Agreement Reached on Student Loan Cancellation for Borrowers in Income-Driven Repayment Plans

Strategic Insights -

Advocates for borrowers hailed an agreement between the Education Department and the American Federation of Teachers as a win for those enrolled in income-driven repayment plans. The agreement, which is subject to court approval, will allow more borrowers to have their remaining debt canceled without facing potentially painful tax bills. Borrowers in these plans make monthly payments tied to their income levels and household size, and any remaining debt is forgiven after 20 to 25 years. However, loan cancellation had been temporarily paused due to a court challenge, leaving borrowers at risk of being taxed on canceled debt.

Key Takeaways:

  • The agreement will enable more borrowers in income-driven repayment plans to have their remaining debt canceled without facing tax bills, ensuring that canceled student debt is exempt from federal taxes.
  • Borrowers in Income-Contingent Repayment (I.C.R.) and Pay As You Earn (PAYE) plans will continue to have their loan discharges processed, as long as the plans remain in effect until 2028.
  • The agreement provides assurances that borrowers who have made enough payments to have their remaining debt wiped away but continued to make payments after crossing the threshold will be reimbursed.
  • Borrowers who spent time in forbearance will continue to be able to submit payments for months spent in forbearance, making them eligible for loan cancellation under the Public Service Loan Forgiveness program.
  • The agreement clarifies that all borrowers will be permitted to enroll in the Income-Based Repayment program, even if they do not qualify for a "partial financial hardship," and that this program will continue to be processed.
  • The agreement allows borrowers to avoid potentially painful tax bills, as a law making canceled student debt exempt from federal taxes expires at the end of this year.

Statistics:

  • The agreement impacts borrowers in income-driven repayment plans who make monthly payments tied to their income levels and household size.
  • The Income-Based Repayment program allows borrowers to make monthly payments as low as $0.
  • The agreement clarifies that borrowers will not be subject to taxes on canceled debt in I.C.R. and PAYE plans.

Sources:

  • A spokesperson for the Education Department
  • Winston Berkman-Breen, legal director at Protect Borrowers
  • Stanley Tate, a consumer lawyer who focuses on student loans
  • The American Federation of Teachers
  • The Federal District Court for the District of Columbia
  • The Brennan Center for Justice at New York University Law
  • The Public Service Loan Forgiveness program
  • The Income-Based Repayment program