Public Service Loan Forgiveness: About the Program, Who is Eligible, & Economic Impacts (Updated for June 2023)
Update: As of June 30, 2023, the Supreme Court has blocked the student loan forgiveness program in a 6-3 decision. The court’s decision impacts 26 million U.S. borrowers who applied for relief after the plan was originally announced in August 2022.
On August 24th, 2022, President Biden announced a student loan forgiveness program, providing relief for current balances on Federal Pell Grants and other student debt. In the following article, we will cover the details of the program, who is eligible, and the economic impacts.
Recently announced, the Public Service Loan Forgiveness (PSLF) program provides relief of $20,000 for Federal Pell Grants and $10,000 for all others. The forgiveness only applies to those who have current balances. Those who have previously paid off debts will not be eligible for any benefits. It is also important to know that there is an income limit to be eligible to receive this forgiveness. Any individual with under $125,000 of income will qualify for full relief through the PSLF program. For those married or filing as head of household there is a $250,000 maximum income threshold.
If you qualify and owe less than the maximum amount of forgiveness ($20,000 for Federal Pell Grants or $10,000 for other student loans), the entire debt will be forgiven. If you qualify and owe more, your debts will only be forgiven up to the maximum limits. For example, if you have $30,000 in debt, they will only forgive up to $20,000. This means you may still be on the hook for the remaining $10,000 or more. In addition to the forgiveness, the existing student loan payment pause has also been extended through December 31st, 2022. For those unaware, student loan payments have been paused and extended repeatedly throughout the COVID Pandemic. It has been suggested that this will be the last extension, but we have heard that before. So, for now, we know that those extensions will be delayed through December 31st, 2022, as a final delay, but it may be possible that we will see further delays to come.
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Regarding eligibility, it has been determined that income thresholds will be based on 2020 or 2021 income. When the time comes, loan forgiveness applications should be available on the Education Department website and ready before the payment freeze ends in December; however, many borrowers will auto-receive forgiveness.
How will this impact you, the economy, and what are the overall long-term impacts? Currently, it has been determined that forgiveness will be a non-taxable event, from a federal tax perspective, due to legislation that passed during COVID to those who receive forgiveness. Still, future forgiveness may be taxed when this legislation expires through 2025. Separately, some individuals may be subject to state taxes for any forgiven loan amounts.
As far as the economy goes, it is not likely this program will have much of an immediate impact. Looking backwards, student loan payments have been delayed throughout most of the country since early 2020. So, many with student loan debts have not been experiencing the impact of payments on their cash flow today, or even for the last couple of years. Due to these payment pauses in the past, the forgiving of these loans may not necessarily mean that those with a debt burden will experience any change in their household cash flow. Therefore, it may have little effect on their disposable income or spending habits. If households were to experience an increase in their household cash flow, we likely would see inflation increase even further. However, because it's not going to have the impact of more spending power than many are already used to, it's not likely to have much of an immediate effect on the economy today.
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In the longer term, there likely may be more significant economic consequences. For instance, as far as education costs go, this could lead to even more inflationary pressures on tuition payments. As many are aware, education costs in our country have been going through the roof for a very long time. The new PSLF program may add fuel to that fire over the long term. Another consideration is how this program is meant to work in the future. So, for those who already have graduated it is clear how these programs will play out. You will either be eligible for loan forgiveness or not based on your income threshold and how much outstanding debt you have. Often missed, however, is how this program is meant to play out for those taking on college debt in the future. The student loan forgiveness program includes new, income-based payment caps on student loan payments moving forward. There is still a bit of clarity that needs to be worked out. But, generally speaking, student loan debt payments in the future would be completely capped above certain thresholds. In addition, after 20 years, any remaining balance on student loans would be completely forgiven, meaning borrowers with a large burden would be relieved of a much larger balance. For illustrative purposes only, here is what this could look like. Borrower A takes out loans of $50,000 but monthly payments are capped at $500/month while borrower B takes out loans of $500,000 with monthly payments capped at the same $500/month. At the end of 20 years, borrower B will have a significantly larger balance that will be forgiven as compared to borrower A. This could lead to even higher costs and the potential that an individual may not have any concern to take on debt above a certain amount.
When it comes down to it, for those who are thinking about education funding for their kids or grandkids, this program should play a role in your education funding strategies. We hope this information about the Public Service Loan Forgiveness (PSLF) program has been helpful. If you have any questions about how this may relate to your specific financial planning, whether it be for yourself, your children, or your grandchildren, do not hesitate to get in touch with us today!