While there may be legal and congressional challenges surrounding the recent executive order, here are some questions and answers about what is known about the announced student loan forgiveness program so far.
Can the president cancel this debt?
Who knows how it will turn out, but maybe not. Only Congress has the power to spend. And debt forgiveness is considered income in the eyes of the IRS. So, to avoid any long-running legal battles, Congress may have to authorize this estimated $1 trillion program. Whether this is the case is up for debate.
If approved, who is eligible for the pardon program?
Here is a checklist of qualifications in the Executive Order:
Type of loan. You have student loans held by the U.S. Department of Education (DoE), including Pell Grants, Federal Family Education Loans, and direct loans such as Parent PLUS and Grad PLUS Loans. Certain Federal Perkins Loan Program loans may be excluded. All private student loans are also excluded.
Loan issue date. Student loans taken out after June 30, 2022 are not eligible for forgiveness.
Income threshold. Your income does not exceed $125,000 if you are single and $250,000 if you are married according to your 2020 or 2021 federal income tax return.*
What are the limits ?
$20,000. Pell Grant recipients can get up to $20,000 in student loan forgiveness.
$10,000. For loans other than Pell Grant, the maximum student loan forgiveness is $10,000.
Is the discounted student loan taxable?
Federal level. In accordance with the executive order, canceled student loans will not be considered taxable income on federal income tax returns. The approach taken by the executive order is to use the U.S. bailout that prevents the taxation of canceled student loans until 2025.
At the state level. While many states follow federal law that excludes student loan forgiveness from being considered taxable income, several states currently do not comply with federal law. Details are being worked out in these states to try to prevent student loan forgiveness from being considered taxable income.
What do you need to do
Stay tuned for any developments regarding challenges to this decree. Waiting:
Watch the forgiveness app. Applying for student loan forgiveness on the Department of Education website, ed.gov, will be the next step. There may be exclusions to this application requirement, with many borrowers potentially receiving an automatic discount if the Department of Education already has your income data.
Check your loan balance. Take a screenshot of your loan balance on the day you submit your rebate request and compare it to your balance after the rebate is applied to ensure the rebate is correctly applied to your account.
There are still a lot of unanswered questions about this student loan forgiveness program, including if it’s even legal. So stay tuned for future updates.
*NOTE: Although the Department of Education generally uses your Adjusted Gross Income (AGI) to determine eligibility for other loan programs, the White House has not confirmed whether the AGI will be used to determine income thresholds of $125,000 and $250,000.
James Angell is a Certified Public Accountant based in Willits. His office is located at 461 S. Main St. and he can be reached at 707-459-4205.