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Luke Delome: Student loan forgiveness plan opens doors for many borrowers

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President Joe Biden's student loan forgiveness plan could cancel or alleviate debt for millions of borrowers. While there are a number of details that are yet to emerge, according to Luke Delome, it's clear the plan will provide an opportunity for many to build a more secure financial future.

President Joe Biden recently took executive action to declare the student loan forgiveness plan, the largest student debt relief measure in U.S. history. Although final details may yet emerge, the plan could cancel or alleviate debt for millions of borrowers.

The plan is politically controversial, but there are plenty of forums to debate politics. This column looks only at the practical implications for borrowers who might qualify for relief. Importantly, those who benefit from the plan may want to take advantage of the chance to pay down other debt and save more.

As of the second quarter of 2022, an estimated 48 million Americans held almost $1.75 trillion in total student loan debt. In 2020, the average borrower held $28,400 in debt upon graduation. For these borrowers, debt can hinder workers from building savings after graduation.

The plan provides up to $10,000 in debt relief for individuals earning less than $125,000 per year or married couples earning less than $250,000 per year (important details have yet to emerge, so consult with a tax professional before making any decisions based on this information). Pell Grant recipients will be eligible for an additional $10,000 in debt cancellation. Moreover, the plan specifies that canceled debt will not be considered taxable income at the federal level.

According to the White House, nearly 8 million borrowers may receive relief automatically. However, you may want to apply directly for relief once the application becomes available in early October. (For more information, visit studentaid.gov/debt-relief-announcement/.)

The plan also extends the current pause on debt payments through the end of December 2022. This pause was granted by the American Rescue Plan Act to help borrowers through the pandemic.

The plan also changes an already confusing array of repayment options, depending on the type and date of loan. For borrowers that opt for income-driven repayment plans, the plan caps payments on undergraduate loans at 5 percent of discretionary income. (Check your lender for more details on how to calculate this amount and whether it could help lower payments.) You may also want to consider whether to consolidate loans or perhaps refinance private loans depending on your loan type and current interest rate.

The Student Loan Forgiveness Plan adds to the Public Service Loan Forgiveness (PSLF). Under PSLF, government and nonprofit employees may be eligible for additional relief. PSLF is intended to forgive loans for employees at public service organizations who have made at least 120 on-time, full, scheduled monthly payments (the recent pause on payments counts toward these 120 months).

Studentaid.gov is a helpful website that lists most loan servicers, with contact information. As always, use this opportunity to research and understand your options based on your income and the type of loan.

Recent student loan initiatives are meant to simplify and reduce loan payments for low- and middle-income borrowers. This opportunity may provide increased cash flow for people with student loan debt. Consider paying down high-interest debt such as credit cards with increased cash flow.

If you don’t carry other debt, consider increasing your 401(k) or Roth IRA contributions if you have these accounts available. Seize the moment to start to build a more secure financial future.

Luke Delorme is director of financial planning at American Investment Services Inc. in Great Barrington. The views presented do not necessarily represent those of AIS. This information is not intended as, or to be interpreted as individualized investment, legal or tax advice. He can be reached at luked@americaninvestment.com.

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