Tuition and Student Loan Payments
Anticipation is swirling around the pending student loan forgiveness plan announced by the Biden Administration in late August.
The plan can cancel up to $10,000 in debt for eligible student loan borrowers who didn’t receive a Pell Grant. If a borrower is a Pell Grant recipient, they will be eligible for up to $20,000. To be eligible, you must be a student loan borrower with a federal student loan and earned up to $125,000 of annual income (or $250,000 as a joint filer) during the COVID-19 pandemic.
Here’s where the plan is so far:
- An exact date for applying for loan forgiveness has not been set, but the U.S. Department of Education says to expect it by early October. The initial form will be available online, with a paper version available later.
- The payment pause has been extended through the end of 2022, and another pause will not be coming. Interest will begin accruing again on January 1, 2023, and regular payments will resume. To receive loan forgiveness before the payment pause ends, the Department of Education recommends applying for relief before November 15.
- Loan servicers will send a notification when relief has been applied to an account. Borrowers should see forgiveness applied to their loan balances within four to six weeks after submission of the application.
- Note that borrowers with FFEL or Perkins loans not held by the Department of Education may not be able to obtain debt relief due to new guidance issued by the Department of Education on September 29, 2022. The best way to find out if loans are eligible for forgiveness is to contact the company holding them.
Even after wide-scale student loan forgiveness and the student loan payment pause, millions of student loan borrowers will still have weighty student loan debt. Parents or grandparents may want to help their student by making payments on their balance owed.
Tuition payments made directly to an educational organization are exempt from gift taxes and — in the case of grandparents — the Generation-Skipping Transfer Tax. There is no limit on the dollar amount, but it’s important to note that these cash payments may adversely affect financial aid depending on the institution. Most colleges treat these direct payments as cash support, which is counted as untaxed income on the FAFSA application.
One alternative to making payments on behalf of a student is to contribute to a 529 plan for the student. It’s possible to front-load 529 plan contributions up to $80,000 and make use of the five-year gift-tax averaging, assuming that no other gifts are made to the same child during that time.
After utilizing the student loan forgiveness plan, direct payments on student loans or giving money to a student to pay the loans will be considered gifts. As a reminder, an individual can gift up to $16,000 per person, per year. Parents can each gift $16,000 to their child per year. However, if the parent is a co-signer on the loan, the payments are not considered gifts. These payments are considered payments on debts and not subject to the gifting rules.
As always, it’s important to stay on top of the timeline and make sure paperwork is filed on time. Borrowers can register to be notified when the application form is available through the Department of Education. The final date to apply for forgiveness is December 31, 2023
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