The Biden Administration’s student loan forgiveness plan is currently being challenged in the courts and has been delayed (perhaps indefinitely). In response, the moratorium on interest rate payments has been extended into next year or until the legal question is resolved. As your wealth manager, here’s what we’d be helping you assess and consider right now.
To Forgive or Forget It?
The first thing we’d do is consider or rule out the prospect of student loan forgiveness. It’s not necessarily about how much income you earn; it’s more about how much debt you owe in relation to your income. Pursuing a forgiveness strategy may make sense even for very-high-income earners like PhDs, professors, doctors, or knowledge workers if their debt-to-income ratio is large enough. We’d also want to understand the potential for a big raise or jump in income down the line. That could derail student loan forgiveness or the use of an alternative repayment plan.
How do repayment plans integrate with student loan forgiveness as a strategy? The idea is if you can get your monthly payment low enough with an alternative repayment plan, you’ll pay less over the life of your forgiveness plan or loan than you otherwise would. Then the remaining balance is forgiven at the end. The savings can be huge. There are three paths to federal loan forgiveness:
- Public Service Loan Forgiveness, which requires that you’ve made 120 monthly payments while working full-time for the government or an eligible nonprofit
- Teacher Loan Forgiveness, which can forgive a limited amount of your debt if you teach for at least five years at a low-income school or eligible education service agency
- And the forgiveness offered through certain repayment plans that require 20 or even 25 years of payments
Other eligibility requirements may apply that differ by program. We’d have to help you navigate all that.
Sometimes changing your tax status is necessary before an alternative repayment plan makes sense. If it looks like it might, we’d run a projection or work with your tax professional to make sure the debt cost savings exceed any tax costs.
When you don’t and won’t qualify for a path to forgiveness, then it is time to consider refinancing, sticking with a standard payment plan, or possibly accelerating payments—the exact opposite of pursuing forgiveness. In certain circumstances, you may still pay less overall with accelerated paydown even if you do qualify for forgiveness. It all depends: We’ve got to look at your individual income level, expected wage growth, debt load, etc., to find the right solution for you.
Explore Your Student Loan Forgiveness & Repayment Options
We can help you tame all this complexity and set out a plan to get debt free: whether through loan forgiveness, an alternate payment plan, accelerated paydown, or meeting standard payments. After the holidays, come talk to us and start the new year off right:
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.
All content presented in this article is for informational purposes only. Materials presented should not be interpreted as a solicitation or offer to buy or sell a security or the rendering of personalized investment advice, which can only be provided through one-on-one communication with a financial advisor. The content reflects the opinions of Hesperian Wealth LLC (HW), except where cited, which are subject to change at any time without notice. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the information cannot be guaranteed. All information or ideas provided should be discussed in detail with a financial, tax, or legal advisor prior to implementation.
Investing involves substantial risk, including the potential loss of principal. HW makes no guarantee of financial performance nor any promise of any results that may be obtained from relying on the information presented. HW may analyze past performance, but past performance may not be indicative of future performance.