President Biden’s student loan debt forgiveness plan is on pause awaiting a Supreme Court decision, but if the program ultimately moves forward, tax professionals should know about the rules when advising their clients.
The plan, originally announced Aug. 24, 2022, is on hold as the result of holdings in two court cases challenging the legality of the President’s executive order. Late last week, the Supreme Court agreed to review the administration’s effort to reinstate its student debt relief plan, but the justices declined to revive the program immediately. They indicated arguments would be heard in February. On Dec. 12, the Supreme Court agreed to hear another case involving the plan, which was initiated by individual borrowers arguing its enactment was procedurally improper. A Texas-federal judge invalidated the plan while a New Orleans federal appeals court let it stand. It is unclear whether the Supreme Court will consolidate the two cases or hear them separately. The plan remains on hold at least until February.
More details, including what was originally announced, what’s changed since then, and the path forward for student loan forgiveness, are below:
What was initially announced
In August, President Biden announced the forgiveness of between $10,000 and $20,000 of federal student loan debt, along with the extension of the student loan pause for a fifth and final time through Dec. 31, 2022.
The White House estimates that 43 million borrowers will benefit from the administration’s forgiveness plan and that more than 60% are Pell grant recipients.
What has changed since August 2022
An extension of the loan repayment pause was announced: Biden announced on Nov. 22 that he would extend the pause on student loan repayments until June 30, 2023, or until legal challenges are resolved, and the Department of Education can implement the student debt relief plan — whichever is sooner.
Interest on eligible student debt will continue to not accrue until the suspension ends, and payments will resume 60 days after the pause ends. This is likely to result in the next loan payments being due in August 2023, assuming court challenges aren’t resolved before June.
The extension of the pause allows time for the Supreme Court to review a ruling by a federal appeals court in the eighth circuit approving a preliminary injunction suspending the relief plan in one of a number of cases challenging its legality.
Where the plan sits with the courts: On Dec. 1, the Supreme Court agreed to review the Biden administration’s effort to reinstate its student debt relief plan. While the justices declined to revive the program immediately, the court indicated it would hear the case in February in a brief, unsigned order. Today, December 12, SCOTUS agreed to hear another case involving the plan, which was initiated by individual borrowers arguing its enactment was procedurally improper. It is unclear whether the cases will be consolidated or heard separately.
How many borrowers have applied for forgiveness: Since the president’s Aug. 24 announcement, roughly 26 million borrowers have applied for student loan forgiveness. The Department of Education has approved 16 million of those applications, but relief will not be granted until the legal challenges are resolved. In addition, the DOE stopped taking new applications on Nov. 11, 2022, after a Texas court ruling halting the program.
Still no determination on Federal Family Education Loans, Perkins and privately held loans: Shortly after the original student loan announcement, the DOE announced efforts to broaden forgiveness to include certain other loans that aren’t held by the federal government and therefore aren’t technically included in the president’s forgiveness announcement. There has been no announcement or determination from the DOE, and in all likelihood, their announcement is placed on hold pending the Supreme Court ruling.
Details on the student loan forgiveness program
Who qualifies for forgiveness? To be eligible for student loan debt cancellation, borrowers must have a 2020 or 2021 tax year income of less than $125,000 for individuals and less than $250,000 for married couples or heads of household. For the purposes of student loan debt cancellation, income is calculated as the borrower’s adjusted gross income, as opposed to gross or taxable income. Loans must have been taken out before June 30, 2022, to qualify for student loan forgiveness.
How much of an eligible taxpayer’s student loan debt can be forgiven? Federal Pell grant recipients who meet the income requirements are eligible for $20,000 in student debt forgiveness, capped at the amount of the borrowers’ outstanding debt. Other eligible borrowers (who meet the income threshold) can receive a maximum of $10,000 in forgiveness for loans held by the DOE, capped at the amount of the borrowers’ outstanding debt.
The types of student loans that qualify… and those that don’t: Most federal student loans qualify for forgiveness, including direct subsidized or unsubsidized loans and graduate or parent PLUS loans. In short, loans that qualified for the federal student loan payment pause should be eligible for forgiveness. The DOE is working on broadening forgiveness to include certain other loans that aren’t held by the federal government and therefore aren’t technically included in the president’s forgiveness announcement.
Student loans that aren’t included in the president’s August forgiveness announcement include:
- Federal Family Education Loans not held by the federal government;
- Perkins loans not held by the federal government; and
- Loans held by private vendors, and therefore not paused.
As discussed above, there has been no announcement or determination from the DOE, and in all likelihood, their announcement is placed on hold pending the Supreme Court ruling.
Relief is “automatic” for 8 million borrowers, but others must apply: The DOE indicates that roughly 8 million borrowers whose income is already on file at the department will have their loans automatically forgiven without having to apply.
Borrowers who do not have their income currently on file with the DOE have to apply through an online form. A borrower who fails to complete the application before the payment pause expires at year-end will still be able to get the relief.
Borrowers can be notified about the forgiveness application at this link. Tax professionals should sign up for notifications, and when speaking to clients whom this forgiveness may impact, should strongly recommend that clients sign up for notifications as well.
Federal and state tax implications: Although the federal Tax Code generally treats forgiven debt as taxable income, the American Rescue Plan Act of 2021 includes a measure that exempts canceled student debt from taxation through 2025. The result is that the recent student loan forgiveness announcement by the White House will not result in the forgiveness being subject to federal income tax.
As of this writing, a few states have not agreed to follow the federal government in excluding debt forgiveness under the American Rescue Plan Act provisions. These states include Indiana, Minnesota, Mississippi, North Carolina and Wisconsin.
Residents in those states may be subject to state income tax for the amount of the student loan debt forgiveness if legislation or administrative action is not taken to forgive this debt.
New York State completed the process of state conformity independent of the ARPA conformance procedure. Forgiven loans will not be counted as income, meaning that the amount of relief a borrower receives will not be subject to New York State’s income tax.
The student aid website includes the answers to a number of frequently asked questions to assist borrowers and their advisors, but any actual loan forgiveness will now depend on the Supreme Court ruling. To be eligible under the original program, a borrower’s annual income must have fallen below $125,000 (for individuals) or $250,000 (for married couples or heads of households). If they received a Pell grant in college and meet the income threshold, they will be eligible for up to $20,000 in debt cancellation. If they did not receive a Pell grant in college and meet the income threshold, they will be eligible for up to $10,000 in debt cancellation. Relief is capped at the amount of borrowers’ outstanding debt. For example, if they are eligible for $20,000 in debt relief but have a balance of $15,000 remaining, they will only receive $15,000 in relief. Nearly 8 million borrowers may be eligible to receive relief automatically because relevant income data is already available to the Department of Education. The Public Service Loan Forgiveness program forgives the remaining balance on a borrower’s federal student loans after 120 payments working full-time for federal, state, tribal or local government; the military; or a qualifying nonprofit.
Millions of taxpayers and tax professionals anxiously await the Supreme Court’s ruling. Whether it will end the pause on the program and allow the DOE to process the millions of applications already submitted, open the application process for eligible borrowers who have yet to apply, invalidate the entire program, or something in between is unknown. The ruling will have significant financial implications for the millions affected and the economy as a whole.
