Articles | August 29, 2022

Federal Program for Student Loan Debt Relief Announced

To help working and middle-class federal student loan borrowers transition to making regular payments as pandemic-related support expires, President Biden has announced a three-part plan for providing student loan debt relief:

  1. Extend the pause on student loan repayment.
  2. Provide targeted debt relief to low- and middle-income families.
  3. Make the student loan system more manageable for current and future borrowers.
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Although additional details are expected to be announced during the coming weeks, this insight summarizes the basic components of the plan announced on August 24, 2022.

 

Extend the pause on student loan repayment

With a stated goal of ensuring a smooth transition to repayment and preventing unnecessary defaults, the administration is extending the loan repayment pause for all federal student loan borrowers for one final time through December 31, 2022. Borrowers will be required to resume making payments in January 2023.

 

Provide targeted debt relief to low- and middle-income families

The Department of Education is cancelling student debt for eligible borrowers up to the maximum limits noted in the following chart.

Maximum Loan Cancellation Amounts

  
Pell Grants

The lesser of $20,000 or the outstanding debt amount

Non-Pell Grants

The lesser of $10,000 or the outstanding debt amount

 

To be eligible for debt cancellation, a borrower’s annual income cannot exceed the limits noted in the following chart. For married couples who earn less than $250,000 a year, each partner can qualify for cancellation.

  

Borrowers Eligible for Cancellation

 

Annual Income Is Less Than:

Individual

$125,000

Married, Filing Jointly

$250,000

 

The cancellation extends to most types of federal student loans that were disbursed by June 30, 2022. This includes subsidized and unsubsidized Direct loans to undergraduate students, Direct Plus loans for graduate students and parent borrowers, Direct Consolidation loans and Federal Family Education Loan debt owned by the federal government — regardless of whether they were in default pre-pandemic. However, the relief does not extend to private student loans.

In the coming weeks, the administration plans to publish a simple application. The application process is expected to be operational before December 31, 2022. Borrowers can sign up at the Department of Education subscription page to be notified when the application process is open.

 

Make the student loan system more manageable for current and future borrowers

Under the third prong of the plan, the administration plans to create a new income-driven repayment plan that will substantially reduce future monthly payments for lower- and middle-income borrowers.

The plan would include the following elements:

  • Borrowers would pay no more than 5 percent of their discretionary income monthly on undergraduate loans. This is down from the 10 percent available under the current income-driven repayment plan.
  • The amount of income that is considered non-discretionary income, and therefore protected from repayment, would be raised. This would guarantee that no borrower earning under 225 percent of the federal poverty level — about the annual equivalent of a $15 minimum wage for a single borrower — will have to make a monthly payment.
  • Forgive loan balances after 10 years of payments for borrowers with original loan balances of $12,000 or less. Under present income-driven repayment plans, balances are generally forgiven after 20 years, regardless of the amount remaining.
  • Cover the borrower's unpaid monthly interest. Consequently, no borrower's loan balance will grow as long as they make their monthly payments — even if the monthly payment is $0 because their income is low.

Projected impact on borrowers

The administration projects that the debt cancellation will provide relief to roughly 43 million borrowers. About 60 percent of those borrowers are Pell Grant recipients eligible for up to $20,000 in relief.

No individual making more than $125,000 or household making more than $250,000 (the top 5 percent of U.S. incomes) will receive relief.

 

Implications for employers

The new federal program will improve the financial wellness and overall well-being of employees who are eligible for the relief since student loan debt is a major issue and cause of stress for many. It could also have implications for employers’ DC retirement plans and other employee benefit programs that have savings components.

 

Changes to Public Service Loan Forgiveness program

On October 6, 2021, certain requirements to qualify for the Public Service Loan Forgiveness program were temporarily waived, enabling individuals a temporary opportunity to obtain credit for past periods of repayment. Under the changes, individuals could receive credit for periods of public service, even if during that period they had a type of federal student loan that did not qualify, were not on an eligible repayment plan, did not pay on time or did not pay the full amount due. The temporary waiver of these and related requirements will expire October 31, 2022. The Department of Education has also proposed permanent changes to the program that will make it easier for qualifying individuals to have their student loans forgiven.

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This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.

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