#145 - Student Loan Cancellation Planning
I am switching things up and putting my interesting article at the top. Quite simply, I want to draw attention to it to get as many people to read it as possible. It is so good and could dramatically alter many’s investment behavior. I hope you all will take a few minutes to read it.
Bull and Baird - Was that the bottom?
“Remember, it’s not you versus the market—it’s you versus yourself. Pessimism about the future is seductive; it always seems like the right mindset. Don’t fall into the trap of thinking that just because things are bad, that means they will get endlessly worse.”
And now moving on to my ramblings… In the financial planning world, whenever a new product, concept, or rule is released there is a flurry of activity as planners seek to understand and maximize the opportunity as much as possible. The recent student loan cancellation has provided planning opportunities. Overview: The Department of Education will cancel some student loans that are held by the Department of Education - up to $20K for Pell Grant recipients and up to $10K for non-Pell Grant recipients. To qualify for this forgiveness, your income must be within certain limits - $125K for single and $250K for married or head of household. Be aware that there is the possibility that whether or not this forgiveness is legal will be challenged in court. Below are several planning opportunities:
Who determines which qualifying loans are cancelled? For example, let’s say you have 10 loans that are all $4,000 ($40,000 total), which loans get cancelled? These loans could be a variety of interest rates, graduate and undergraduate, have a different number of qualifying payments for forgiveness, etc. Which loans are cancelled could have a material impact on the borrower. IF the borrower gets the opportunity to choose which loans are cancelled, this is just a caution to think through that carefully.
What if I already paid down my student loans beneath the cancellation amount? Generally speaking, if you made a payment during the payment pause (beginning March 13, 2020) you can request a refund. In other words, it is at least possible you could request a refund of your payment (your loan value would increase) and then you could request that be cancelled. It is uncertain yet if this will be allowed (for example, will they use loan balances at the time of cancellation announcement?). Notably, this applies to those who were within the income limits, who made a payment after March 13th, 2020, and whose current balance is below the cancellation maximum.
Are there ways to adjust income to fit within guidelines? It seems likely income will be based on 2020 or 2021 income. While 2020 income is mostly fixed, there may be people who could make adjustments for 2021 returns. For example, some business owners can still make retirement plan contributions. Also, it seems likely (not for sure) that the $125K income limit applies to married filing separately. In other words, if you have not filed your 2021 return yet and could make your income qualify by filing married filing separately, it is worth considering.
Please see this Kitces.com article for more information and ideas.
Thank you for reading!