Last Wednesday, the Biden Administration did in fact announce broad-based federal student loan forgiveness (in addition to several other related executive actions). It was still up in the air when I last posted a blog. In the absence of legal challenges, this is great news for student loan borrowers.
Personally, I believe the schools themselves should participate in the cost of any forgiveness program. But I like that the benefit will at least be means-tested. Though I might quibble with how high the income limit was set, I don’t see the big problem with loan forgiveness from a philosophical point of view. The government directs all sorts of benefits (or the opposite: onerous regulations, fees, or taxes) toward different and sometimes narrow interests all the time. When the government blesses you with largesse, take it!
Also, the inflation effect is likely overblown. Forgiving $10,000 perhaps frees up an additional $100 each month, so not a big increase in spending power even in the aggregate. And since the forgiveness plan disproportionately benefits lower-income citizens, this extra spending will likely (or rather, hopefully) go to paying down “bad debt” or to buying necessities. Only the benefits to higher-income borrowers will foreseeably go toward discretionary spending that contributes to the services/goods inflation we’re suffering.
Public Service Loan Forgiveness (PSLF) Update
What Else Is in the Plan?
Various other aspects of Biden’s plan can make getting out from under a big student loan debt burden much, much easier.
The New Repayment Plan
Even more important than the immediate forgiveness, in my opinion, is the new “proposed” repayment plan. Assuming it becomes operational, this has the potential to be even more impactful in absolute debt relief. Consider this situation:
Let’s say you have additional student loan debt even after receiving any loan forgiveness this year. By selecting this new income-based repayment plan, if you earn less than the equivalent of $15 an hour, your monthly payment would be set to zero, nada, zilch. Plus, the government will pay the interest for you. In the past, it would accrue and be added to your principal at the end of the repayment plan. Then, after 20 years, your remaining balance would be completely forgiven, It would be taxed as income at that point, but hey, you didn’t make any additional payments!
So the big news to me is that, for some deserving borrowers, this announcement potentially amounts to complete forgiveness. Even for low-income borrowers who make more than $15 per hour, this new, more generous repayment plan will limit your payments to 5% of discretionary income (vs. 10% in the current income-based plan). This effectively cuts your current payment in half and potentially makes this payment strategy the optimal one for additional student debtors. And if your original loan balance was less than $12,000, you can achieve total forgiveness in just 10 years (not the usual 20).
How can a wealth manager help? For those very-low-income borrowers with the possibility to eliminate their debt payments through this program, you may need help navigating the system. For other lower-income borrowers, you might need someone to help you make sure an alternative repayment plan (even this newer proposed one) will actually make financial sense for you given your current and expected salary track.
Taking Advantage of the Payment Moratorium
As part of this same announcement, the moratorium on student loan payments was extended (supposedly for the last time) till the end of the year. If your income is low or you’d be struggling to make your loan payments without this, you thankfully have further relief and another four months to prepare for payments to restart. If you don’t already have a debt management plan, it’s time to get one. There are wealth managers like me dedicated to serving clients who have not yet built their nest egg or who need expert financial advice to dig their way out of debt. I’m here to help you.
Alternatively, if you have the means, this whole moratorium period has been (and through year-end will continue to be) a great chance to eat into the principal of your loan. How? You could have maintained your normal payment amount, which would have been applied in its entirety to the loan principal because there’s no interest to pay. Nothing is stopping you from starting this strategy or making up for it if you have the savings. Combined with any forgiveness you’ll receive, this could make a big dent in your debt load. And paying back debt, even if your interest rate’s below 4%, is highly competitive on a risk-adjusted basis with forward-looking returns available today on your savings in my opinion.
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Eric R. Figueroa, CFP®
I am a Folsom, CA, fee-only wealth manager serving the Greater Sacramento area, California Gold Country, and the nation virtually. I offer financial planning and investment management, specializing in impact investing and personalized values-based investing.
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