Consider Forgiveness for Your Federal Student Loans
If you have a high balance on your federal student loans, pursuing a forgiveness strategy could be (A LOT) more effective than paying off your loans.
The Department of Education lists 10 different ways to qualify for forgiveness, cancellation, or discharge. There are 4 main ways that I will highlight here:
Public Service Loan Forgiveness (PSLF)
Standard forgiveness
Discharge due to death
Total and permanent disability discharge
Right now, we'll focus on the PSLF and standard forgiveness programs. We'll cover discharge due to death and the total and permanent disability discharge later on. Under PSLF and standard forgiveness, you will generally make payments based on your income. This allows you to pay less on your loans than you would under a standard 10-year repayment plan. At the end of the repayment period, the remaining balance is forgiven.
There are some important differences between the two.
PSLF becomes a very sensible option if you work for a non-profit or government employer. If you satisfy that criteria, along with some others, the remaining balance will be forgiven at the end of 10 years’ worth of payments. What’s more is this balance is forgiven tax-free.
Under standard forgiveness, there is no work-related requirement, but the length of repayment is longer. Depending on the income-driven repayment plan you are on, you are looking at a 20 or 25 year time period. The amount forgiven is counted as taxable income, though there are multiple strategies to relieve the tax burden.
Forgiveness (whether PSLF or the standard version) can be a very powerful strategy if your loan balance is high compared to your income. Rather than putting all your hard-earned dollars to your (or your child’s) loans, you can focus more of your money on retirement or other financial goals.
Now, on to the two others: total and permanent disability discharge; and discharge due to death.
Two key points to keep in mind with these programs are that the forgiven amounts under these circumstances are not taxed. Nor are they put upon your heirs to pay back.
First and foremost, I am not suggesting taking any action here on your health and well-being. The point is, structuring your loans the right way is all that’s needed to be done to utilize these methods of forgiveness.
Total and permanent disability discharge The Department of Education’s criteria for this is to show that you are unable to engage in any substantial gainful activity due to a physical or mental impairment. I bring this up because forgiveness may come sooner than having to wait until you pass away. If your health has declined to the point where you wouldn’t be able to work, even if you wanted to, you could apply for this type of discharge to have your loans forgiven tax-free.
Discharge due to death The repayment lengths under the income-driven plans are 20 or 25 years, depending on the repayment plan. If you consolidate your loans, this restarts the clock. This can stretch out your repayment period up to 50 years. If you don’t expect to live that long, you could structure your loans so they outlive you, allowing you to skip the tax on forgiveness.
You would not take a vacation to a completely unfamiliar destination without doing some sort of planning in advance, right? Things like: how long will your stay be, where will you stay while you’re there, what sorts of things will you do and see, who will get your mail while you’re gone, etc. Paying down your student loans should be the exact same thing. You need a plan, a cohesive strategy, for how you will pay these down.
Most likely, the rules of the game have completely changed since you last went to school yourself. The student loan landscape is now a complex maze of rules, and they impact many other aspects of your life and finances: retirement and taxes especially.
When it comes to planning out your student loan strategy, first start with getting an inventory on your loans: loan type, available repayment plans, interest rates, and balances are all important figures to consider. Next, think about the potential for achieving forgiveness: does it make sense or is an aggressive pay-down strategy the best way? Finally, map out how you will structure your loan payments, retirement savings, taxes, and investments to achieve the best outcome.
Have questions or want to learn more? Schedule a call with me