The White House estimates that more than 40 million people are eligible for the student debt relief that President Biden announced in August. That includes more than 700,000 Minnesotans. For nearly 20 million Americans, the chance to wipe out up to $20,000 from their student debt will completely clear them of their monthly student loan payments.
According to NPR, the government estimates that, among borrowers who are no longer in school, almost 90% of the relief will go to households earning less than $75,000 per year. Families with incomes less than $125,000 a year, or less than $250,000 a year for couples, are eligible for this debt forgiveness. This blog covers who is eligible for what level of relief and how the process will actually go.
Who is Eligible for Relief?
The Department of Education (ED) will give up to $20,000 in debt relief to Federal Pell Grant recipients and up to $10,000 in debt relief to non-Pell Grant recipients. The Federal Pell Grant program helps low-income students pay for tuition or other expenses related to attending school, such as room and board fees.
The loan forgiveness is available to borrowers with ED loans if their individual income is less than $125,000 (or $250,000 for people who file jointly or as the head of household). You can use the income reported on either your 2020 or 2021 federal tax returns to determine your own eligibility.
More information on eligibility can be found on the government’s student aid website.
You can start the application process here, and the form may be filled out in either English or Spanish. You can do it either from a mobile device or a desktop computer. The White House estimates it’ll only take 5 minutes to fill out the application and you don’t need to submit any official documents. For people who do not want to fill out the online form, there will be a paper version available soon. People have until the end of 2023 to apply, although most experts agree it’s better to apply early.
The good news for all borrowers is that federal taxes will not be collected on the amount forgiven. However, some states have already said they plan to collect state taxes on the money. Minnesota has not officially confirmed whether or not state taxes will be collected on the debt that is forgiven. You will want to keep tabs on this because it could impact your 2022 or 2023 state tax filing.
What To Do Next
The millions of borrowers who will see what’s left of the balance of their student debt wiped out by this forgiveness plan have an important financial question to answer for themselves: What do I do with this “new-found” money in my account each month?
For borrowers who have been able to make their loan payments without squeezing their budget too tight, this is a golden opportunity to make some smart financial moves. Here are three steps to shoring up your finances today and setting yourself up well for the future.
- Make sure you have a rainy-day fund for emergencies. A good rule of thumb is to have 3 to 6 months of living expenses in a savings account. This money will be there for things like a car repair or medical emergency or job loss.
- Make a plan to save for any larger expenses you see on your horizon (Will you need to buy a new car in the next couple of months? Do you want to save for a house or remodel?).
- Look at your retirement plan and see if this is an opportunity to increase your savings. A good way to do this would be to contribute to a Roth IRA or utilize the backdoor Roth IRA contributions strategy. The sooner you put money toward your retirement, the more you are able to take advantage of the power of compounding interest.
If you would like help setting up a Roth IRA or exploring other retirement saving options that could benefit you, please contact a Birchwood Financial Partner today.