Small business owners with student loan debt end up with less cash to invest in their business, negatively impacting their growth. In fact, in a survey of 1,200 small business owners, almost half (47%) reported that the pause in student loan repayment, interest, and collection during the COVID-19 pandemic allowed them to invest more capital into their businesses.
If you are a small business owner who’s currently paying off student loans, chances are that this forgiveness plan will help free up the cash you would put toward repayment, and use it elsewhere—like building your business, for example.
Part 1: student loan debt relief
The most significant part of the student loan relief plan is the forgiveness of student loan debt. The U.S. Department of Education will provide up to $20,000 in debt relief for recipients of the Pell Grant and up to $10,000 in debt relief for non-Pell grant receipts.
The Pell grant is a need-based federal aid program to help lower-income students with the cost of college. Because of their financial backgrounds, recipients of Pell Grants typically experience more challenges repaying their debt when compared to other borrowers, which is why they have been targeted with greater loan forgiveness.
Why is student loan forgiveness needed?
Over the 30 years between 1991-92 and 2021-22, the average tuition and fees at a public four-year university have increased from $4,160 to $10,740. As a result of the skyrocketing college costs, a student today graduates with an average of $25,000 in debt.
This coupled with increasing interest rates and ballooning balances has forced borrowers to delay many adult milestones such as buying a home, starting a family, and—you guessed it—starting or growing their own business. This debt relief plan is designed to alleviate some of that stress and allow more people greater financial freedom.
Who is eligible?
The student debt relief is targeted at low-to-middle income borrowers with an adjusted gross income of less than $125,000 ($250,000 for married couples) in 2020 or 2021. Debt relief will be provided only for federal loans, and not private, third-party student loans.
Current students with federal loans or parents of dependents with student loans (such as the Parent Plus loan) are eligible for loan forgiveness too.
How and when to apply for debt relief
While there has been little information regarding how the application process will look, the U.S. Department of Education is set to start accepting applications in October. Subscribe to the Department of Education’s Federal Student Loan Borrower Updates for more information.
Taxes and debt relief
While student loan forgiveness will not be considered taxable for federal income tax purposes, the same cannot be said about state income taxes. Some states may choose to tax the amount, so we recommend being prepared to pay state taxes on it.
The plan once again extends the pandemic-era pause on student loan repayment until December 31st, 2022. Students who have made payments toward their federal loans throughout the pause will be eligible for refunds. With loan repayments starting in 2023, you can plan ahead by creating a budget that allows you to save up for the monthly payments.
Further reading: How to Create a Budget (with Templates)
Part 2: changing the student loan repayment system
Another aspect of the Student Loan Relief program is changing the ways that student loans are collected going forward. This is primarily going to be done by reducing monthly payments to make them more manageable for borrowers.
Right now, borrowers’ monthly payments equal 10% of their discretionary income (income that’s left after paying taxes and expenses). This plan will cut this in half, making monthly payments equal to only 5% of discretionary income. It will also raise the amount that is considered non-discretionary so that it’s protected from repayment.
Currently, the Department of Education forgives loan balances after 20 years of payments, which means that it takes 20 years after graduating to become debt free. This plan will cut this in half again by forgiving loan balances after 10 years of payments for borrowers with original loan balances of $12,000 or less.
Lastly, this plan will cover a borrower’s unpaid monthly interest. Generally, a borrower makes monthly payments toward the principal and interest. In instances where a borrower is only able to make payments towards the principal, the plan will cover the unpaid interest. This way the total loan balance will not grow so long as they make their monthly principal payments - even if that monthly payment is $0 because their income is low.
Part 3: changes to the Public Service Loan Forgiveness Program (PSLF)
Under the PSLF program, borrowers working in public service are able to earn credits toward debt relief. However, due to complex eligibility restrictions, historic implementation failures, and poor counseling given to borrowers, many borrowers have not received the credit they deserve for their public service.
To address this, the Department of Education will implement time-limited changes to the program. Student loan borrowers who have served at a non-profit, in the military, or in federal, state, Tribal, or local government for at least 10 years, including non-consecutively, are eligible for forgiveness of all outstanding debt. For borrowers who have worked for less than 10 years, you can gain credit toward eventual forgiveness.
Holding universities responsible for hikes in tuition
The third part of the debt forgiveness program is focused on making college more affordable by holding universities accountable for steep increases in tuition.
This will be done by re-establishing the Enforcement Office within Federal Student Aid that will oversee colleges that participate in federal loan and grant programs.
This unit will ensure that colleges comply with the rules of federal aid programs and provide quality education. They’ve already gotten to work by terminating the authorization of an accrediting agency that was responsible for overseeing schools that misled students about job placement rates. This office will continue to hold career programs accountable for leaving graduates in debt they cannot repay.
The Department of Education will also create an annual watch list of programs with the worst debt levels so that students can be aware of the poor outcomes of the program. The department will also request that educational institutions with concerning debt outline outcomes to implement improvement plans that bring down student debt levels.
How Bench can help
Having more cash available to invest in your business can be a game-changer—as long as it’s effectively managed and accounted for. Bench’s team of experts can take your bookkeeping off your hands, so you can spend your time focusing on business planning and growth. Come tax time, our team will hand you a tax-ready Year End Financial Package so filing is a breeze, and you’ll also receive unlimited phone support from our tax advisors.
The bottom line
The Biden student loan forgiveness program is set to help 20 million Americans become debt free from their burdensome student loans. If you’re a small business owner, you can take advantage of this plan and invest the forgiven amount back into your business. If you’re looking for strategies on how to best use the extra cash, check out this Bench guide to managing a financial windfall.