What We Know About Student Loan Debt Relief (So Far)

Student loan debt relief has been the big news lately. It’s a complicated program, with student loan forgiveness as just one part of plans from the Biden administration. And while an executive order has been issued, nothing is finalized. In this video, Brendan goes over what he feels are the most important parts of this proposed relief plan that you need to consider when planning for your future.


Topics Discussed:

  • Cancellation of student loan debt

  • Final extension on the pause of Federal student loan payments

  • New Income-Driven Repayment (IDR) plan

  • Important dates related to the Student Loan Debt Relief Plan

Transcript:

Hi, and welcome to another episode of Coffee with Brendan. Today's episode is going to be on the most recent college loan debt relief executive order that was just passed by President Biden this week, a week or so ago on August 24 2022.


So I'm shooting this on September 1. One thing that I'm going to preface everything I'm about to say is that this was passed by executive order. So what that pretty much means is, yes, it's the law of the land. However, just like the Democrats challenge a lot of President Trump's executive orders, but through the court system, the Republicans are certainly going to do the same here, and try to either adjust this or even overturn the debt relief plan. So this is not a foregone conclusion. But at least again, as of as of September 1, these are the provisions associated with this executive order.


I'm going to keep this pretty high level. There's lots and lots of different things that I could share with you. The source material for a lot of this stuff that I'm using is from a gentleman that I think very highly of. He’s kind of a nerd like me, and put out a 26 page article on this. And what I'm going to do is I'm going to summarize it. His name is Michael Kitces, his website is kitces.com. So if you did want to read the entire thing, you can go to his website and download it. So again, I'm just going to touch upon the high level things, parts of this plan, and try to keep this at 10 minutes or less. The last - I shot this a moment ago, and it was 17 minutes. So I'm going to try to cut this in half. So that means let me just jump in.


So let me start sharing my screen. These are the main provisions here, the one that's getting all the press right now is federal student loan debt, $10,000 of it is going to be forgiven, as long as you are making less than $125,000 for single individuals and $250,000 for married couples. If at any point you receive a Pell Grant—I was one of the recipients of a Pell Grant because at the time that I was going to college, I was considered economically disadvantaged. If at any point you got a Pell Grant, your loan cancellation is $20,000 with the same income thresholds up above.


So one of the questions I get from a lot of people is that, you know, typically when you have a loan that's forgiven, is that forgiveness amount, that $10,000, $20,000 taxable income. In the case of the federal government, the answer is no, there is no tax of federal tax on the 10 or $20,000 for forgiveness, however, at the state level, that's still to be determined. So each state may look at this a little bit differently. I would imagine most of them will follow the federal government but who knows, you know, you may have a state or two that is in need of some additional tax funds and will actually tax it. So one of the things - so that's that's bullet point number one.


Bullet point number two is extending the moratorium on making payments with the federal loan. So people who have federal loans have not had to make a payment since March of 2020, all the way through to now they're extending it again, to December 31 2022. But that probably will be the last time. So the first date and I'll show you a calendar and a little bit. The first date you'll have to make student loan payments is January 31 2023. Now, if you did make loan payments between March of 2020 and December of 2022, you can - and this is a planning opportunity for you - you can actually request that the loan servicer actually return that money to you. In case you haven't hit that $10,000 threshold. So an example. So let's say that you dutifully paid and got your student loans down to $5,000. But over that two year timeframe, you made $10,000 of payments, you could request $5,000 to come back be returned to you so that your loan balance goes back up to that 10,000. And then the federal government forgives that $10,000. So there is a planning opportunity with that.


Another thing to take into consideration is who is the owner of the debt. So one of the things that I think a lot of people don't fully appreciate is that even graduate loans, and also parental federal loans, so the Parent Plus loans, which are federal federally backed, you actually, if the, that income threshold 125, or the 250 is based on the borrower, not on the student. So if you had a parental loan that you took out for your child, the forgiveness is going to be based on your income, not on your child's income. And you could actually have kind of a double dipping situation, where let's play out the perfect scenario, you have taken out a Parent PLUS loan of $10,000, and you're less than that 125 or 250 threshold, and your child took out $20,000 of regular loans in the in the student's name, you could have all 30,000 of that wiped out because of the $10,000 of Parent Plus loans that you as the borrower own. And then 20,000 If that child was the recipient of a Pell Grant. So again, lots of different ways to structure this.


One of the things that another thing that people ask me about is, well, how do they calculate 125 or 250? It's based on your adjusted gross income for tax year 2020. In tax year 2022, excuse me, it's just screwed that up 2020 and 2021. 2022, hasn't hasn't been finalized yet. So it's 2020 2021. So 2020, is in the books, there's nothing you can do about it. But there are a handful of people who are still on extension for their 2021 taxes all the way through to October of 2022. If you're right around that threshold, the 125 or the 250, you could take some steps between now and the time that you file to somehow get yourself under that threshold. One thing that I know a lot of my clients do, who are small business owners will open up a SEP SEP IRA, and make a contribution to that to reduce their income. So again, lots of different planning opportunities for that.


Let's go down to so let's shift gears now. And let's go down to the last bullet point here. So the third bullet point I'm not going to cover because that one is it only affects a handful of people. And it's very, very technical. So I'm not even going to touch that one.


But the last one is very, very important. This one I think has a bigger impact on the US taxpayer than the 10,000 and the 20,000. This last one, the creation of a newly proposed income driven repayment plan that limits payments on federal undergraduate loans to 5% of a borrower's discretionary income and forgives loans of less than $12,000 after tech 10 years of payments. Now, that is a mouthful. But let me try to explain what that means. What they're pretty much saying is that the maximum monthly loan payment that you have to make has come down significantly based on that definition of the 5%. Of of your discretionary income. So discretionary income is different from adjusted gross income, which is what many things are based off of discretionary income is based on how close are you to the poverty line. And what has happened is your discretionary income number, the formulas change so that that's come down, and the 5% has also come down. So now for someone that like in the case of this teacher making $47,000 She he or she used to have to pay $333 on their on their student loan debt. Now we'll only have to pay $68 a month. For this married couple with no kids who have some undergraduate school debt and making $80,000 they reduce their monthly payment from 657 to 162. And then this final example of the married couple of three kids and graduate school that goes from $1,500, down to 850.


So that in and of itself, is very helpful from a cash flow standpoint for these individuals. But the place where I really have a problem with this is that it creates lots of opportunities for people to game the system. The colleges will be thrilled because they can charge whatever the heck they want, and know that students won't be dissuaded by it. Because students will just simply say, Hey, let me take out a student loan, pay this exorbitant tuition amount, and then just know that my monthly payment could be as low as $68, I may have $300,000 of student loan debt. But in this first example, the teacher making 47,000, only has to pay $68 a month. Now, in that case of $300,000, it's actually discharged after 20 years of making payments. So this teacher may have a couple hundred thousand left on his or her loan at the end of the 20th year, but the government is saying that they're going to forgive that. So there's just lots of different areas where this disincentivizes people to go from a $47,000 a year job to a $400,000 a year job because they know that, hey, you know, why would I want to pay more on my loan, if I know that at the tail end of this, if I keep paying on this for 20 years, it gets forgiven at the end of the day. So I don't want to get too deep into this. But this is the one area that I am really not a big fan of.


So let me just finish with a calendar. So the calendar of important dates is right here. So what this is pretty much saying in the first one is very important because I had a client who was trying to game the system a little bit. And they said, You know what, if I take out even though I don't need a student loan, what if I take one out for the upcoming year? The answer is it does not apply, because you have you would have had to have taken that loan out by June 30 2022. For it to be a part of this 10,000 or $20,000 discharge, as they call it. The next couple are based on that public service loan forgiveness program. But the fall of 2022, what the US Department of Government with the US Department of Education is going to do is they're going to look at all of the income driven repayment plans and recalibrate how much the ceiling is that everyone has to has to pay. So again, in that teacher's case, they could go down pretty significantly down to that $68. First day that you can start applying for your forgiveness is November 15 2020, to December 31 is when the moratorium on not making payments. And so your first payment is January 31 2023. In July of 23, that's when you recertify what your income level is. So therefore they can calculate what your discretionary income level is. And then finally, the last time that you can apply for your 10 or $20,000 forgiveness is December 31 2020.


All right, I don't know what the my what's on the clock right now. But I think it's probably right around 10 minutes. Hopefully it's not too much further. So I'll end it here. Thank you for watching and sticking with me on this. And as I mentioned, you know, I just summarized 26 pages of material. So there's a lot to this plan. And but as we sit here today, the things that I highlighted were the things that I feel are the most important. So thanks again for listening, and we'll see you next time.


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