On August 24, 2022, the U.S. Department of Education (the Department) announced an extension of the pause on student loan repayment, student debt cancellation, a new income-driven repayment plan, and proposed changes to the Public Service Loan Forgiveness program.
Extension of Student Loan Payment Pause
The Department announced an extension of the pause on student loan repayment, interest, and collections through December 31, 2022. The Department said borrowers should plan to resume payments in January 2023, as this will be the final extension. Note that administration officials stated the extension that ended on January 31, 2022 would be the "final" extension of student loan relief, but the pause has been extended several times since.
Student Debt Cancellation
The Department also announced targeted student debt cancellation for borrowers with loans held by the Department of Education. Borrowers with annual income during the pandemic of under $125,000 (for individuals) or under $250,000 (for married couples or heads of households) who received a Pell Grant in college will be eligible for up to $20,000 in debt cancellation. Borrowers who meet these income standards but did not receive a Pell Grant will be eligible for up to $10,000 in relief. Eligibility for dependent students is based on parent income if they were enrolled as a dependent for financial aid purposes between July 1, 2021 and June 30, 2022. The amount of the debt cancellation cannot exceed the borrower's outstanding debt. The Department made available a legal memorandum regarding its authority for these discharges, and a slip opinion from the Department of Justice (DOJ) was also made public. The Congressional Budget Office (CBO) estimates the present value cost of the debt cancellation is approximately $400 billion, and the Department estimates the cost in today's dollars to be $379 billion.
Eligible Loan Types
According to the Office of Federal Student Aid (FSA), the following types of federal student loans with an outstanding balance as of June 30, 2022 are eligible for relief:
- William D. Ford Federal Direct Loan (Direct Loan) Program loans
- Subsidized loans
- Unsubsidized loans
- Parent PLUS loans
- Graduate PLUS loans
- Consolidation loans, as long as all of the underlying consolidated loans were held by the Department and disbursed on or before June 30, 2022
- Federal Family Education Loan (FFEL) Program loans held by the Department or in default at a guaranty agency
- Federal Perkins Loan Program loans held by the Department
- Defaulted loans (includes Department-held or commercially serviced Subsidized Stafford, Unsubsidized Stafford, parent PLUS, and graduate PLUS; and Perkins loans held by the Department)
- Consolidation loans comprising any FFEL or Perkins loans not held by the Department, as long as the borrower applied for consolidation before September 29, 2022
- As of September 29, 2022, borrowers with federal student loans not held by the Department cannot obtain one-time debt relief by consolidating those loans into Direct Loans.
Private (non-federal) loans are not eligible for debt relief. If borrowers have consolidated federal loans into a private loan, the consolidated private loan is not eligible for debt relief. The administration has stated it is assessing whether there are alternative pathways to provide relief to borrowers with federal student loans not held by the Department, including FFEL Program loans and Perkins loans, and is in negotiations with private lenders.
For borrowers with multiple loans, the Department will apply the relief in the following order:
- Defaulted Department-held loans
- Defaulted commercial FFEL Program loans
- Non-defaulted Direct Loan Program loans and FFEL Program loans held by the Department
- Perkins loans held by the Department
If borrowers have multiple loans in a program type (e.g., multiple Direct Loan Program loans), the Department will apply the relief in the following order:
- Apply relief to loans with the highest statutory interest rate.
- If interest rates are the same, apply to unsubsidized loans prior to subsidized loans.
- If interest rate and subsidy status are the same, apply to the most recent loan.
- If interest rate, subsidy status, and disbursement date are the same, apply to the loan with the lowest combined principal and interest balance.
The Department will be announcing further details on how borrowers can claim relief and has stated that the application will be available in October 2022. FSA has advised borrowers to apply for relief before November 15, 2022 in order to receive relief before the payment pause expires, though FSA noted that the Department would continue to process applications as they are received, even after December 31, 2022.
Borrowers who have completed a Free Application for Federal Student Aid (FAFSA) form for the 2022–23 school year or are enrolled in an income-driven repayment plan based on their 2020 or 2021 income may be eligible for relief without applying because the Department already has their qualifying income information.
Tax Treatment of Forgiven Loans
The American Rescue Plan Act of 2021 modified the federal tax treatment of student loan forgiveness for discharges in 2021 through 2025. Cancellation of certain loans for postsecondary educational expenses after December 31, 2020, and before January 1, 2026, including the ones the Department announced were eligible as of August 24, 2022, may be excluded from gross income according to the Internal Revenue Service (IRS) and will not be subject to federal income taxes. However, state and local tax implications will vary.
Legal Challenges
The administration is facing legal challenges to its loan cancellation plan. On September 27, 2022, a lawsuit was filed in the U.S. District Court for the Southern District of Indiana by a lawyer who claimed standing because the debt cancellation would trigger a tax liability. The Indiana Department of Revenue confirmed in an email to the Associated Press on September 6, 2022 that the state will add the forgiven debt to taxpayer's income for state and local tax purposes. In response to the suit, the Department filed a notice on September 28, 2022 with the Southern District Court of Indiana to say the plaintiff has specifically been removed from automatic forgiveness. The same day, the Department updated its website to state that borrowers who wish to opt out of debt relief will be given an opportunity to do so. Other states that could tax forgiven student loan debt include Arkansas, California, Minnesota, Mississippi, North Carolina, and Wisconsin. In Pennsylvania, despite historically including student loan debt forgiveness as taxable income, Governor Tom Wolf has stated that the cancellation is not taxable.
On September 29, 2022, six states filed a suit in federal court in Missouri. The suit alleges that Missouri's student loan servicer, the Higher Education Loan Authority of the State of Missouri (MOHELA), which is part of its state government, is experiencing financial harm due, in part, to the cancellation creating an incentive for borrowers to consolidate FFEL loans not held by the Department (which are not eligible for forgiveness) into eligible direct loans. On the same day, the Department updated its guidance to state that as of September 29, 2022, borrowers with federal student loans not held by the Department could not obtain debt relief by consolidating those loans into direct loans. The Missouri attorney general leads the suit and is joined by Arkansas, Iowa, Kansas, Nebraska, and South Carolina.
New Income-Driven Repayment Plan
The Department is also proposing a rule, which has not been published, to create a new income-driven repayment (IDR) plan that will reduce future monthly payments for lower- and middle-income borrowers. The proposed rule would cut in half—from 10% to 5% of discretionary income—the amount that borrowers have to pay each month on their undergraduate loans, while borrowers with both undergraduate and graduate loans will pay a weighted average rate. The proposed rule would also raise the amount of income that is considered nondiscretionary income and is therefore protected from repayment. According to the Department, this would guarantee that borrowers earning under 225% of the federal poverty level, or about the annual equivalent of a $15 minimum wage for a single borrower, will not need to make a monthly payment.
The proposed rule would also forgive loan balances after 10 years of payments, instead of the current 20 years under many IDR plans, for borrowers with original loan balances of $12,000 or less. Additionally, the proposed rule would eliminate interest capitalization on borrowers' loans so that the balance would not grow as long as they are making their required monthly payments, even if the required monthly payment is $0. According to the Department, the plan would also "simplify borrowers' choices among loan repayment plans." The proposed regulations will be published in the Federal Register, and the public will be invited to comment on the draft rule for 30 days.
Changes to Public Service Loan Forgiveness Plan
The Department is also proposing long-term changes to the Public Service Loan Forgiveness (PSLF) program with the stated goal of making it easier for borrowers working in public service to gain loan forgiveness. Specifically, the Department proposed allowing more payments to qualify for PSLF, including partial, lump sum, and late payments, and allowing certain kinds of deferments and forbearances—such as those for Peace Corps and AmeriCorps service, National Guard duty, and military service—to count toward PSLF. The PSLF program forgives the remaining balance on federal student loans after 120 payments made by borrowers working full-time for federal, state, tribal, or local government; the military; or a qualifying nonprofit.
These proposed changes build on temporary changes announced by the Department last year that expire on October 31, 2022. These changes, under a limited PSLF waiver and described in a fact sheet published by the Department, allow borrowers to receive credit for past periods of repayment that would otherwise not qualify for PSLF. Enrollments on or after November 1, 2022 will not be eligible for this treatment. Since the start of the temporary changes, the Department has approved more than $10 billion in loan discharges for 175,000 public servants.
If you have questions or concerns regarding this article, please contact the authors or any other member of Venable’s Labor and Employment Group.