As a result of the significant legal challenges that the Biden Administration is facing with their student loan forgiveness proposal, the Administration and the Department of Education announced an extension of the Administrative Forbearance. This is now the eighth extension of the forbearance of payments and interest, which originally began due to the COVID-19 pandemic in March 2020 and was set to last only six months. Previously set to expire on December 31, 2022, the President’s announcement has extended the Administrative Forbearance. Although, instead of specifying a new expiration date, the Administration has tied the end of the payment pause to when the student debt relief proposal is ruled on by the U.S. Supreme Court. In his announcement, President Biden indicated that the latest the extension could last is June 30, 2023. Payments and interest accumulation will begin 60 days after the forbearance ends. This could mean that borrowers of federal student loans could benefit from no required payments and no interest accumulation into August 2023.
In August 2022, President Biden announced his plan for up to $10,000 ($20,000 for borrowers with Pell Grants) of Student Loan Forgiveness for American households earning under $250,000 per year ($125,000 for individual tax filers). The income threshold requirement must be met in the 2020 or 2021 tax year. Along with this momentous announcement, the COVID-19 forbearance of payments and interest was also extended one “final” time through December 31, 2022.
On Monday, October 17, the long-awaited application for student debt relief officially went live on StudentAid.Gov. However, after growing legal challenges, the application was subsequently closed on November 11. According to the White House, over 26 million borrowers completed the application while it was available. A whopping 40 million borrowers were reported to be eligible for the original forgiveness proposal. The initial deadline for completing the application was December 31, 2022.
It is likely that this case will eventually end up being heard by the U.S. Supreme Court.
The group most likely affected by the potential forgiveness are medical and dental residents and fellows. Some attending physicians and associate dentists may qualify for the $10,000 forgiveness plan depending on what year they are in practice and their specialty. One key point to remember is that both 2020 and 2021 tax returns were to be accepted for income verification purposes. You can check your Adjusted Gross Income (Line 11 of your Form 1040) to see if you meet the eligibility criteria.
The $10,000 forgiveness would have varying impacts on doctors. With many medical and dental school graduates accruing six-figure loan balances, the $10,000 balance reduction may be just a fraction of their total debt in the bucket. For others, it may get them markedly closer to the goal of paying off their loans. But, on the other hand, a $10,000 lump-sum forgiveness may feel meaningless to any resident or fellow with their eyes set on a different loan forgiveness program. Whether they are aiming for Public Service Loan Forgiveness, National Health Service Corps Loan Repayment, or another program, the $10,000 forgiveness for borrowers in this group will likely not change their outlook on their debt repayment strategy.
In the days following President Biden’s announcement, a myriad of questions began swirling:
Some of these questions are leading to what is currently unfolding in the courts.
One reason many physicians and dentists may want to opt out or not apply for the lump sum forgiveness is taxes. While the proposal was set to be federal income tax-free, many states planned to include the $10k or $20k in an individual’s taxable income. For example, the impact in a state like North Carolina (one of the states who would tax the forgiveness) could be around $500 of tax liability. For many physicians and dentists planning on complete forgiveness through another program, the tax liability may be a reason not to apply if the forgiveness proposal moves forward.
It is clear that the student loan world is changing rapidly. As always, the Spaugh Dameron Tenny team will continue to monitor the announcements and help you understand how the changes may affect your situation. Please reach out to your trusted advisor with any questions.
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Will Koster is a financial planner with Spaugh Dameron Tenny. The experience of losing his father as a teenager helped Will find his calling in financial planning. He has a passion for working with dentists and physicians, helping them navigate their unique wealth creation journeys. In addition, Will has become the in-house expert on student loans after completing the Certified Student Loan Professional® training.
