Earlier this month I addressed higher education financial planning, but parent or not, what if you’re still paying off your own student loan debt? The knee-jerk recommendation from financial professionals is often to pay off student loans as fast as you can allowing for other priorities. But broad student loan forgiveness has been in play since President Biden came into office. A final decision supposedly may be coming as early as this week. Even if it doesn’t materialize, there are other opportunities for forgiveness that may be available to you, some of which have looming deadlines. Let’s explore.
The Prospect for Broad Student Loan Forgiveness
It’s my understanding that President Biden himself never promised to unilaterally forgive federal student loans across the board. It’s not a settled legal question that he can even do so. He simply voiced approval for another politician’s proposal to forgive $10,000 of student loan debt per person through legislation (which went nowhere). Some student loans have already been forgiven, but only in unique circumstances such as for victims of school fraud.
Hope is not a strategy, but the Biden administration is under pressure to do something (mid-term elections are approaching after all). It recently promised to announce a final decision (on something) by the end of the month. As long as you’ve still been paying on time (and holders of federal loans haven’t had to make payments at all for quite a while), there’s been no downside to holding off on refinancing or aggressive repayment. You just might get a helping hand from the government. We’ll see what comes out between now and August 31.
The Public Service Loan Forgiveness Program Has Been Expanded for a Limited Time
In the past, if after school you went to work for the government, a 501(c)(3), or another not-for-profit organization providing a qualified service, you could receive full tax-free loan forgiveness after 120 payments. If your income was low enough, you would switch to an income-based repayment plan, pay less each month than you normally would, and after 10 years, your loan balance would be wiped out. But there were a lot of criteria to meet, and you still had to make 120 full payments.
Last year, however, the government expanded Public Service Loan Forgiveness (or PSLF) eligibility for a limited time. Existing debtors in the PSLF program will see additional credits toward forgiveness that they’re entitled to automatically. And some others who previously didn’t qualify (or for whom it wouldn’t have made much difference) can now take advantage of the program. For more detailed information, visit this official government resource:
But hurry, this opportunity is currently only available until October 31, 2022 (unless the deadline is extended). It may take you some time to track down and submit all the documentation you need to certify your employment. And if you don’t have a Direct loan (or you have multiple eligible loan types), you need to first consolidate your loan(s) into a Direct loan, which by itself can take months.
Ultimately, PSLF only makes sense if you’ll see an amount forgiven before your current payment plan ends. But if you think this might be you and you’ve worked in public service, reach out to me. As your wealth manager, I can help you determine whether this matters to you and is worth your while to look into.
Student Loan Forgiveness the Old-Fashioned Way
Other programs and stipulations exist for either forgiveness or cancellation. But typically, for those who haven’t worked in public service, you can only receive loan forgiveness “the old-fashioned way”. Under alternative payment plans, student loan debt can be forgiven after 20 to 25 years (the particulars depend on the type of federal loan and the payment plan selected). Alas, there are two big catches: (1) you can end up paying way more over the life of the loan, despite any forgiven portion, and (2) any amount of forgiveness is taxed like income, all in the single year you receive it, so it can cause a big tax bill many years from now (I believe “tax bomb” is the technical definition of this event). Note, there is a temporary moratorium on catch #2 until 2025, so this may change your calculus if you’re very close to forgiveness.
If you find yourself in any sort of student loan predicament, I encourage you to talk to me before you make a decision on your own. We can compare the math behind each of the differing repayment plans—considering the opportunity for forgiveness—and analyze your budget for opportunities to increase your ability to pay your obligations, so you can make the best financial choice.
Impending Announcements on the Student Loan Crisis
The Biden administration may or may not announce a decision on a number of things: It could extend the moratorium on student loan payments yet again. It hopefully will extend the deadline to take advantage of the temporary rule changes around PSLF (because at this point, it may already be impossible for folks to meet the current deadline if they must consolidate their loans first). And it may even announce broad student loan forgiveness.
Regardless of what happens, if you have student loan debt and need help figuring out forgiveness eligibility, repayment plans, refinancing decisions, or a general plan to get out from under debt (no matter what type it is), find a wealth manager you can trust. Debt management is just one of the many areas of financial planning I can help you with on your way to financial strength and independence. Below is a link to schedule a free consultation with me.
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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