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Do My Kids Qualify for Student Loan Forgiveness?

Do My Kids Qualify for Student Loan Forgiveness?

October 18, 2022
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If you have college-age kids like me, you may be asking this question.

One of my favorite resources for the college planning process is the team at College Inside Track. Below is an update for them on the new Student Loan Forgiveness program.

There has been a lot of publicity around the Biden-Harris Administration’s Student Loan Forgiveness Plan. Does my child’s loan qualify?

There is an income limit, so the first place to start is whether your student has an annual income of $125,000 or less (or $250,000 or less for married couples). If their income is higher, they do not qualify for debt cancellation. They can use their Adjusted Gross Income (AGI) from either your 2020 or 2021 tax return.

Next, do they qualify for the benefits of the Public Service Loan Forgiveness Program (PSLF). If they work at a nonprofit, in the military, or in government, they may be eligible for expanded and more flexible terms that allow borrowers to receive credit for past periods of repayment that would otherwise not qualify. 

You must apply by Oct. 31, 2022, to see if you are eligible for this benefit.

Finally, nearly all government-held federal student loans qualify. However, private student loans and Federal Family Education Loan (FFEL) program loans held by private lenders do not. FFEL borrowers can qualify if they consolidate their loans into the direct loan program. Discuss with your lender whether that is an option that makes sense.

First, The Repayment Pause is Extended

The current pause in student loan repayment will be extended one last time through the end of 2022. Starting in January 2023, payments will be due again.

During this pause, it is essential for borrowers with incomes that qualify for debt forgiveness (annual income of $125,000 or less for individuals and $250,000 or less for couples) to apply when the application is released by the Dept. of Education. The government says borrowers can expect relief within 4-6 weeks of completing the application, so if the application is completed by Nov. 15, 2022, student loan forgiveness would occur before repayment begins in January 2023.

Future Payments Recalculated

Once the forgiveness happens, remaining balances will be re-amortized, meaning monthly payments will be re-calculated based on the new balance after forgiveness, potentially reducing your monthly payment. 

Income-Based Forgiveness Update Proposed

While not enacted yet, the Biden administration is also proposing changes to the income-driven repayment plan to reduce monthly payments for lower- and middle-income borrowers. For those on this plan, loan balances of $12,000 or less would be forgiven after 10 years (instead of the current 20 years). Stay tuned.

In Summary

  • Borrowers who meet the income limit and received a Pell Grant while in college are eligible for up to $20,000 in loan forgiveness.
  • Borrowers who meet the income limit but did not receive a Pell Grant are eligible for up to $10,000 in forgiveness.
  • There are no time limits based on when the loans were taken out and defaulted federal student loans qualify.
  • Relief is capped at the amount of outstanding debt, so if you are eligible for $10,000 but have a remaining balance of $7,000, you will only receive $7,000 of forgiveness.
  • Only federal student loans held by the U.S. Department of Education are eligible for forgiveness; private student loans are not eligible. If you are unsure where your loan is held, contact your loan servicer or check your account at gov.
  • Parent PLUS loan holders are also eligible for debt forgiveness and qualify based on their own income and loan, while their children would separately qualify based on the same factors. If both the parent and student received a Pell Grant and separately meet the income limits, each would be eligible to receive up to $20,000 in debt cancellation.

NEXT STEPS

The Department of Education plans to release an application for student loan forgiveness in October 2022, and some may automatically qualify because the government has the income data it needs from you. Because it is unclear, we recommend consumers sign up at the Department of Ed subscription page to be notified when the application is open.

Student loans can be a big deal. If you are concerned about your financial plans, don’t hesitate to CONTACT ME, I would love to talk with you.

As a fiduciary, fee-first, CFP® professional, I can help you make great retirement income choices and develop a holistic financial plan that is driven by your goals and priorities and addresses all aspects of your financial life. With a big-picture approach, you will be better prepared to understand your options at every step along the way.

Yes, I am a CFP® professional. I’m always a fiduciary and I work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.

If this article has you thinking about your own circumstances, contact my office at rdunn@dunncreekadvisors.com. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.