year (or $250,000 for couples) to be eligible. The White House has also confirmed that a simple application filed with the Department of Education will be required to request the forgiveness. What hasn’t been confirmed is whether your prior year's tax return will be used to determine your income or if your 2022 Tax Return could possibly be used.
If the government plans to use your 2022 Tax Return, select taxpayers may have financial planning opportunities to delay certain income items to stay at or below the limit. For example, if a corporate professional doesn’t have to exercise stock options this year, it might make sense to delay until next year. Business owners may want to consider if their business accounting practices would allow for the delay of income or acceleration of expenses to bring themselves within the income limit. Another option to consider is filing separately from your spouse if that affects one spouse’s eligibility. If you think you may be close to the limit, it might make sense to reach out to a financial or tax professional.
3 – Newly Revised Payment Cap for Income-Driven Repayment Plans
President Biden didn’t just announce the forgiveness of billions of dollars of student loans. He also announced an order that caps the monthly payment of remaining federal loans at 5% of your monthly income if you are on an Income-Driven Repayment Plan. If a cap on monthly payments creates a meaningful change to your monthly cash flow, it may be time to re-evaluate what to do with that extra cash. Depending on your unique situation, your financial goals, and the interest rate on your loan, you may have a lot of options to save your excess cash flow, pay down other debt, or make lump sum payments directly to the principal of your student loan.
4 – Pause on Payments Extended through December 31, 2022
The final announcement shared by President Biden is that he will extend the payment pause for Federal loans one last time through the end of 2022. Since the beginning of the COVID-19 pandemic, no payments have been due, and no interest has accrued on Federal Student Loan balances. Though the repayment suspension is ending, there is a significant change that the White House addressed. Following the end of the pause, as long as you make your calculated payment according to your Income-Driven Repayment Plan, your student loan balance will not grow, even if your calculated payment doesn’t cover the amount of the interest.
President Biden’s Student Loan Forgiveness Announcement is an unprecedented move to boost the financial well-being of many Americans. With so much unknown, it is essential to review your personal situation and eligibility to see what this historic moment means for you.