Due to the amount of conflicting news about the student debt relief program, we wanted to provide a student loan forgiveness update and repayment restart guide. As the end of the year approaches, student loan borrowers and people who use the FAFSA process need to understand the importance of their future tax filing decision, especially their 2022 filing.
Starting in July 2023, the IRS data will automatically feed many Department of Education systems. This change has received little press since the focus is on student loan forgiveness. This process change is significant for borrowers who use the Income-Driven Repayment (IDR) methods and those submitting the FAFSA. These changes are all part of the FAFSA Simplification Act.
Student Debt Relief Update
The President’s Student Debt Relief is on hold due to various lawsuits. The lawsuits were combined and will now be heard by the Supreme Court on February 28, 2023. A decision is expected by the end of June or before.
Once a decision is made, the federal student loan repayment will restart 60 days after that date. If a decision is not finalized by June 30th, the National Forbearance will end, and repayment will resume by September 1st.
There is a growing concern regarding the approval of Debt Relief Forgiveness. Two similar executive orders followed the same path to the Supreme Court. Both were halted and found unconstitutional. Similar cases were the renters’ eviction and the employee vaccine mandate. The Debt Relief Forgiveness portion is different but has many similarities to these two other cases. It is still hard to project the outcome at this time, but borrowers need to prepare before the decision is finalized.
Another growing issue with the Debt Relief Program is the final cost. The White House’s original estimate was approximately $240 Billion over the next ten years. The Congressional Budget Office (CBO) has estimated that just the forgiveness aspect will cost over $400 billion. A Wharton Group has estimated that the new IDR program will cost another $600 Billion. These recent estimates make the total cost approximately $1 Trillion. This would make it the highest-costing executive order in history without congressional approval.
To date, over 26 million borrowers have applied for this forgiveness program, and the Department of Education has notified over 16 million that their forgiveness has been approved. This notification is an early example of how the Department of Education is using the IRS and its own data together. Borrowers and FAFSA filers need to recognize the importance of their tax filing positions going forward. The 2022 tax submission will the first year for this new processing.
PSLF Limited Waiver Program
The PSLF Limited Waiver program is the most successful PSLF program to date. This program corrected many of the errors that caused borrowers to be denied due to the complexity of PSLF. Approximately 300,000 borrowers have been approved for this type of student loan forgiveness.
The only issue with the program has been the processing timing. It takes approximately seven months to complete the process based on the needed documents and the errors that need to be corrected by the borrower.
This program is not accepting any new applications since it expired on 10/31/2022. Some may qualify for a similar program called the One-Time IDR account Adjustment. The rules are very similar to the Limited Waiver program.
One-Time IDR Adjustment
On April 19, 2022, the One-Time IDR Adjustment Program was announced. It is part of the Department of Education program to correct IDR inaccuracies. This program is expected to cancel over 40,000 borrowers’ balances and increase over 3 million borrowers’ credit months up to 36 months.
The forgiveness program is an extension of the PSLF Limited Waiver. The most significant difference is that the proper employer type must still employ the applicant to qualify. The people who will be more likely to qualify for this program will be borrowers over 30. They will have worked for a PSLF-qualified employer (Government agency or 501c3 company. In most cases, they will have either FFEL loans and/or have been in the wrong repayment method during their work period.
We are recommending that loan consolidations be submitted before May 1, 2023. The loan balance and credit month adjustments will happen sometime after July 1, 2023. It is recommended that the borrower update their work history using the form on the StudentAid.gov website. If they have FFEL loans, they need to be consolidated and become Direct Federal Loans.
Importance of 2022 Tax Filing
As we enter the 2022 tax filing season, many borrowers may overlook the need to refocus on their repayment process. As I said earlier, repayment may start in September, but there is a significant change in the process. According to current plans, the Department of Education will receive a direct feed of income and tax data starting July 1, 2023, from the IRS.
This automation will impact the borrowers that use the IDR methods and the annual income recertification. The income recertification process will be eliminated with this change. My concern is that IDR income recertification was not required during COVID. Some have changed their income and tax filing status in this time frame. Without proper planning, borrowers could see their monthly payment change significantly and have limited ability to make an adjustment due to the process.
In addition to the repayment automation, it will also impact people who file the FAFSA. The FAFSA automation will start on October 1, 2023, for School Year financial aid 2024-25.
Getting the Right Advice
Many borrowers depend on loan servicers for their student loan repayment advice. As this may be a good start, they legally cannot provide all the answers your need. Loan servicer employees cannot give any tax or personal financial or tax advice.
Currently, over 54% of student debt is repaid using IDR methods. The loan servicers legally cannot tell you how to manage your income to lower your payments and maximize your student loan forgiveness. This is a significant shortcoming of the advice process that most borrowers do not realize. PayForED has trained advisors with expertise in personal financial strategies and student loan repayment.
Summary of the Student Loan Forgiveness Update
Many may feel that nothing needs to be done until the Supreme Court decides on the program. That is the furthest thing from the truth. We have gone for almost three years without making a student loan repayment on federal loans. No matter what the result, repayment will start in 2023.
Borrowers need to plan for the restart, no matter the loan forgiveness decision outcome. Revisiting your tax filing will be the first step. With the IRS data integration part of the Department of Education systems, borrowers will need better planning going forward.
