I know that a lot of active and retired Senior Military Officers and NCOS have or had the option of using the GI Bill to pay for some or all of their children's college education. That doesn't mean that student loans affect none of you. So, I thought I would provide some information about the new Student Loan Debt Relief Plan and some branches and sequels you may not be thinking about.
- Cancellation applies only to Federal Student Loans, not private lenders
- Up to $10,000 cancellation of debt for borrowers with income under $125,000 for single taxpayers and $250,000 for married taxpayers (that file jointly)
- Up to $20,000 can be forgiven for those who have Pell Grants
- Cancellation is per borrower. So, if the loans are in your name for your 3 children, you'll get $10,000 of debt cancelled. If your 3 kids have loans, they'll each get $10,000 of debt cancelled
- Pause on Federal Student Loan payments extended to 31 Dec 22
- The new Income-Driven Repayment (IDR) plan limits loan payments to 5% of discretionary income
Things to Keep Your Eye On
- "Income" hasn't been defined yet. Adjusted Gross Income (AGI) is the likely benchmark
- It appears that income will be based on 2020 or 2021 Income. If income was below the threshold in either year, you'll be eligible for cancellation
- There appears to be no phase out. $1 of income over the threshold and no cancellation...resulting in a $10,000 increase in taxes on $1 of income
- Loan forgiveness could have tax consequences. Normally at the Federal level, debt forgiveness is considered income (makes sense if you think about it...you received money and you kept it). The American Rescue Plan made student loan forgiveness exempt from taxes through 2025. That isn't the case at the State level. As of this writing, it appears that 13 states have the potential to tax the forgiven debt (Virginia is one of them)
- If the loan is in your child's name and you claim him or her as a dependent, your income is used to determine whether any of the loan will be forgiven.
One-Time Good Deal
- If you made the mistake of paying off your loans since the pandemic arrived, you have a potential to get some cash from the government. The CARES Act allows you to ask for a refund of any loan payments made after 13 Mar 20. So...you could ask for the refund (you'll get the whole amount back) and then apply for student loan forgiveness. If you have a remaining balance after this, take your refunded amount and pay off the loan and pocket $10,000
- I should note that it is not 100% certain that this strategy will work. You might want to wait for further guidance from the Department of Education.
Perhaps the Biggest Change
While the loan forgiveness will cost a lot of money, the IDR repayment plan could really be expensive. Under the current income-based plan, if your payment doesn't cover the principal and interest, the interest can get added to your loan balance. The new plan will essentially forgive the unpaid interest. The plan also redefines discretionary income. The calculation is a little complicated, but suffice it to say under the new plan, borrowers will pay a lower percent on a smaller amount resulting in more interest being waived.
There is still a lot to be determined in this program. I'd continue to keep my eye on this for changes.
If your children have student loans in excess of the forgiveness amount and they haven't been making payments since COVID, it might be time to chat with them about budgeting for and starting payments in January.
Military Finances are Different
While all Americans can be eligible for this round of student loan forgiveness that isn't always the case. In fact, there are student loan forgiveness programs that apply to military (and other government employees) only. That isn't unusual. There are a lot of special financial considerations that apply to active and retired Senior Military Officers and NCOs and not civilians. That is why we think you should work with a financial planner and/or advisor that specializes in working with people like you. If you would like to chat about how we do things, use the button below to schedule a free, no-obligation initial consultation.
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