Student Loan Forgiveness: Tips from a CPA Financial Planner

Either way, the recently announced student loan relief measures will have a positive impact on the lives — and pocketbooks — of Americans who struggle to pay for their education long after graduation.

Details are slowly emerging on exactly how the initiative will erase up to $10,000 in student debt per borrower, but CPA financial planner Brianne C. Smith encourages her clients to act quickly in response to lesser-known but no less important to the initiative.

“General information is one thing,” said Smith, CPA/ABV/PFS, Ph.D., owner of a CPA firm in Alabama and member of the AICPA’s Personal Financial Planning Executive Committee.

“But,” Smith continued, “it’s really about thinking about getting $10,000 debt forgiven and really being mindful of what you’re doing about it, this gift.

“And there are future pardons around which to strategize.”

The measures will cancel up to $10,000 of student debt held by the federal government (and up to $20,000 for those with a Pell Grant). However, as the official announcement of the relief program pointed out, the U.S. Department of Education estimates that students who graduate today on loans owe an average of nearly $25,000.

This means, according to Smith, that financial planners must be prepared to help clients who still owe money in three ways:

  • By proposing a game plan for making loan repayments from January;
  • Ensuring customers take advantage of meaningful enhancements to income-contingent repayment plans that could reduce that next payment; and
  • By taking advantage of generous changes to the Civil Service Loan Forgiveness Program ahead of the October 31 deadline.

“Now there are more advantageous rules,” Smith said. “Now there is a sense of urgency.”

Addition of an additional budget line

With the good news of debt cancellation comes a potentially strong dose of reality.

“People who have been on forbearance for more than two years have become accustomed to not paying their student loans,” Smith said. “Well, they’re going to have to make that first payment in January, so it’s important to be prepared for that over the next few months.”

The pause on debt payments that began at the start of the COVID-19 pandemic in March 2020 has been extended again, but with a caveat: payments are expected to resume in 2023.

“I think a lot of people have been in denial, thinking this will never happen, but it’s pretty clear that this is the last time payments will be suspended,” Smith said. “You have to set your mindset to be ready to pay for this in January, which is a very difficult time on the calendar to add an additional budget line, after Christmas.”

Smith said that given the time that has passed since the last required payment, some customers have grown accustomed to using that money to support different parts of their budget.

She has some simple advice for those facing the prospect of payments in 2023.

“For the last four months of the year, I would really think about pretending you have to pay it now to make sure you’ve saved enough,” Smith said.

Down payment reduction

Hidden under the debt forgiveness headlines is this: The Department of Education is proposing changes to income-based repayment plans that would cut monthly payments and cut the duration of those payments in half.

In addition to a favorable new formula for calculating payment amounts, the proposal would forgive an entire federal loan balance of $12,000 or less after 10 years of payments on the plan — up from 20 years.

The new formula would base the monthly payment on 5% of Discretionary Income (it is currently 10%); further reduce what is calculated as discretionary income by increasing what is considered non-discretionary income; and would cover any unpaid monthly interest that may be incurred by the resulting lower payments.

The White House debt cancellation briefing estimated that public school teachers earning $44,000 a year would see their monthly payments reduced from $197 to $56.

“It’s not a new program, but what’s new is how your disposable income to pay student loans is taken into account – and it’s now better for the borrower,” said Smith. “You should let the IRS know where you stand on your income and apply for this program to reduce your payment.”

Thank you for your service

Smith also said it was essential that people in certain careers who will continue to have student debt look into the Public Service Loan Cancellation Program (PSLF) before it is too late.

“It really surprises me how many people don’t know about the program,” Smith said. “And there’s a deadline in less than two months.”

Smith helped a client who works for the military, which qualifies her for the PSLF alongside people who work full-time for any branch of government as well as some nonprofit organizations. People who enroll in the program will have the rest of their debt forgiven after 120 monthly payments.

Before the 2007 program was revised last october, the Ministry of Education estimated that around 16,000 borrowers had received forgiveness under the PSLF to date. The White House briefing last month updated that number to 170,000, a testament to the new effectiveness of the program.

October 31 is the deadline to take full advantage of the new program offers. If someone applies and has a Direct loan, or applies to consolidate student debt into a direct loan before the deadline, then some, if not all, of the monthly payments made before the person had a direct loan should count toward the 120 monthly payment threshold . In addition, each month during the pandemic pause will count as well.

“People who previously struggled to repay their student loan, even though they still have a lot to pay, should consider other aspects of the program as well,” Smith said. “Be sure to apply if you are eligible.”

— To comment on this article or suggest an idea for another article, contact Bryan Strickland at [email protected].

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