Escape Sallie Mae!
Let's Get These Loans Forgiven! Hey bestie, it’s your Wealth Bestfriend®️. Everyone has been talking about student loan forgiveness but do you really understand your options? Today let’s chat about student loans and your payment/forgiveness options because student loans can be a huge obstacle to building wealth.
Right now, there are two sources of forgiveness people are talking about. Public Service loan forgiveness and the one-time $10/$20k forgiveness plan created by presidential executive action that expires 12/31/2023.
Now let's see if you qualify bestie. To start, both of these programs require that you have FEDERAL student loans, meaning if your student loans came from places like: Wells Fargo, Credible, SoFi or some other entity other than the department of education then you have to find another way to get your loans paid off.
For federal student loans this means, you must have direct subsidized or unsubsidized loans, graduate or parent PLUS loans. An easy way to tell if you have federal loans is to think about whether the payments have been paused since a little after the pandemic started (March 2020). Now bestie, there are a few types of loans that I saw that didn’t qualify for the pause on payments but is still a federal loan. These are the Federal Family Education loans (FFEL) and Perkins loans that aren’t held by the federal government (you may have had a servicer like Navient). These loans are ineligible for forgiveness BUT what I hope you did if you had them is applied for a direct consolidation loan through the federal government (on their website https://studentaid.gov/) before Sept. 29, 2022 to make these loans eligible for forgiveness. If not, then like I said you will have to work on using other methods to get your student loans paid off. There are other methods besties so don’t fret.
One-Time Only Forgiveness Plan
Okay, let's talk about this $10,000 or $20,000 first. You have to check line 11 on your 2020 or 2021 taxes (form 1040) and yes, bestie you have to do your taxes every year so you don’t miss out on benefits like this. Check line 11 to see if the amount listed is less than $125,000 if you are filing single or $250,000 if you file jointly. If you are under this income amount you should qualify for $10,000 in forgiveness.
To check your eligibility for the $20,000 you have to have received a Pell Grant during your time in school. These grants were need-based federal government grants offered to students who qualified based on their family’s household income (remember filling out your FAFSA?) They are only for students who didn’t have an undergrad degree so for those of us with multiple degrees you might have to dig deep to see if you ever received this grant. You can check this information on the https://studentaid.gov/ website too under “Aid Summary.” If you see a Pell Grant listed then that's it, you are likely eligible for the $20,000!
Now there is an application that you may have to fill out unless the Department of Education already has your income data.
Why would they have this?
If you are on an income-based payment plan and you have been certifying your income and submitting your taxes to them they will likely send you an email that you don’t need to submit anything because they have your information and they will work with your servicer to process any relief you are eligible for.
If you do have to fill out the forgiveness application that's okay too. It’s easy, it asks for your name, social security number, date of birth, phone number, e-mail, and requests that you certify that you qualify and all the information you submitted is correct. THAT’S IT!
Submit the form and make sure you get the email confirmation. We have to take a wait-and-see approach because there is a court case temporarily blocking the debt discharge because some believe forgiving loans in this manner to be unconstitutional. But you will be notified if you need to submit more information or when your application is approved.
Public Service Loan Forgiveness
This one takes a bit more work and is a bit more specialized. But this program has also been around for a long time and is not really new they just made some “time-limited changes to the rules.” So, if you have worked full-time for a federal, state, local or tribal government or a non-profit (qualifying employer) for 10 years and made 120 qualifying payments to your direct loans you may be eligible for forgiveness even if your payments for the last two years were $0 because of the pause.
As I mentioned earlier depending on when you got your loans the Federal Family Education Loan (FFEL) Program and the Federal Perkins Loan (Perkins Loan) Program don’t qualify for Public Service Loan Forgiveness. However, they may become eligible if you consolidate them into a Direct Consolidation Loan. The reason you need to act now is because normally when you consolidate you are washing away your qualifying payments and starting over but if you consolidate the loans with the department of education before 10/31/2022 you may be able to receive qualifying credit for your prior payments made through the limited waiver. If and when you find out you have the right employer and the right type of loan, don’t forget to have your employer certify your employment. Employers are receiving lots of requests and have been since the program was announced so apply ASAP. It can take them a few weeks. After you get the paperwork back from your employer, then you have to fax or mail the form to the department of education so plan ahead bestie.
*Update: In response to requests by colleges, universities, and other qualifying employers the US Department of Education recently clarified that they will accept documentation submitted after the Oct. 31, 2022, waiver deadline if you generate your Public Service Loan Forgiveness application through the online PSLF Help Tool and submit your request for employment verification by that date. You can still get the benefit of the waiver even if UC has not yet certified your employment status at that time.
That's it for the forgiveness options. If you qualify for both, DO BOTH.
Uncle Sam Might Want A Piece Too.
After you apply for forgiveness, check with your state to see if they are one of the few that is planning to tax the forgiveness. This means the amount forgiven by the department of education might be considered income and taxed by the state. If this happens the amount you end up responsible for depends on your tax bracket. Speak with your qualified tax professional to learn more but the good news is the federal government will not be taxing the forgiveness.
An Uncomfortable Reminder
It's been lovely having student loan payments paused, however, all loans that are on the payment pause are slated to resume in January 2023 so if you will still have a balance after any forgiveness it's time to start your financial planning bestie. You still have income-based payment plans available that may make your payments more affordable.
Here’s hoping you can get rid of Sallie Mae for good bestie!! Good Luck!
Jala Eaton known as Your Wealth Bestfriend® is a seasoned personal finance writer as well as an Attorney and award-winning Certified Trust & Fiduciary Advisor (CTFA). When she is not running her businesses, teaching, or writing she enjoys dance parties in the kitchen with her daughter. Her work has appeared on, Business Insider, Experian, Real Simple, The Skimm, Yahoo News, and others.