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Tax & AccountingJanuary 04, 2023

Biden Admin student loan debt forgiveness program: full details, current status, tax implications

Here’s the latest on the Biden student loan debt forgiveness program (Program) and what tax pros and their affected clients might expect going forward. The two challenges to the Program (Biden v. Nebraska) and (Department of Education v. Brown) will be heard by the Supreme Court (Court) on February 28th. It is most likely that the Court will not issue its opinion(s) until May or June, however, an earlier announcement is possible.

Bottom line up-front: The Biden student loan forgiveness plan – first announced on August 24, 2022 – is on hold as the result of findings in two court cases challenging the legality of the President's executive order. As of December 12, the Supreme Court (SCOTUS) has agreed to hear two cases involving the plan; but the justices declined to revive the program immediately. They indicated arguments would be heard in February.

More details, including what was originally announced on August 24, 2022, what's changed since then, and the path forward for student loan forgiveness, are covered in more detail in the article below.  

A brief review of the Biden Administration's Student Loan Debt Plan


What was initially announced regarding student loan forgiveness in August 2022

On August 24, 2022, President Biden announced the forgiveness of between $10,000 and $20,000 of federal student loan debt. The President also announced the extension of the student loan pause for a fifth and final time through December 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 President Biden's original August student loan forgiveness announcement 

There was an extension on the student loan repayment pause

Biden announced on November 22 that he would extend the pause in student loan repayment pause until June 30, 2023, or until legal challenges are resolved, and the Department of Education (DOE) 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 will likely 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 student loan forgiveness plan sits with the courts.

On December 01, the SCOTUS 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. 

On December 12, SCOTUS 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 if the disputes if SCOTUS will consolidate the two cases or hear them separately. The plan remains on hold until at least February of 2023.

How many borrowers have applied for student loan forgiveness.

Since the President's August 24 announcement, roughly 26 million borrowers have applied for student loan forgiveness. The Department of Education (DOE) 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 November 11, 2022, after a Texas court ruling halting the program.

Still no determination on FEEL, Perkins, and privately held loans.

Shortly after the original student loan announcement, the Department of Education (DOE) announced efforts to broaden forgiveness to include certain other loans that aren't held by the federal government and aren't technically included in the President's August 2022 student loan forgiveness announcement.

There has been no announcement or determination from the DOE, and in all likelihood, their decision is placed on hold pending the Supreme Court ruling.

Details on the student loan forgiveness program

Who qualifies for 2022 student loan 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 (AGI), 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 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 Department of Education, 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 Department of Education (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 2022 forgiveness announcement include:

  • Federal Family Education loans (FFEL) not held by the federal government.
  • Perkins loans not held by the federal government.
  • 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 decision is placed on hold pending the Supreme Court ruling.

Relief is "automatic" for 8 million borrowers; 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 will have to apply through an online form. This form is expected to be available by early October, and borrowers should complete that application before November 15 to receive relief before the latest payment pause extension ends on December 31.

If a borrower 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 when the forgiveness application is available at this link. Tax professionals should sign up for notifications, and when speaking to clients who this forgiveness may impact, strongly recommend that clients sign up for notifications as well.


To advise your clients on this plan, tax professionals need a list of individuals most likely to be impacted. CCH Axcess™ iQ uses predictive intelligence to automatically create this list, leveraging the wealth of information in your Axcess Tax database to help you pinpoint your clients that are impacted and generates a client impact letter that you can utilize to inform your client on the issue and encourage them to take the appropriate action.

Learn more about CCH Axcess iQ.


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Federal and State tax implications of student loan forgiveness

Although the federal tax code generally treats forgiven debt as taxable income, the American Rescue Plan Act, signed by President Biden in 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
  • 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.

Of note, 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. 

FAQs on the student aid website

The student aid website includes the following frequently asked questions to assist borrowers and their advisers: 

How do I know if I am eligible for debt cancellation?

To be eligible, your annual income must have fallen below $125,000 for individuals or $250,000 for married couples or heads of households.

If you received a Pell Grant in college and meet the income threshold, you will be eligible for up to $20,000 in debt cancellation.

If you did not receive a Pell Grant in college and meet the income threshold, you will be eligible for up to $10,000 in debt cancellation.

What does the “up to” in “up to $20,000” or “up to $10,000” mean?

Your relief is capped at the amount of your outstanding debt.

For example: If you are eligible for $20,000 in debt relief, but have a balance of $15,000 remaining, you will only receive $15,000 in relief.

What do I need to do in order to receive loan forgiveness?

Nearly 8 million borrowers may be eligible to receive relief automatically because relevant income data is already available to the U.S. Department of Education.

If the U.S. Department of Education doesn't have your income data, the Administration will launch a simple application which will be available by early October.

If you would like to be notified when the application is open, please sign up at the Department of Education subscription page.

Once a borrower completes the application, they can expect relief within 4-6 weeks.

We encourage everyone who is eligible to file the application, but there are 8 million people for whom we have data and who will get the relief automatically.

Borrowers are advised to apply before November 15th in order to receive relief before the payment pause expires on December 31, 2022.

The Department of Education will continue to process applications as they are received, even after the pause expires on December 31, 2022.

What is the Public Service Loan Forgiveness Program?

The Public Service Loan Forgiveness (PSLF) program forgives the remaining balance on your federal student loans after 120 payments working full-time for federal, state, Tribal, or local government; military; or a qualifying non-profit.

Temporary changes, ending on Oct. 31, 2022, provide flexibility that makes it easier than ever to receive forgiveness by allowing borrowers to receive credit for past periods of repayment that would otherwise not qualify for PSLF.

Student Loan Debt Forgiven Programs: Final Thoughts

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 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 an unknown. The ruling will have significant financial implications for the millions affected and the economy as a whole.

This article was originally published on Accounting Today.

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Mark Friedlich
Vice President of US Affairs for Wolters Kluwer Tax & Accounting
Mark Friedlich, a CPA & tax lawyer, is the Vice President of US Affairs for Wolters Kluwer Tax & Accounting. He is a member of the U.S. Senate Finance Committee’s Chief Tax Counsel’s Advisory Board, advisor to 14 state taxing authorities, and has been a member of the American Bar Association’s Tax Section and AICPA’s Tax Section leadership teams. Prior to joining Wolters Kluwer he was a COO and Principal at PwC.

 

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