The Biden administration has announced another extension for repayment of federal student loans to an unspecified date in 2023 due to legal challenges that have blocked implementation of the student loan debt relief program. The previous payment moratorium was set to expire on December 31, 2022.
Under the new extension, student loan payments will resume 60 days after the student loan debt relief program is implemented or the lawsuits are resolved. If the courts have not resolved the issue by June 30, 2023, payments will start 60 days after that.
Legal challenges bring uncertainty
The latest extension is in response to court rulings that have blocked implementation of the student loan forgiveness program. Under that plan, announced in August 2022, federal student loan borrowers — including graduate students and parents with PLUS Loans — with an adjusted gross income under $125,000 ($250,000 for married couples filing jointly) are eligible for $10,000 in loan forgiveness, with Pell Grant recipients eligible for up to $20,000 in debt relief.
In November, a federal judge in Texas ruled that the student loan forgiveness program was unlawful. And in a separate lawsuit, a federal appeals court issued an injunction against the program on behalf of six states — Arkansas, Iowa, Kansas, Missouri, Nebraska, and South Carolina — effectively stopping the Department of Education from accepting more applications and discharging any debt.
The Biden administration asked the Supreme Court to review the lower court rulings during its current term, and the Supreme Court has agreed to hear the case, with arguments tentatively scheduled for February 2023. In the meantime, the Supreme Court left the injunction blocking the program in place.
Pandemic-era payment pause continues
There have been nine student loan payment pauses since the start of the coronavirus pandemic. The first pause came in March 2020 when Congress passed the Coronavirus Aid, Relief, and Economic Security Act. Subsequent payment extensions have come via Presidential executive orders. The latest extension, most likely sometime after June 2023, will bring the total payment pause to over three years.
Over 45 million Americans owe a collective $1.6 trillion in federal student loans, the largest category of consumer debt behind mortgages.1 To date, more than 26 million people have applied for debt relief under the program; an additional 8 million people who have their income information already on file will qualify automatically for the program.2
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Prepared by Broadridge. Edited by BFSG. Copyright 2022.
Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.
October is the kickoff month for financial aid. That’s when incoming and returning college students can start filing the Free Application for Federal Student Aid (FAFSA) for the next academic year. The FAFSA is a prerequisite for federal student loans, grants, and work-study, and may be required by colleges before they distribute their own institutional aid to students.
How do I submit the FAFSA?
The FAFSA for the 2023-2024 school year opens on October 1, 2022. Here are some tips for filing it.
How does the FAFSA calculate financial need?
The FAFSA looks at a family’s income, assets, and household information to calculate a family’s financial need. This figure is known as the expected family contribution, or EFC. All financial aid packages are built around this number.
When counting income, the FAFSA uses information in your tax return from two years earlier. This year is often referred to as the “base year” or the “prior-prior year.” For example, the 2023-2024 FAFSA will use income information in your 2021 tax return, so 2021 would be the base year or prior-prior year.
When counting assets, the FAFSA uses the current value of your and your child’s assets. Some assets are not counted and do not need to be listed on the FAFSA. These include home equity in a primary residence, retirement accounts (e.g., 401k, IRA), annuities, and cash-value life insurance. Student assets are weighted more heavily than parent assets; students must contribute 20% of their assets vs. 5.6% for parents.
Your EFC remains constant, no matter which college your child attends. The difference between your EFC and a college’s cost of attendance equals your child’s financial need. Your child’s financial need will be different at every school.
After your EFC is calculated, the financial aid administrator at your child’s school will attempt to craft an aid package to meet your child’s financial need by offering a combination of loans, grants, scholarships, and work-study. Keep in mind that colleges are not obligated to meet 100% of your child’s financial need. If they don’t, you are responsible for paying the difference. Colleges often advertise on their website and brochures whether they meet “100% of demonstrated need.”
Should I file the FAFSA even if my child is unlikely to qualify for aid?
Yes, probably. There are two good reasons to submit the FAFSA even if you don’t expect your child to qualify for need-based aid.
First, all students attending college at least half time are eligible for unsubsidized federal student loans, regardless of financial need or income level. (“Unsubsidized” means the borrower, rather than the federal government, pays the interest that accrues during school, the grace period, and any deferment periods after graduation.) If you want your child to be eligible for this federal loan, you’ll need to submit the FAFSA. But don’t worry, your child won’t be locked in to taking out the loan. If you submit the FAFSA and then decide your child doesn’t need the student loan, your child can decline it through the college’s financial aid portal before the start of the school year.
Second, colleges typically require the FAFSA when distributing their own need-based aid, and in some cases as a prerequisite for merit aid. So, filing the FAFSA can give your child the broadest opportunity to be eligible for college-based aid. Similarly, many private scholarship sources may want to see the results of the FAFSA.
Changes are coming to next year’s FAFSA
Changes are coming to the 2024-2025 FAFSA, which will be available October 1, 2023. These changes are being implemented a year later than originally planned. One notable modification is the term “expected family contribution,” or EFC, will be replaced by “student aid index,” or SAI, to better reflect what this number is supposed to represent — a measure of aid eligibility and not a definite amount of what families will pay. Other important changes are that parents with multiple children in college at the same time will no longer receive a discount in the form of a divided SAI; income protection allowances for both parents and students will be increased; and cash support to students and other types of income will no longer have to be reported on the FAFSA, including funds from a grandparent-owned 529 plan.
Prepared by Broadridge Advisor Solutions. Edited by BFSG. Copyright 2022.
Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.
For parents and students trying to manage college bills and student loan payments, the federal government offers education-related tax benefits. The requirements for each are different, so here’s what you need to know.
The American Opportunity Credit (formerly the Hope credit) is a tax credit available for the first four years of a student’s undergraduate education, provided the student is attending school at least half-time in a program leading to a degree or certificate. The credit is worth up to $2,500 in 2022 (it’s calculated as 100% of the first $2,000 of qualified expenses plus 25% of the next $2,000 of expenses). The credit must be taken for the tax year that the expenses are paid, and parents must claim their child as a dependent on their tax return to take the credit.
To be eligible for the credit, your income must fall below certain limits. In 2022, a full credit is available to single filers with a modified adjusted gross income (MAGI) below $80,000 and joint filers with a MAGI below $160,000. A partial credit is available to single filers with a MAGI between $80,000 and $90,000 and joint filers with a MAGI between $160,000 and $180,000.
One benefit of the American Opportunity Credit is that it’s calculated per student, not per tax return. So, parents with two (or more) qualifying children in a given year can claim a separate credit for each child (assuming income limits are met).
The mechanics of claiming the credit are relatively easy. If you paid tuition and related expenses to an eligible educational institution during the year, the college generally must send you a Form 1098-T by February 1 of the following year. You then file Form 8863 with your federal tax return to claim the credit.
The Lifetime Learning Credit is another education tax credit, but it has a broader reach than the American Opportunity Credit. As the name implies, the Lifetime Learning Credit is available for college or graduate courses taken throughout your lifetime (the student can be you, your spouse, or your dependents), even if those courses are taken on a less than half-time basis and don’t lead to a formal degree. This credit can’t be taken in the same year as the American Opportunity Credit on behalf of the same student.
The Lifetime Learning Credit is worth up to $2,000 in 2022 (it’s calculated as 20% of the first $10,000 of qualified expenses). The Lifetime Learning Credit must be taken for the same year that expenses are paid, and you must file Form 8863 with your federal tax return to claim the credit. In 2022, a full credit is available to single filers with a modified adjusted gross income (MAGI) below $80,000 and joint filers with a MAGI below $160,000. A partial credit is available to single filers with a MAGI between $80,000 and $90,000 and joint filers with a MAGI between $160,000 and $180,000.
Unlike the American Opportunity Credit, the Lifetime Learning Credit is limited to $2,000 per tax return per year, even if more than one person in your household qualifies independently in a given year.
If you have more than one family member attending college or taking courses at the same time, you’ll need to decide which credit to take.
Example: Joe and Ann have a college freshman and sophomore, Mary and Ben, who are attending school full-time. In addition, Joe is enrolled at a local community college taking two graduate courses related to his job. Mary and Ben each qualify for the American Opportunity Credit. Plus, Mary, Ben, and Joe each qualify for the Lifetime Learning Credit. Because the American Opportunity Credit isn’t limited to one per tax return, Joe and Ann should claim this credit for both Mary and Ben, and then claim a Lifetime Learning Credit for Joe. Joe and Ann can claim both the American Opportunity Credit and the Lifetime Learning Credit in the same year because each credit is taken on behalf of a different qualified student.
The student loan interest deduction allows borrowers to deduct up to $2,500 worth of interest paid on qualified student loans. Generally, federal student loans, private bank loans, college loans, and state loans are eligible. However, the debt must have been incurred while the student was attending school on at least a half-time basis in a program leading to a degree, certificate, or other recognized educational credential. So, loans obtained to take courses that do not lead to a degree or other educational credential are not eligible for this deduction.
Your ability to take the student loan interest deduction depends on your income. For 2022, to take the full $2,500 deduction (assuming that much interest is paid during the year) single filers must have a MAGI of $70,000 or less and joint filers $145,000 or less. A partial deduction is available for single filers with a MAGI between $70,000 and $85,000 and joint filers with a MAGI between $145,000 and $175,000.
Also, to be eligible for the deduction, an individual must have the primary obligation to pay the loan and must pay the interest during the tax year. The deduction may not be claimed by someone who can be claimed as a dependent on another taxpayer’s return. Borrowers can take the student loan interest deduction in the same year as the American Opportunity Credit or Lifetime Learning Credit, provided they qualify for each independently.
Comparison of Credits/Deductions
MAGI limits 2022 | Qualified expenses include | |
American Opportunity Credit $2,500 | Single filer: $80,000 or less for full credit; partial credit if MAGI $80,000 to $90,000 Joint filer: $160,000 or less for full credit; partial credit if MAGI $160,000 to $180,000 | Tuition and fees, plus course materials |
Lifetime Learning Credit $2,000 | Single filer: $80,000 or less for full credit; partial credit if MAGI $80,000 to $90,000 Joint filer: $160,000 or less for full credit; partial credit if MAGI $160,000 to $180,000 | Tuition and fees only |
Student loan interest deduction $2,500 | Single filer: $70,000 or less for full deduction, partial deduction if MAGI $70,000 to $85,000 Joint filer: $145,000 or less for full deduction; partial deduction if MAGI $145,000 to $175,000 | Tuition and fees, room and board, books, equipment, and other necessary expenses |
For more information, see IRS Publication 970.
Prepared by Broadridge Advisor Solutions. Edited by BFSG. Copyright 2022.
Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.
On April 6, the U.S. Department of Education announced a record sixth extension for federal student loan repayment, interest, and collections, through August 31, 2022. The fifth payment pause was set to end on April 30, 2022. The six extensions have postponed federal student loan payments for almost two and a half years — since March 2020 at the start of the pandemic. During this time, the loans will not accrue interest.
A “fresh start”
As part of the extension, the Department of Education noted that it will give all federal student loan borrowers a “fresh start” by allowing them to enter repayment in good standing, even those individuals whose loans have been delinquent or in default. More information about loan rehabilitation can be found here.
The Department’s press release stated: “During the extension, the Department will continue to assess the financial impacts of the pandemic on student loan borrowers and to prepare to transition borrowers smoothly back into repayment. This includes allowing all borrowers with paused loans to receive a ‘fresh start’ on repayment by eliminating the impact of delinquency and default and allowing them to reenter repayment in good standing.”
What should borrowers do between now and September?
Approximately 41 million Americans have federal student loans. There are a number of things borrowers can do between now and September 2022.
Prepared by Broadridge Advisor Solutions. Edited by BFSG. Copyright 2022.
Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.
After two years of decreases, interest rates on federal student loans are set to increase almost a full percentage point for the 2021-2022 school year.1
The interest rates on federal student loans are reset each year after the May auction of the 10-year Treasury note. The rates apply to new federal student loans issued on or after July 1, 2021, through June 30, 2022. The interest rate is fixed for the life of the loan.
Subsidized vs. unsubsidized: what’s the difference? With subsidized loans, the federal government pays the interest that accrues while the borrower is in school, during the six-month grace period after graduation, and during any loan deferment periods. With unsubsidized loans, the borrower is responsible for paying the interest during these periods. Only undergraduate students are eligible for subsidized loans, and eligibility is based on demonstrated financial need.
In case you missed it, check out our A Definitive Guide to Education Planning webinar where we outline your options with student loans.
1) The New York Times, May 28, 2021
2) U.S. Department of Education, 2021
Prepared by Broadridge Advisor Solutions. Copyright 2021. Edited by BFSG, LLC.
Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.