In August, the Biden-Harris administration and the U.S. Department of Education announced their three-part plan to help federal student loan borrowers transition back to regular payments as pandemic-related support expires. This plan included loan forgiveness of up to $20,000 for Pell Grant recipients and up to $10,000 for non-Pell Grant recipients.

On October 14, 2022, the forgiveness application portal went live as a “beta” version. On October 17, 2022, the forgiveness application officially went live in its final form. More than 8 million people applied for forgiveness through the beta site over that weekend, according to Secretary of Education Miguel Cardona, with an additional 14 million applications being received by October 20.

However, several lawsuits have threatened the forgiveness plan. On October 21, the 8th Circuit Court of appeals issued a temporary stay, preventing the Department of Education from processing applications for forgiveness, which was scheduled to begin on October 23. Several states have contested that the Biden forgiveness plan would financially harm the states. While the Department  of Education cannot implement any student loan forgiveness while the stay remains in place, loan applications are still being accepted, though ultimately if and when forgiveness occurs will hinge on the outcome of the litigation. If you are eligible and interested in forgiveness, we encourage you to submit your application promptly. The process is not time-consuming.

Individuals seeking to apply can fill out the form in English or Spanish at Studentaid.gov. The application requires a few minutes to fill out and only asks applicants to attest that their income meets the forgiveness requirements, along with minimal information including their full name, Social Security number, date of birth, phone number and an email address. No proof of income is required, unless the Department of Education subsequently reaches out to the applicant.

Qualifying for Loan Forgiveness

To be eligible for up to $20,000 in debt cancellation to Pell Grant recipients and up to $10,000 in debt cancellation to non-Pell Grant recipients, borrowers must have federally held student loans and, more specifically, must have individual income less than $125,000 or $250,000 for married filed jointly on their 2020 or 2021 tax returns and meet dependency rules as described below.

The Biden administration has said that applicants who are “more likely to exceed the income cutoff” will be required to submit additional information, like copies of a tax return or a tax transcript. In addition to federal Direct Loans used to pay for an undergraduate degree, graduate students with federal PLUS loans may also be eligible if the borrower (or their parents, as may be applicable) meet the income requirements (discussed further below).

What Are the Income Requirements?

The income utilized in determining eligibility is generally based on the borrower’s 2020 or 2021 federal tax return. You are generally eligible if your adjusted gross income (AGI) was under $125,000 (single or married filing separately) or $250,000 (all other filing statuses) in either 2020 or 2021. You would find this income information on line 11 of IRS Form 1040. However, if you are a dependent student, your parents’ income information will be used to determine your eligibility.

Who Is a Dependent Student?

For many young borrowers, the most important question is “what happens if my parents claimed me as a dependent on their 2020 or 2021 tax returns?”

The answer is not straightforward. This is because the student loan forgiveness application utilizes the dependent student rules under the Department of Education Free Application for Federal Student Aid (FAFSA) framework, rather than strictly relying on your classification as a dependent on a tax return. While there may be some overlap, for financial aid purposes, a borrower is classified as a dependent student when they do not meet one of the criteria to be an independent student. An independent student is one of the following:

  1. At least 24 years old;
  2. Married;
  3. A graduate or professional student;
  4. Someone with legal dependents other than a spouse;
  5. A member of the armed forces;
  6. A veteran;
  7. An orphan or a ward of the court;
  8. An emancipated minor; or
  9. Someone who is homeless or at risk of becoming homeless.

Thus, a 24-year-old who is working on their undergraduate degree and still supported by their parents may qualify as a dependent for tax purposes, but as an independent student under this loan forgiveness framework. Similarly, a 22-year-old graduate student who lives at home may also qualify as a dependent for tax purposes, but be an independent student for purposes of loan forgiveness.

As stated above, any borrower who is deemed a dependent student by the Department of Education would be subject to the income limitations based on their parent’s income.

Which Student Loans Are Eligible for Forgiveness?

Most loans held by the Department of Education are eligible for this relief, including:

  1. William D. Ford Federal Direct Loan Program loans;
  2. Federal Family Education Loan (FFEL) Program loans (or those in default being held at a guaranty agency);
  3. Federal Perkins Loan Program loans;
  4. Defaulted loans (including commercially serviced Subsidized Stafford, Unsubsidized Stafford, parent PLUS and graduate PLUS); and
  5. Most consolidation loans (which contained underlying loans held by the Department of Education).

However, private loans are not eligible for this debt relief program.

If your FFEL loan is owned by a private company, it’s likely excluded from receiving debt relief unless you consolidated it before September 29, 2022. The Department of Education initially said borrowers with these loans could call their servicer and consolidate them into the Direct Loan Program to become eligible for forgiveness, but now has reversed course. Federal student loans guaranteed by the government but held by private lenders must have been consolidated before September 29, 2022, to be eligible for debt relief, according to its website.

The department says it’s assessing whether there are “alternative pathways” for these borrowers. Still, it’s worth contacting your loan servicer to determine which type of loans you have and if you can work with them to forgive any commercially owned FFEL loans.

When Should I Apply?

Different timelines exist depending on the type of forgiveness being sought and your individual situation, but below are some key dates:

  • November 15, 2022: Recommended Deadline to Apply
    • Start gathering your income information now because the Department of Education recommends filling out the application by November 15 to receive forgiveness before payments resume in January. Once you submit your application, you can expect relief within four to six weeks if approved.
  • January 1, 2023: Student Loan Payments Resume
  • December 31, 2023: Application Closes
    • The Department of Education will continue to process applications for student loan forgiveness through the end of 2023, but you would have to continue to make payments until the forgiveness application is processed.

Will Any Student Loans That Are Forgiven Be Taxed?

Under the American Rescue Plan Act of 2021, individual taxpayers may exclude from federal gross income the amount of qualified student loan on post-secondary education expenses that is cancelled or discharged after December 31, 2020, and before January 1, 2026. Qualified student loans include loans for post-secondary education provided by the government or educational institution, private education loans, original and refinanced loans from tax-exempt organizations with a public service requirement and refinanced loans.

Therefore, any student loan debt cancelled by the Department of Education pursuant to the one-time Student Debt Relief Plan announced on August 24, 2022, is not taxable for federal income tax purposes. Most states have conformed to federal law and will not consider the forgiven student loans as taxable income. Others have not and state income tax may be due. At of the writing of this Alert, four states (Indiana, Minnesota, Mississippi and North Carolina) plan to treat forgiven student loans as income, while three states (Arkansas, California and Wisconsin) continue to review its tax rules.

Can I Get a Refund on Student Loan Payments Made During the COVID-19 Pandemic?

Under the CARES Act, you can request a refund for any payment (including auto-debit payments) you have made during the payment pause, which began on March 13, 2020 (and ends December 31, 2022). It could take a few weeks or months, so we suggest that you contact your loan servicer to request that your payment be refunded as soon as possible.

If you have repaid your loans during this time, you may still request a refund of the payments made during this period. Then, any outstanding balance may also be eligible for this one-time forgiveness.

What Else Do You Need to Know About the Biden Student Loan Plan?

Final Extension of the Student Loan Repayment Still on Pause

Due to the economic challenges created by the pandemic, the Biden-Harris administration has extended the student loan repayment pause several times. Presently, the final pause is extended through December 31, 2022, with payments resuming in January 2023.

Making the Student Loan System More Manageable for Current and Future Borrowers

Income-based repayment plans have long existed within the Department of Education. As recently as October 31, the Education Department finalized a new set of rules that will ease the debt burden for many borrowers. Interest capitalization, commonly referred to as “interest on top of interest,” which adds unpaid interest to principal, has been eliminated. The new rules also make permanent certain temporary provisions for nonprofit and government employees, eliminate any remaining loan balances after making a decade of payments, and will permit payment credit for partial, late or lump-sum payments. Deferment will also now be permitted for periods of cancer treatment and military service. Borrowers with outstanding loans who were misled by their schools will also have those loans forgiven. Disability discharges will also be easier and less time-consuming to process.

TAG’S Perspective

President Biden’s ambitious debt relief program has arrived, followed by fraud and misinformation. Whether or not you wish to apply for relief, if you receive unsolicited emails, phone calls and/or text messages from unrecognized numbers promising debt cancellation in exchange for fees, you should ignore them. You should also consider submitting a complaint or reporting suspicious activity with the Education Department.

The White House recently said it plans to crack down on student loan scammers nationwide, and pointed to guidance to help borrowers avoid fraud in connection with student loan forgiveness. As a reminder, never give out personal or financial information over the phone to someone you do not know.