Understanding Student Loan Forgiveness | Adviser Investments

The Lowdown on Student Loan Forgiveness

If you thought Medicare was convoluted, hold on to your hat. The government might just outdo itself with this one.

To recap: Last week, the Biden administration announced that eligible undergraduate and graduate students could have up to $10,000 in federal student loan debt forgiven. If they received a Pell Grant, the cap on forgiveness jumps to $20,000. The income cutoff to be able to take advantage of this relief is $125,000 for single filers and $250,000 for joint filers (based on either the 2020 or 2021 tax year). Private loans aren’t going to be forgiven—more on that in a moment.

Additionally, the freeze on federal student loan repayment has been extended to January 2023.

But let’s back up for a second. The Public Service Loan Forgiveness (PSLF) program has been around since 2007. The problem was that borrowers had to walk a bureaucratic tightrope to qualify for forgiveness, resulting in a low success rate thus far for applicants.

To facilitate the forgiveness process, the Department of Education (DOE) recently introduced a temporary waiver that expands eligibility for different types of loans and repayment plans. However, to take advantage of this expansion, debtors must apply before the end of October 2022.

Payments that may have been disqualified in the past (such as late payments or payments for the incorrect amount) could now qualify toward the required 10-year repayment period. In addition, the DOE expanded the types of loans that are eligible for forgiveness. Previously, only Federal Direct Loans were eligible—this waiver expands eligibility to Federal Family Education Loans (FFEL) and Perkins Loans.

That’s a lot of red tape. Let’s cut through it with two key points:

  • Before pulling the trigger on refinancing a public student loan to a private lender, consider whether your federal student loans could qualify for relief under this new (albeit temporary) PSLF expansion. Remember, private loans do not qualify for forgiveness. Once you refinance to a private lender, you shut the door on loan forgiveness forever.
  • If your loans qualify, you will need to consolidate your FFELs and/or Perkins Loans to Federal Direct Loans and apply before Oct. 31, 2022 to take advantage of the expanded PSLF rules.

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