vns_debt_maze
Updated on Oct. 6, 2022
Tens of millions of federal student loan borrowers in the United States received a blast of tantalizing news last month from President Biden and the U.S. Department of Education about a coming suite of debt-relief actions, including cancellation of up to $20,000 in debt for income-eligible borrowers.
To explore the ins and outs of the measures, the VIN News Service spoke with Dr. Tony Bartels, the go-to guy on student debt at the Veterinary Information Network, an online community for the profession and parent of the VIN News Service. Bartels is a 2012 graduate of Colorado State University's dual MBA/DVM program. He and his wife, a small animal internist, together have more than $400,000 in debt from attending veterinary school. At VIN and the VIN Foundation, Bartels spends his days helping veterinary students and veterinarians manage their educational borrowing and repayment.
In a few words, what is your reaction to the Biden debt relief package?
Encouraged. Confused. Pessimistically optimistic.
You've been frustrated for a long time about the U.S. student debt situation — not only the ever-growing size of veterinarians' debt but how complicated it is for borrowers to navigate repayment. In your view, how significant are the measures just announced?
Actually, there have been a suite of announcements over the last several years, dating to the previous administration, that have potential and actual significant benefits for veterinarians with federal student loans. We've seen pandemic forbearance relief; a temporary tax exemption on student loan forgiveness; changes to Public Service Loan Forgiveness that broaden eligibility; a forgiveness payment-count adjustment; a new repayment option; and the thing everyone's talking about — one-time debt cancellation. And there is more in the works.
Thanks for putting it into perspective. A lot has been happening in this arena! Let's take them one at a time — pandemic forbearance first.
Pandemic forbearance benefits have had the most tangible impacts for the widest range of borrowers: All interest and payments on federally held student loans have been suspended since March 13, 2020, and will continue to be, through at least Dec. 31, 2022. Borrowers also can receive forgiveness qualifying credit during the pandemic forbearance period. That means every month during this special forbearance that they've been paying nothing, they get credit toward forgiveness for those months as if they've been making payments. And, any payments a borrower made anyway during the pandemic forbearance period to federally held loans can be refunded if the borrower requests it.
Speaking of loan forgiveness, what's the temporary tax exemption about?
In most cases, debt that is canceled or forgiven is treated by the IRS as taxable income. The American Rescue Act Plan of 2021 exempts from federal income tax any student loan forgiveness received between 2021 and 2025. At the time the law passed, this exemption seemed not very useful because almost no one would have been eligible for otherwise taxable student loan forgiveness during those years. For the most part, the programs that allow for forgiveness haven't been around long enough for most borrowers to have made enough payments to reach forgiveness. But in light of the pending cancellation and forgiveness count adjustment, the tax exemption is a much bigger deal. For example, anyone who receives $10,000 to $20,000 in debt cancellation will not have to pay federal income tax on that.
Forgiveness count adjustment. What is that?
The education department announced on April 19 that it would conduct a "one-time count adjustment" that should enable borrowers to reach forgiveness sooner for those using income-driven repayment (IDR) plans and Public Service Loan Forgiveness (PSLF). That count adjustment is, in my opinion, the most significant measure announced so far because it addresses a major flaw in income-driven repayment — a lack of forgiveness progress counts and tracking.
The one-time forgiveness count adjustment will count any student loan repayment time as forgiveness-eligible. This includes any repayment time spent in plans that don't normally provide for forgiveness, such as standard, extended and graduated repayment plans. As part of the adjustment, even most periods of deferment and forbearance will be considered forgiveness-qualifying.
Let's say you finished veterinary school in 2000 and have $40,000 of federal student loans remaining that you've been repaying using a 25- or 30-year graduated repayment plan. Maybe you put your loans into forbearance a couple of times due to a job change or family event, for a total of two years of forbearance. With the one-time forgiveness count adjustment, you will have at least 22 years of forgiveness-qualifying repayment time. That would leave you just three years from receiving forgiveness. Moreover, if you're eligible for $10,000 of the one-time cancellation announced last month, then you will have $30,000 of loan balance remaining for no more than three more years, provided you choose an eligible forgiveness-qualifying repayment plan when student loan repayment returns to "normal," currently scheduled for 2023. And remember, if you receive forgiveness by 2025, you will not have to pay federal income tax on the canceled amount.
I see why you say that's significant. That program sure flew under the radar. Now let's go over PSLF. What's happening with that program?
A lot! PSLF enables borrowers who work for government entities or 501(c)(3) nonprofits to get their loan balances forgiven after making 120 qualified monthly payments. Sounds fairly simple, but the program originally was set up with lots of caveats: You had to be in a particular repayment program, your loans had to be a particular type, and your monthly payments had to be made on time and in full to count. Due to the ifs, ands and buts, many people who applied for forgiveness found out that they weren't eligible.
Last October, the Department of Education announced a "limited waiver" that loosens the rules in a variety of ways. For instance, any payment made since October 2007 while working for a qualifying PSLF employer, regardless of your government loan types or repayment plan, would be counted as PSLF credit. In order to make these loans that had been deemed non-qualified eligible for PSLF, you must consolidate them into a Direct Consolidation Loan before the waiver period ends, then submit an employment certification form via the PSLF help tool. This special PSLF reconsideration is limited in that it is available only through Oct. 31 — the end of next month. So anyone who believes they might qualify for PSLF should hustle to get their application in and take any necessary action to be considered for retroactive credit.
Going back to 2018, Congress, through the Consolidated Appropriations Act, made qualifying for PSLF easier by making more repayment plan types eligible. That program is known as Temporary Expanded Public Service Loan Forgiveness, or TEPSLF. Although the expansion is temporary, there is no designated end date — it ends when funding runs out. As of now, it's still active.
Between the limited waiver and TEPSLF, essentially, any payment made on federal student loans while working for an eligible employer since October 2007 will now be counted toward the required 120 qualifying payments needed to receive PSLF.
Some borrowers will need to consolidate their loans to be eligible, and the Department of Education and loan servicers have been providing confusing information on the results of TEPSLF and the limited waiver. They have also been slow to apply the credit described in the limited waiver, but overall, the program expansions are working.
There are also some newly proposed changes to what is considered "qualifying employment" under PSLF that are working their way through the Federal Register public-comment period. Those changes, which expand the definition of "qualifying employment," will likely be implemented in 2023.
Let's talk about debt cancellation and other measures announced on Aug. 24: I know you've been poring over the details. Do you now have more confidence, or less or the same, about the impact of those measures compared with when you first heard the news? In other words, is this a real deal?
The Aug. 24 announcement has definitely captured the most attention. That announcement seems to be still evolving — meaning I see new little bits of information almost daily, largely logistical details to color in the mountain of questions that I’m sure loan servicers and the Department of Education are fielding hourly since they made this announcement.
We won't know if it's a "real deal" until we see loan amounts canceled. To my knowledge, nothing has been canceled yet. There are stories about legal challenges that could delay or even potentially overrule the planned cancellation.
If it does proceed, there is some vague language about some cancellations happening automatically. That sounds ambitious to me. But we did learn recently that the application for cancellation will be available in October, and the application window will run through December 2023. My guess is that they will attempt to automatically cancel what they can before the application comes out so you don’t have to go through millions of applications of people who should receive cancellation automatically — but who knows?
And when I hear "application," my mind goes to PSLF and how challenging it's been to get those applications processed correctly and in a timely manner. So the fewer the applications, the better, right?
The headline-grabber has been the $10,000 to $20,000 in debt cancellation for those who qualify, based on income. What's your take on the income limits?
Sure. Why not? You have to draw the line somewhere, I guess. The income limit for individuals (below $125,000 per year) happens to be just above the 2021 median income of veterinarians as calculated by the U.S. Bureau of Labor Statistics. That means many veterinarians will be eligible for at least $10,000 of cancellation. If you're married and file taxes jointly, the household income for eligibility is under $250,000.
If you received a Pell Grant during college and meet the income thresholds, then you are eligible for $20,000 of student loan cancellation. I see quite a few veterinarians who received a Pell Grant. If you're unsure whether you did, you can find that data in your federal student aid data file. We just released a feature in the VIN Foundation My Student Loans tool that will tell you whether we see a Pell Grant in your student loan history. Grab your federal student aid data file from studentaid.gov and upload it to the tool to see if you might be eligible for the $20,000 in loan cancellation.
Is it really that simple?
Of course not. As we've seen with PSLF, the pandemic forbearance benefits and all of the other recent announcements, the Department of Education is offering these new benefits only to borrowers of federally held student loans. This highlights some of the complexity of the federal student loan system and the messiness that has resulted from the persistent privately or commercially held student loans that are out there. Let's review:
There are two major loan programs that the majority of federal student loans fall into: the Federal Direct Loan program and the Federal Family Education Loan (FFEL) program.
Federal Direct Loans are all federally held and eligible for all of the benefits that have been announced.
The FFEL program is more complicated. In the past, it provided federally guaranteed private student loans. The program was discontinued in July 2010. The Department of Education bought up about half of the FFEL program loans, making them federally held. The other half remained in the privately held category. Until recently, borrowers with privately held FFELs could become eligible for all of the new benefits by consolidating them into a federal Direct Consolidation Loan.
That changed on Sept. 29. The education department stated on its website: "As of Sept. 29, 2022, borrowers with federal student loans not held by ED cannot obtain one-time debt relief by consolidating those loans into Direct Loans. Borrowers with FFEL Program loans and Perkins Loans not held by ED who have applied to consolidate into the Direct Loan program prior to Sept. 29, 2022, are eligible for one-time debt relief through the Direct Loan program."
This was very unfortunate for the numerous veterinarians who were working to understand if they needed to consolidate their loans in order to benefit from cancellation. To summarize: If you applied for consolidation before Sept. 29th, you should still be eligible for the cancellation benefit as long as you meet the income limits. We have been hearing from those who are consolidating that it's taking 30, 60 or even 90 days to complete the process. Keep as much documentation as you can that confirms when you submitted your consolidation application, to document your eligibility for the cancellation benefit.
We have also been getting questions from borrowers whether they should cancel consolidation requests they made after Sept 28. The answer is no. There are reasons besides debt cancellation to consolidate your privately held FFELs. There are the one-time forgiveness count adjustment discussed earlier, the limited PSLF waiver opportunity if you have ever worked for a qualifying nonprofit, and the potential to use a more beneficial income-driven repayment plan, like REPAYE or a new plan that was announced at the same time as the cancellation benefit. If there has been a consistent thread in changes to the federal student loan system, it has been that updates and benefits are most easily received by people with Direct Loans, which are federally held. That will likely be the case for a new repayment plan or any further benefits going forward.
If you upload your student aid data file to the VIN Foundation My Student Loans tool, it will tell you whether you have FFELs that need to be consolidated in order to tap perks of federally held loans. In my opinion, this is the most complicated aspect of navigating the recent benefits.
For those expecting cancellation, we also learned this week through a court filing that the Department of Education will not cancel any debt before Oct. 17 — after a judge has had a chance to rule on a lawsuit brought against the administration on the cancellation benefits. That early ruling will likely determine if there will be an application available or any automatic cancellation to be had any time soon. So stay tuned for more information and updates.
Considering today's new veterinary graduates routinely have debt of $200,000 or more, will canceling $10,000 or even $20,000 be significant or useful to them?
The cancellation is not targeted to recent veterinary school graduates. So, taken by itself, you're right — $10,000 or $20,000 of student loan balance canceled may not be a significant impact. However, taken together with the pandemic forbearance benefits — the almost three-year pause on interest and payments — they have already realized savings of tens of thousands of dollars. And as the saying goes, "Don't look a gift horse in the mouth."
Whether you end up paying your student loans to zero or you reach forgiveness and have to pay a tax on the amount forgiven, the cancellation will help reduce the total amount you'll pay. (For those who qualify for forgiveness but don't have to pay tax on it, the cancellation will have zero benefit — similar to the cases of those who make additional payments on their student loans or receive employer contributions to their student loans.)
The government has some timing issues to finesse. As we've discussed, the application for cancellation should be ready in October, while loan payments, which have been on pause since spring 2020, are scheduled to resume as of Jan. 1. Do you believe the Department of Education can get through millions of applications quickly enough to cancel everyone's debt before borrowers are expected to resume paying in 2023?
No way — certainly not all of them. I think they believe 8 million cancellations will be able to happen automatically. More than 20 million will need to apply. We're getting toward the end of September.
I hope they will try to trigger the automatic cancellation before the application drops in order to reduce the number of people who need to apply. At worst, I hope they get the automatic cancellation completed by the end of this year, before pandemic forbearance ends. But they will be processing those applications well into 2023. So it will be interesting to see how they approach that at the beginning of 2023. I wonder if there will be some kind of forbearance option in the application to help address this issue. But that will bring up concerns on forgiveness eligibility and unpaid interest capitalization. To be determined soon, I guess.
As folks wait for the cancellation application, are there things they should be doing in the meantime? And what is your advice for borrowers who are preparing to resume their loan payments?
First, if you meet the income thresholds, position yourself as soon as you can to be eligible for the cancellation. Make sure you have the right loan types. If you don't, consolidate them into a federal Direct Consolidation Loan, which is eligible. If you do have the right loan types, request a refund for any payments you made during pandemic forbearance.
For those preparing to resume loan payments, use the tools on the VIN Foundation Student Debt Center to confirm that you have the appropriate repayment plan, or select one. Obtain your up-to-date student aid file, review your current repayment plan, the minimum payment due, and your income-driven anniversary date if you're using an IDR plan like PAYE, REPAYE or IBR.
If you have a high enough loan balance such that you could be eligible for IDR forgiveness in the future, choose the most beneficial forgiveness-eligible repayment plan after pandemic forbearance ends. Based on what we know right now, that would be a standard 10-year payment plan or any of the income-driven plans. (It's possible other plans could be considered forgiveness-eligible going forward.)
The best plan for you depends on your loan balance, forgiveness count, the plans you're eligible for, tax-filing status, state of residence, taxable income and family size. The VIN Foundation Student Loan Repayment Simulator can help you identify the best repayment option for your situation. Remember to include your anticipated forgiveness count in your simulation.
By the way, here's a lesser-known benefit of the pandemic forbearance, related to what happens after the forbearance period ends: The IDR renewal dates keep getting pushed out, as well. The earliest anyone enrolled in an IDR would need to update their income is now July 2023. That means if you entered or applied for an IDR during the pandemic forbearance period and your payment was X, it will remain X until at least July 2023. So as long as your current income is not lower now than when your IDR payment was last set, you can enjoy a lower payment for a while even after pandemic forbearance ends.
Run a VIN Foundation student loan repayment simulation. Enter your student debt balance, subtracting the $10,000 or $20,000 in loan cancellation that you might be eligible for. Enter your current qualifying forgiveness time (remember, the one-time forgiveness count is giving everyone forgiveness credit for any historical repayment time). If you're due to reach loan forgiveness after 2025, then plan for the possible tax. If you're projected to reach forgiveness at any time or you could otherwise use additional funds to shore up your financial wellness (as we all could), then request a refund of any payments you made during the pandemic forbearance period.
The Department of Education has a new IDR plan in the works. How might the new plan improve upon the existing offerings?
Of the available repayment options for the majority of recently graduated veterinarians with student loans, IDR plans provide the most flexibility, reduce their cash-flow risk, and often result in the lowest projected total repayment costs. IDRs happen to be the best financial repayment options for anyone with a debt-to-income ratio greater than one. (In other words, someone whose debt exceeds their annual income.)
The new IDR mentioned in the Aug. 24 announcement sounds like it could be beneficial, but from the information available so far, it sounds like it's mostly designed for folks with undergraduate loans only. That's not veterinarians. Unfortunately, there's just not enough information available yet to say for sure. The administration is going to be detailing that plan in the Federal Register soon, and we can get more insight with more details.
The most consequential part of the new plan is the end of unpaid interest. Unpaid interest is a huge problem in the existing IDRs. That's because monthly payments are based on the borrower's income, and quite often, that payment is less than the interest that accrues. Therefore, the unpaid interest balance grows, contributing to the difficulty of reaching a zero balance and increasing the probability that a bigger balance will be forgiven — and potentially taxed — in the end.
REPAYE is the only plan now that helps to reduce unpaid interest, by kicking in a 50% unpaid interest subsidy. But REPAYE has a few "gotchas" in it for grad-school loan holders (veterinarians) that can make other plans, like PAYE, even without the subsidy, better for them. Those devilish details are the things we'll be looking for when we assess this new IDR.
Wait, will canceled debt be subject to income tax?
Like all things involving student loans, it depends.
Any eligible student debt that is canceled between 2021 and 2025 will be exempt from federal income taxes.
A handful of states may tax any student debt cancellation. Thankfully, state taxes are much lower than federal taxes. So if you have any kind of emergency fund, or you are benefiting from the pandemic forbearance payment pause (which you should be if you hope to receive some cancellation), then save one of those payments or two to cover any state tax liability you may have this year or next.
We've covered a lot of ground. Are we missing anything? Any other debt reforms on the horizon?
There are! Along with the expanded employment qualifications for PSLF, there are also some beneficial changes coming to the treatment of unpaid interest. Those proposed changes would eliminate capitalization of unpaid interest (adding it to principal) in most cases — basically any time capitalization is not required by law.
To wrap up, I'm sure you've heard the criticisms of debt cancellation. Would you like to address the complaint that it's a giveaway to elites like doctors, lawyers and other fancy professionals?
Those are pretty hyperbolic, nonsensical complaints. Anyone who actually reviews what has been proposed and knows the difference between an undergraduate student loan portfolio and a graduate school/professional student loan portfolio knows comments like that are ignorant.
This cancellation is going to be most helpful to lower- and middle-income folks who have an average-size undergraduate student loan balance. For them, it will eliminate most, if not all, of their remaining student debt. That's huge, and that's the goal of this particular relief.
There will be a few professionals who receive the $10,000 or $20,000 cancellation based on timing or how much they earned recently. I'm thinking of recent graduates from medical, veterinary or law school — people who are just completing specialty training that will enable them to earn above the threshold soon, but they don't yet. Students in professional school, etc. But in many cases, that $10,000 to $20,000 is a minute fraction of their loan balance — so they have plenty of time to pay their fair share!
Or, it will help those professionals who have been paying on their loans for decades to cancel most or all of the rest, provided they fall under the income thresholds. Many of your "elites" and fancy professionals, if they have been out of school for a long time and have been relatively successful in their fancy professions, probably will have income above the thresholds. That means they will not be eligible for any of this particular relief.