Here are five things you need to know about receiving assistance on your student loans.
1. You need to start paying back your loans again. The student loan deferral program that was put in place during the COVID-19 pandemic is set to expire on December 31, 2022. Regardless of whether you apply for forgiveness or not, it’s time to budget for making monthly loan payments again beginning in January 2023.
2. Only federal loans are eligible for relief. Pell Grant recipients can receive up to $20,000 in debt cancellation while non-Pell Grant recipients can get up to $10,000 (with eligibility). Pell Grants are typically issued to low- and middle-income students (primarily those whose families earn less than $60,000 annually). Eligible non-Pell Grant loans include Parent and Grad PLUS, Federal Family Education Loans, Perkins loans, and direct undergraduate and graduate loans. Private student loans aren’t eligible for loan forgiveness.
3. There is a deadline. If you want to apply for debt relief and have your loan payments lowered, you’ll need to file your application by December 31, 2023, on the Federal Student Aid website. The U.S. Department of Education says it’ll make decisions within four to six weeks. Note that a court case filed by six states has caused a hold to be placed on the process. You can still file your application, but it will not be reviewed until a federal appeals court reviews and determines if it should be allowed to continue.
4. There is an income threshold. Single tax filers who earned under $125,000 and married couples filing jointly or heads of households who earned under $250,000 in 2020 or 2021 are eligible. You may need to provide proof of income later in the process.
5. Some states will treat your loan relief as taxable income. Four states—Indiana, Minnesota, Mississippi, and North Carolina—plan to treat forgiven student loans as income. Several others are considering it as well. If you live in one of these states, be sure to meet with your tax professional to find out what the tax costs may be if you receive relief.
If you need more help paying your student loans, don’t forget that 529 account owners may also withdraw up to $10,000 (lifetime limit) tax free for payments toward qualified education loans. Additionally, there are other loan forgiveness plans available. The Federal Student Aid website has more information.
Be sure to contact your financial professional, who can help you determine your options and implement a plan for paying debts.
1 Consumer Credit Report, U.S. Federal Reserve, October 2022.
This material does not constitute financial, tax, legal, or accounting advice, is for informational purposes only, and is not meant as investment advice. Please consult your tax or financial professional before making any decision.
Consult your financial, tax, or other professional to learn more about how state-based benefits (including any limitations) would apply to your specific circumstances. Some states do not consider 529 withdrawals for student loan repayments to be qualified withdrawals and, therefore, the investor may be subject to penalties. The $10,000 qualified education loan limit is a lifetime limit that applies to the 529 plan beneficiary and each of their siblings. Any student loan interest paid for with tax-free 529 plan earnings is not eligible for the student loan interest deduction.
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