The biting GOP pushback to President Joe Biden’s student loan forgiveness program has some wondering if the student debt deal ultimately could derail.
But advocates for student loan debt relief say they’re far less worried about Republican opposition than they are about the red tape. Will millions of borrowers be so confused or overwhelmed by the application process — which won’t begin until October — that they just sit back and do nothing?
“I am more concerned about borrowers being denied access to this vital relief because of bureaucratic hurdles than I am about legal challenges,” said Persis Yu, policy director and managing counsel for the advocacy group Student Borrower Protection Center.
It’s sad, she said, that people are threatening to use the courts for political gain — claiming that Biden has no authority to forgive the debt — and deny student loan borrowers what for many will be life changing relief. She’s expecting that any potential lawsuit is unlikely to prevail in court.
Well, maybe. We will see what happens. But my two cents anyway: There’s an opening now for debt relief and if you qualify, well, you better go for it.
What’s worrisome for many advocates is that some borrowers do not realize that it will be up to them to apply for relief. One group has begun a grassroots effort, gathering 600 volunteers nationwide to mobilize and educate student borrowers about the one-time debt relief program.
Bad information on debt relief
Cody Hounanian, executive director of the Los Angeles-based Student Debt Crisis Center, said the mobilization effort is needed because information gaps could harm borrowers if they don’t file the required online application. Some borrowers, he said, didn’t see an application immediately when the program was announced Aug. 24 and now are unsure what to expect.
Hounanian said older borrowers, in particular, could be at risk if they’re not willing or able to take on the online application process. The application isn’t online yet.
You can sign up to receive updates at www.ed.gov/subscriptions. You’d provide an email address to the U.S. Department of Education and click on the top box “NEW!! Federal Student Loan Borrower Updates.”
Others will try to get the word out too. Farmington Hills-based GreenPath Financial Wellness is hosting a free webinar from 8 p.m. to 8:30 p.m. on Oct. 6 called “Student Loan Forgiveness — what you need to know (and do.)”
To register online to attend, see https://www.greenpath.com/calendar/student-loan-forgiveness-need-to-know/
More: Who qualifies for forgivenessHow to apply for student debt relief
Another issue: Some social media sites, Hounanian said, are spreading misinformation, particularly targeting Black and Brown borrowers, wrongly suggesting that they should avoid applying because the forgiveness program is simply a way for the government to collect more taxes.
There may be some reason for confusion, but experts say borrowers should still apply for debt relief.
Will debt relief will be taxed? And where?
Debt relief under this new, limited program will not be included as part of your taxable income on your federal income tax return.
Some states — but not including Michigan — will treat the student loan debt relief forgiveness as taxable income on state income tax returns.
But the majority of states that have an income tax will not tax forgiven student loans because they “conform” with federal definitions of income, according to a detailed analysis by the Tax Policy Center, a Washington think tank run by the Urban Institute and Brookings Institution.
Currently, four states plan to treat forgiven student loans as income — Minnesota, Indiana, North Carolina and Mississippi. And three states are reviewing their tax rules — Wisconsin, Arkansas, and California, according to the Tax Policy Center.
Forgiven debt is usually treated as income. But what the rumors might not take into account is that the American Rescue Plan Act in 2021 explicitly exempted student debt forgiven between 2021 and 2025. Not all states, according to the Tax Policy Center, conform to the current version of federal tax laws.
Federal student loan debt forgiveness will not be treated as taxable income on your state income tax return for Michigan, according to Ron Leix, a spokesperson for the Michigan Department of Treasury.
What’s key to remember: Even if taxed on a state level, the taxes would amount to the equivalent of a few months of monthly student loan payments, far less than the amount forgiven, said Mark Kantrowitz, student loan expert and author of “Who Graduates from College? Who Doesn’t?”
Think about it: A state income tax of 10% on $10,000 is $1,000. Depending on the state, the rate could be less than that.
How much money is on the table
Under the new Biden program, up to $10,000 in federal student debt will be forgiven if you did not have a Pell Grant while in college. But up to $20,000 in federal student loans can be forgiven if you had a Pell Grant in college.
Income limits apply — an individual’s income must be less than $125,000 or less than $250,000 for married couples to qualify.
For most, federal student loan forgiveness won’t be automatic. Up to 35 million borrowers will need to fill out applications.
Nearly 8 million borrowers already may be eligible to receive relief automatically because their relevant income data is now available to the Education Department.
Borrowers have not had to think about how they will make their monthly payments on most federal student loans for nearly three years now. A moratorium began March 2020 and the payment pause has been repeatedly extended.
But the moratorium ends Dec. 31 and payments will resume in 2023.
Why Nov. 15 is a key date
The Education Department says borrowers should file an application for student debt forgiveness before Nov. 15 for adjustments to be reflected in your student loan monthly payment beginning in January.
Loan balances that remain after any loan forgiveness are going to be recalculated based on the amount of debt forgiven. Your monthly payment will drop. “Your loan servicer will communicate your new payment amount to you,” according to the Education Department.
Applications aren’t online yet but will be in October. Once a borrower completes the application, the Education Department, said the borrower can expect relief within four weeks to six weeks.
If you miss the Nov. 15 date, don’t worry. You’d actually have until Dec. 31, 2023, to apply, but you’d want to apply as soon as possible.
Make sure you avoid getting caught in a scam. You don’t need to pay anybody to sign up for the new forgiveness program. “Nobody can get you in early, help you jump the line, or guarantee eligibility,” the Federal Trade Commission warns.
Under pandemic related relief, those who owed money on most federal student loans did not have to make monthly payments; did not see their debt build, thanks to a temporary 0% interest rate; and avoided the debt collection process due to a stop on defaulted loans.
More: Student debt forgivenessWhat parents and others need to know
What should you do now?
The first step to take — even before the application is available online in October — is to update your contact information with your loan servicer and at StudentAid.gov. You can visit StudentAid.gov/DebtRelief to keep up with what’s likely to be a complex process involving student loan forgiveness.
Another important move: Ignore any pitches to refinance your federal student loans right now into private student loans if you think you will qualify for the federal student loan forgiveness program. Private student debt isn’t eligible for federal debt forgiveness.
Many times, borrowers refinance because they’re tempted by potentially lower rates on private student loans but you don’t want to walk away from debt forgiveness.
What student loans will be forgiven first?
The highest-cost debt will be forgiven first, Kantrowitz said, which is the most beneficial way to do it for borrowers who often have multiple student loans. The borrower doesn’t select the specific loans that will be forgiven.
Relief will apply to loans in the following order, according to the Education Department:
- Defaulted loans held by the Education Department.
- Defaulted loans under the commercial Family Federal Education Loan program.
- Loans in the Direct Loan Program and Family Federal Education Loan program held by the Education Department.
- Perkins loans held by the Education Department.
If you have multiple loans in the same program, forgiveness first applies the loans with the highest rate. If rates are the same, unsubsidized loans would be forgiven before subsidized loans.
If interest rate and subsidy status are the same, the forgiveness would first apply to the most recent loan.
If the interest rate, subsidy status, and disbursement date are the same, the Education Department said, forgiveness would apply to the loan with the lowest combined principal and interest balance.
More: Student loan forgivenessHow does forgiveness apply to those in college
Does this mean I will lose my tax refund?
As part of pandemic-related relief efforts, the U.S. Department of Education temporarily suspended the seizure of tax refunds, Social Security and other government payments to cover money owed for defaulted student loans. Defaulting on a federal student loan requires nonpayment for at least 270 days.
Borrowers ended up getting a break when federal income tax refunds were not offset for old student loan debt in 2020 and 2021, too.
The good news is that debt collection through this Treasury offset will stay paused for at least six months after the COVID-19 payment pause ends — which means the debt collection pause on tax refunds and the like goes through June 2023 now. The relief includes collections on loans held by Education Department and FFEL Program loans held by guaranty agencies.
Someone who is eligible for the Fresh Start for defaulted loans can apply to get this collections relief through one year after the payment pause ends or through December 2023.
As a result, the government notes, borrowers would not lose money from certain government payments, such as the child tax credit, Social Security payments, and tax refunds for the 2022 tax season.
What if my loans were in default?
About 7.5 million borrowers were in default prior to the pandemic. Student loan forgiveness and another effort called “Fresh Start” can be a huge help to this financially vulnerable group.
Most borrowers in default on their federal loans should be able to see some student loan debt forgiven, Kantrowitz said, as they should qualify under the income caps. Depending on how much debt you have, you could still owe money.
“Between the forgiveness and the Fresh Start program, this will eliminate the defaulted loans and restore the borrowers to a current status, removing the default from their credit history,” Kantrowitz said.
As a result, he said, borrowers could be able to qualify to get new credit, such as auto loans and mortgages, and dig themselves out of a financial hole.
The Fresh Start program will enable borrowers to qualify for federal student aid again, so they might be able to finish their education.
“If they can get a degree, it may help them get a better-paying job,” Kantrowitz said.
On April 6, the Education Department announced that it would eliminate the negative effects of default for borrowers with defaulted federal student loans. You’d need to resume payments if all debt isn’t forgiven.
“These borrowers are disproportionately likely to be first-generation college students, have received a Federal Pell Grant, and qualify for low monthly payments under affordable income-driven repayment plans,” the Education Department noted.
Some borrowers dropped out of college and aren’t benefiting from higher wages that can be connected with a college degree.
The White House noted that the Department of Education estimates that, among borrowers who are no longer in school, nearly 90% of relief dollars will go to those earning less than $75,000 a year.
The Fresh Start program means that previously defaulted borrowers have an opportunity to avoid debt collection for at least a year. The borrower must call the “Default Resolution Group” at 800-621-3115 and ask for the Fresh Start program. See StudentAid.gov/FreshStart for details.
Then, Kantrowitz said, the borrower will switch to a non-default loan servicer and choose a repayment plan. “If they start making payments on the repayment plan, the relief is permanent,” Kantrowitz said. “If they do not start making payments, their loans will return to a default status by the end of 2023.”
Student loan forgiveness isn’t a simple process. And there is bound to be some confusion. But no one should let rhetoric and rumors stop them from being getting help recovering from a troubling financial challenge.
Contact Susan Tompor: email@example.com. Follow her on Twitter @tompor. To subscribe, please go to freep.com/specialoffer. Read more on business and sign up for our business newsletter.