Options for students in debt: Loan forgiveness for some, loan interest tax deduction for others
Saturday, March 18, 2023
Forgiveness of debt piled up by college students has been a campaign mainstay in recent elections. It finally became a reality in August 2022.
On Aug. 24, 2022, President Joe Biden directed the Department of Education to forgive up to $10,000 per borrower of federally-held student loan debt, $20,000 for those who went to school on Pell grants.
The next month, six Republican state attorneys general filed a lawsuit to stop the Biden move. In October 2022, a federal appeals court ordered the loan forgiveness plan put on hold while the case is considered.
Now, we — especially the nearly 44 million borrowers who owe a total of $1.6 trillion in federal student loan debt — await the final word from the U.S. Supreme Court.
In the meantime, there are some other options to cope with student loans. Examinations of the alternatives are this weekend's four Saturday Shout Outs.
Another federal program might help: First, "a different federal program may still offer relief to many borrowers," writes Ann Carrns in her New York Times article A New Federal Student Loan Program Will Move Millions Toward Forgiveness.
Under the income-driven repayment (IDR) rule, writes Carrns, "borrower accounts will be reviewed and updated, and credit will be given for months that didn't previously count toward the maximum repayment period — such as certain periods of forbearance or deferment, when borrowers pause payments because of financial setbacks."
The adjustments will revise their accounts so that more of their payments will count toward the required number of payments needed to qualify for loan forgiveness, according to Carrns' article, with more than 3.6 million borrowers expected to receive at least three years of credit toward forgiveness.
Loan help out of court's reach: The IDR option is one of a half-dozen existing ways that students can turn to for help relieving the burden of college debt. They are —
- The Public Service Loan Forgiveness (PSLF);
- Income Driven Repayment (IDR) Account Adjustment;
- Total and Permanent Disability (TPD) Discharge;
- Borrower Defense to Repayment program;
- Discharges Through Bankruptcy; and
- Revised Pay As You Earn (REPAYE) plan.
Adam S. Minsky examines each of these in his Forbes' article These 6 Student Loan Forgiveness Avenues Are Not Blocked By The Supreme Court., which is this weekend's second Saturday Shout Out.
State relief, too: There's also help from states, discussed in the third Saturday Shout Out this weekend.
In her Pew Trusts Stateline article As Supreme Court Considers Student Loan Forgiveness, States May Expand Their Programs, Elaine S. Povich tells us that lawmakers in many states are looking to expand their own student debt repayment programs.
"Every state but North Dakota has at least one loan forgiveness plan," writes Povich. But, she adds, there is a catch. "Most of the 129 state plans are tailored to just a single industry or profession — such as doctors, teachers, police officers or farmers. Or the plans are targeted to people who agree to work in places with a dire need for their services," notes Povich.
However, the state plans are on more solid legal ground. Experts tell Povich that a Supreme Court ruling that strikes down Biden's program likely wouldn't adversely affect state programs, largely because the state plans are so narrowly tailored.
Federal tax break remains: For those left paying student loans, there's also a bit of help from Uncle Sam in the form of an adjustment to income.
Qualifying taxpayers can claim up to $2,500 in interest on school debt on line 21 of Form 1040's Schedule 1. This adjustment to income, which (still) is known as an above-the-line deduction, is one of the two dozen breaks found in Part I of Schedule 1 and discussed in my post Don't miss these 24 tax deductions that don't require itemizing.
So, this weekend's fourth Saturday Shout Out is the Internal Revenue Service's Topic No. 456 Student Loan Interest Deduction. It offers a bit more on eligibility and claiming this deduction, as well as links to other IRS publications that take a deeper dive into this educational expense.
Plus, topic #456 suggests using IRS.gov's online tool to help you determine whether you can claim the student loan interest deduction.
You also might find these items of interest:
- 6 tax-smart financial gifts for grads (and the givers)
- Tax credit lesson: American Opportunity vs. Lifetime Learning
- Make paying for college a family affair, with contributions from parents, kids & Uncle Sam
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