The Biden administration’s student loan forgiveness plan is expected to provide financial relief to as many as 43 million borrowers, according to White House estimates. This total primarily includes those eligible to receive up to $20,000 in forgiven loans.
See: 9 bills you should never put on automatic payment
Cash App Borrow: How to Borrow Money on Cash App
The plan will forgive $10,000 of debt for individual federal student loan holders who earn less than $125,000 per year, or married couples who file jointly and earn less than $250,000 per year. An additional $10,000 will be waived for borrowers who received Federal Pell Grants.
The plan also includes a proposal from the Department of Education that would halve monthly payments for undergraduate loans, increase the amount of income that would be protected from repayment, and write off some loan balances 10 years earlier than is currently the case. allow the current rules.
Being freed from thousands of dollars in student loan debt will have the biggest immediate impact on borrowers, but that’s not the only way you could be affected. The residual effects could impact everything from your savings and taxes to your credit score.
Here are five ways the student loan forgiveness plan could affect you.
More money will be freed up for retirement savings
With millions of borrowers eligible to receive between $10,000 and $20,000 in loan forgiveness, there is a huge opportunity to put that money into retirement funds. As previously reported by GOBankingRates, a CNBC/Momentive survey of student borrowers conducted last month found that 45% plan to use loan forgiveness to save for retirement.
“It’s not just a boon, it’s an opportunity,” Rose Niang, director of financial planning at Edelman Financial Engines, told CNBC. “It’s an opportunity to push yourself to the next level; it’s an opportunity to improve your financial life.
Pay off other debts
The same CNBC/Momentive survey found that more than half of respondents (53%) planned to use canceled student loans to pay off other debts such as mortgages and credit card balances.
This will not only give you more leeway financially, but it could also improve your credit score. The reason is not necessarily because you will eliminate student loan debt from your credit history. Ted Rossman, senior industry analyst at CreditCards.com, told CNBC that student debt alone has minimal effect on your credit score because it’s considered an installment loan that you pay off over a period of time, with regular payments. As such, it is not heavily weighted in your credit utilization rate – a key component of credit scores.
However, using the money you save on student loans to reduce your credit card debt can have a significant impact on your credit score.
You may face tax consequences, but only in certain states
The student loan forgiveness plan shouldn’t have tax implications on federal filing, primarily because the 2021 U.S. bailout made student loan forgiveness tax-exempt until 2025. But you might have to pay state taxes, depending on where you live.
Some states might consider forgiveness of student loan debt a taxable event, which means borrowers would have to pay state income taxes on the forgiven debt, according to the Tax Foundation. He said 13 states “have the potential” to tax canceled student loan debt, though the final number “could be significantly lower” if states make legislative changes or determine that debt cancellation can be excluded.
The 13 states mentioned are Arkansas, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Mississippi, New York, Pennsylvania, South Carolina, Virginia, West Virginia, and Wisconsin. The potential state income tax liability ranges from $307 in Pennsylvania to $1,100 in Hawaii, with most states between $500 and $700.
Parents will also be relieved
The Biden loan forgiveness plan doesn’t just apply to students — parents who hold Parent Plus loans are also eligible for relief. These loans are granted directly to the parents of the students rather than to the students themselves.
According to the Saving for College website, federal Parent Plus loans may be eligible for forgiveness through an income-contingent repayment plan or the Civil Service Loan Forgiveness Program.
Live Richer Podcast: First Home Buyer During Inflation: Is It Worth It?
Student Loan Repayment: Mark These 4 Dates on Your Calendar Now
FFEL loans could also be included
Federal loans for family education may also be included in the forgiveness plan. If your FFEL loans were eligible for the student loan payment pause — which has been in effect since March 2020 — you may qualify for a discount, according to an FAQ page on the US Department of Education website. Borrowers with private federal student loans, such as the FFEL, Perkins, and HEAL programs, can take advantage of this relief by consolidating those loans into the Direct Lending Program.
More from GOBankingRates