Rewards, Risks in Federal Student Loan Forgiveness Program by Angie Adames, CPA
Posted on September 08, 2022
by
Angie Adames
On August 24, 2022, the Biden administration announced a three-point plan to cancel student loan debt for millions of eligible Americans and to extend the suspension of required federal student loan repayments that began at the start of the COVID pandemic. It is important taxpayers recognize that the plan does come with some restrictions and caveats, including income limitations and a potential state tax liability on forgiven loan amounts.
Under the government’s plan, individual taxpayers earning less than $125,000 per year (or less than $250,000 for married couples filing joint tax returns) can qualify to have $10,000 of their remaining student debt forgiven, provided their loans are held by the federal government. This includes recipients of Federal Direct Student Loans and Federal Plus Loans but excludes those individuals who refinanced and/or consolidated federal loans with private institutions.
An additional $10,000 of outstanding debt cancellation is available to borrowers who received federal Pell Grants to pay for their college education. If taxpayers qualifying for the full $20,000 in debt relief have outstanding student loan balances of $20,000 or less, their loan will be considered paid in full.
The plan also extends through the end of 2022 a pause on federal student loan payments, meaning that qualifying borrowers do not have to resume making loan payments until Jan. 1, 2023. An addition proposal to create a new, income-driven repayment plan should also provide much needed help to borrowers.
It is not currently known how qualifying taxpayers may apply for debt forgiveness. The Department of Education is expected to roll out these details in the coming weeks. What is clear is that this relief is available only for loans disbursed on or before June 30, 2022, and no refunds are available for loans that borrowers already paid-in-full. Moreover, while federal income tax will not apply to forgiven loan amounts, cancelled debt may be treated as taxable income subject to income tax at the state level.
It is important for all borrowers to speak with their advisors and CPAs to ensure they understand all their payment responsibilities and their qualifications for debt cancellation.
About the Author: Angie Adames, CPA, is a director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where she provides tax and business consulting services to real estate companies, manufacturers and closely held entities. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or info@bpbcpa.com.
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