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Most know about $10,000 in student loan forgiveness. Here’s what could be overlooked

The Biden administration recently announced a sweeping loan forgiveness program for most federal student loan borrowers. The historic initiative includes more than blanket loan forgiveness, and the other provisions might have a greater effect on your budget.

In my interactions with clients, financial advisers and financial professionals, I have found that many have opinions on the program, but few know the details. The purpose of this article is to explain each part of the announcement and how it might affect your student loan debt situation.

The first part of the announcement covers the extension of the federal student loan payments and interest pause through December 31, 2022.

The first extension was under the Trump administration on March 13, 2020. This program only applies to federal student loans held by the Department of Education unless the holder of the loan elects to participate. This will likely be the last extension, so you should prepare to begin paying on your loans once this expires.

The second part of this announcement is arguably the most tracked. It includes up to $20,000 in loan forgiveness for eligible federal student loan borrowers at the undergraduate and graduate levels.

Students who did not receive a Pell Grant while in school will only receive up to $10,000, based on their balance on June 30. A borrower’s annual income needs to be below $125,000 for individuals (or married filing separate tax status), or $250,000 for married couples (or married filing joint or head of household tax status). Note that this forgiveness is only for certain qualifying federal student loans (even Parent PLUS and defaulted loans) but not private loans.

The application for loan forgiveness will open in October 2022 but for some borrowers the forgiveness will come automatically. If you want to know when the application opens, make sure your contact information is up to date at StudentAid.gov and sign up for alerts at https://www.ed.gov/subscriptions.

A lingering question exists in the mind of many borrowers: Will this happen?

It is true this could be challenged in the courts, although legal experts question if anyone has standing to sue. I am not a lawyer, but the basic argument is that someone must demonstrate harm to sue. This is easier said than done.

Meanwhile, based on the proposed release date of the application for loan forgiveness, I am guessing servicers will begin erasing the debt later this year. I will leave it to the experts to debate the legality of the issue, but personally, I am optimistic about the program.

The hard truth is that many borrowers, typically Parent PLUS and Grad PLUS loan holders with a professional degree, have more than $100,000 in student loan debt. For these individuals, $10-20,000 in loan forgiveness will not change much about their overall plan to tackle debt.

Finally, the third part of the Biden announcement discusses the creation of a new income-driven repayment plan for undergraduate loans.

The plan is quite generous: Borrowers pay 5% of their discretionary income, which is calculated using 225% of the poverty line. Also, there is no interest accrual if the borrower makes their monthly payments. The plan comes with forgiveness of up to $12,000 after years of payments. This provision, arguably, might have more impact on borrowers over time than blanket loan forgiveness.

Luckily, these are not the only federal programs to alleviate the burden of student loan debt. In fact, the Biden administration has been quite active with various initiatives in the student loan space.

Specifically, public servants and nonprofit professionals should check out the Public Service Loan Forgiveness program, which makes it easier to gain tax-free forgiveness. The PSLF waiver program expires at the end of October, so it is important to act now. Also, the student loan debt of many for-profit schools has been wiped out by the administration, including for students of Corinthian Colleges and ITT Technical Institutes.

Borrowers with further questions should seek out a qualified student loan professional to discuss their situation and create a plan that fits within their financial goals.

Jason Anderson is a CERTIFIED FINANCIAL PLANNER professional and a member of Financial Planning Association of Greater Kansas City. He is the owner of Gradmetrics, a college and student loan planning firm. He is also a Certified Public Accountant (CPA) in the State of Kansas.