Will Your $20K Loan Forgiveness Be Applied Automatically?

It has been widely understood that up to 8 million people will receive automatic discharge under the forgiveness Biden announced last week for student loan debts. Most of those automatic discharges will be for individuals that have filed FAFSA applications since 2020. 

 

                 Unsure if your income on file is up to date? Call Edapt today for assistance at +1 (800) 438-2869 

 

Most borrowers enrolled in an IDR (Income Driven Repayment) program will need to apply for forgiveness because most of these loan holders have not certified their income with their servicer since the tax year 2019. 

 

In general, there is no downside to applying if you are going for forgiveness.  

 

Currently, federal loan forgiveness of any kind is not taxable income until December 2025 and in most states free of state tax. If you live in North Carolina, Mississippi, Indiana and possibly Wisconsin, Arkansas, West Virginia, or Minnesota, we recommend that you consult with a tax preparer. 

 

While the 10k – 20k in forgiveness is significant, the new IDR plan which is expected in the coming months will arguably be more impactful. 

 

Borrowers with undergraduate debt pay a maximum of 5% and graduate borrowers pay a maximum of 10% of their income towards repayment or their loans. 

 

If you have both undergraduate and graduate debt, then your payment is calculated as a weighted average. So most post graduate borrowers would pay somewhere between 8% and 9.5% because most borrow slightly more for their undergraduate education. 

• The new IDR plan doubles the poverty line deduction. Unless you have a big family, this may not affect you directly. 
• Excellent interest subsidy. We expect that it will work similar to REPAYE (Revised Pay as You Earn), but with a 100% interest subsidy instead of 50%. 

One issue to closely monitor is whether the new IDR plan will allow married couples to potentially file separately. 

If so, it will be better than most other current IDR plans. If it treats borrowers like REPAYE, we’ll still compare it to the PAYE (Pay as You Earn) plan.  

Note that the rules are not finalized, and no one can sign up for this plan until July 2023. So, we’ll have a long time to figure out all the details. And payments are scheduled to start again after December 31, 2022, so the old plans will remain the focus for the next year. 

 

No one can join this plan until July 2023, and the rules have not been finalized. So, we’ll have plenty of time to understand and plan.  

 

After December 31, 2022, payments will resume on the existing plans so they will remain our primary focus going into the next year.