On August 24, 2022, President Biden announced a plan to give relief to borrowers by forgiveness of a portion of their educational loan debt. During his campaign in 2020, he promised to provide student debt relief because he believes that while a college education should be a ticket to a middle-class life, the cost of borrowing for college can be a lifelong burden for some students.
According to a fact sheet released by the White House, “Since 1980, the total cost of both four-year public and four-year private college has nearly tripled, even after accounting for inflation. Federal support has not kept up: Pell Grants once covered nearly 80 percent of the cost of a four-year public college degree for students from working families, but now only cover a third. That has left many students from low- and middle-income families with no choice but to borrow if they want to get a degree. According to a Department of Education analysis, the typical undergraduate student with loans now graduates with nearly $25,000 in debt.”
The three-part plan, administered by the Department of Education, will provide up to $20,000 in debt cancellation to Pell Grant recipients with federal loans and up to $10,000 in debt cancellation to non-Pell Grant recipients.
Borrowers are only eligible for this relief if their individual income is less than $125,000 ($250,000 for married couples). No high-income individual or high-income household—in the top 5% of incomes—will be able to take advantage of this program.
The Department of Education estimates that, among borrowers who are no longer in school, nearly 90% of relief dollars will go to those earning less than $75,000 a year.
The Biden administration expects that its plan will provide relief to as many as 43 million Americans. More than 12 million Americans in their 30s—which is almost a quarter of this age cohort—still have unpaid student debt.
In addition, the pause on federal student loan repayment will be extended through December 31, 2022. Borrowers will be expected to resume payments on their educational loans in January 2023.
A new income-driven repayment plan has also been proposed that caps monthly payments for undergraduate loans at 5% of a borrower’s discretionary income, which is half of the rate that borrowers must pay now under most existing plans. This means that the average annual student loan payment for undergraduate debt will be lowered by more than $1,000 for both current and future borrowers. While this undergraduate plan will not be of much help to veterinarians and others with high graduate school debt, it might benefit some.
More importantly, borrowers working in public service are entitled to earn credit toward debt relief under the Public Service Loan Forgiveness (PSLF) program. Because of complex eligibility restrictions, historic implementation failures, and poor counseling given to borrowers, many borrowers have not received the credit they deserve for their public service.
The Department of Education intends to reboot the Public Service Loan Forgiveness (PSLF) program by making sure that borrowers who have worked at a nonprofit, in the military, or in federal, state, tribal or local government, and have made 120 educational payments, receive appropriate credit toward loan forgiveness.
Temporary changes, ending on October 31, 2022, provide flexibility that makes it easier than ever to receive forgiveness by allowing 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. They encourage borrowers to sign up immediately by visiting https://www.whitehouse.gov/publicserviceloanforgiveness/?utm_source=pslf.gov.
Previous problems with the PSLF have left many veterinary borrowers with broken promises. It is hoped that these issues will finally be resolved through this action. To investigate whether your employer qualifies you for PSLF, utilize the tool at https://studentaid.gov/pslf/.
You might be wondering what loans will qualify for this program.
Nearly all federal student loans will qualify for forgiveness, including direct subsidized or unsubsidized loans and graduate or parent PLUS loans.
At this time, it is not yet clear whether Federal Family Education loans (FFEL) and Perkins loans will qualify. However, if your loans qualified for the federal student loan payment pause, they’re likely eligible for this forgiveness opportunity.
According to Forbes Advisor, about half of FFEL loans are currently held by private lenders, but they state that the Department of Education is working with those lenders to include FFEL loans in this forgiveness opportunity (https://www.forbes.com/advisor/student-loans/student-loan-forgiveness-faqs/).
Although many of the sources of information about this new program talk about undergraduate loans, if you have federal loans used for professional school, you are eligible for forgiveness of $10,000-$20,000.
In order to claim the reduction in the federal loan balance, a simple application process for borrowers will be developed and made available no later than the end of the year, according to the Department of Education.
Borrowers can learn more at https://studentaid.gov/debt-relief-announcement/ and can sign up to hear when the application becomes available at https://www.ed.gov/subscriptions.
Nearly 8 million of the eligible 43 million borrowers might be eligible to receive relief automatically because their relevant income data is already available to the Department, but it is recommended that nothing be assumed.
Thankfully, the debt relief will not be treated as taxable income for federal income tax purposes. However, some states might tax the amount forgiven.
According to an analysis from the nonprofit Tax Foundation, 13 states, including Arkansas, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Mississippi, New York, Pennsylvania, South Carolina, Virginia, West Virginia and Wisconsin, might tax forgiven student debt.
To investigate how student loan relief could affect your state tax bill, check with your state’s department of revenue (https://www.irs.gov/businesses/small-businesses-self-employed/state-government-websites) or speak with a tax professional. But remember that whatever tax you pay will be much lower than the amount forgiven.
There is some worry about the legality of the President canceling federal student loans, with a high likelihood that the plan will face legal challenges in the coming months. As with many other issues, legal experts remain divided over whether or not the plan will be struck down by a court. Borrowers should refer to StudentAid.gov for the latest information.
Take-Home Message
With veterinary educational debt averaging $188,853 for those graduates with debt, a forgiveness of $10,000 will be of little help. Certainly, it is worth pursuing, but conversations should continue with our federal government to adopt meaningful changes to federal loan programs such as minimizing interest rates and maximizing credit for those who work in underserved areas or for non-profits.
In addition, innovative ways to provide a veterinary medical education in a shorter number of years might need to be developed. While this program is a step that will assist many veterinarians, it will not change the difficult reality that our profession faces with regard to educational debt.
