By The Welch Group
Americans owe more than $1.75 trillion in student loans. Monthly payments for these loans can be overwhelming for many households, and the loans can be amortized for up to 30 years. Borrowers often take advantage of forbearance or deferment plans, which only end up accruing more interest on the loan and lengthening the term of the loan.
The student loan forgiveness plan announced recently by President Biden would provide up to $20,000 of debt forgiveness for students who receive a Pell Grant, and $10,000 of forgiveness for non-Pell Grant recipients. (1) Pell Grants are offered to low-income and middle-income students based on financial need, and the amount awarded to students does not need to be paid back. According to the White House, approximately 60% of people who have federal student loans received Pell Grants. (2)
Requirements for Forgiveness
Borrowers are eligible for this relief if their individual income is less than $125,000 or $250,000 for households.
Private student loans are not eligible, only federal student loans. Of the $1.75 trillion of debt Americans have in student loans, roughly $1.62 trillion is from federal student loans while the remaining $131 billion comes from private loans. (3)
There is no age requirement, nor does the plan stipulate that the borrower must be the one who used the loan for college. That means that parents, or grandparents, who took out student loans for family members would be eligible for forgiveness, so long as they met the income requirements.
The plan also stipulates that the reprieve is only for those who took out loans prior to June 30th, 2022. Thus, no loans taken after that date would be eligible for forgiveness under this plan. It is currently unclear if there will be future loan forgiveness plans.
The Department of Education said that the application to apply for forgiveness will end on Dec. 31, 2023. To be notified of when the application opens to apply, you can sign up at the Department of Education subscription page.
Additional Student Loan Changes
The plan also made changes to the repayment of federal student loans, including:
- Lowered the percentage borrowers pay of their monthly discretionary income from 10% to 5% (only for undergraduate loans).
- Forgive loan balances after 10 years of payments if the borrower has a balance of $12,000 or less.
- Paying for a borrower’s unpaid monthly interest. Some borrowers have paid their monthly payments but have seen their balances grow because of the interest. Now, as long as they make their payment, their balance will not grow.
Planning for Future College Expenses
Despite the $10,000 to $20,000 debt forgiveness coming to certain borrowers, it is still advisable to plan for other ways to pay for the cost of a college education. In 2021-2022, the average cost of an in-state public college was $10,388, while an out-of-state public college was 22,698. The average private college cost was $38,185. (4) The main takeaway is that even if there is more forgiveness, that alone won’t be able to cover the full cost of 4 years in college.
Two of the most popular ways to save for college are a 529 plan and the Coverdell Education Savings Account (ESA); each offers tax benefits and can be suitable for savers.
A 529 plan allows for borrowers to invest contributions into an account, invest it with tax-deferred growth, and withdraw the money tax-free as long as the money is used for a qualified education expense. Additionally, some states offer a tax deduction on contributions made to 529 plans.
The ESA contributions are not tax-deductible, but like a 529, your contributions grow tax-deferred, and distributions used for qualified education expenses are tax-free.
The ESA has a $2,000/year contribution limit, while there is no contribution limit for the 529 (although you do need to ensure you don’t exceed any gift tax limits, and if you do, you’ll need to report it on your tax return).
If You Qualify for Forgiveness
If the student loan forgiveness plan results in your loan being paid off in full, then this is an ideal time to put that money to work for you. Instead of spending the money previously spent on monthly loan payments, consider using that money to invest and build wealth. Depending on your goals and circumstances, you can contribute to your workplace retirement plan, an IRA, or a joint investment account.
If you qualify but the amount forgiven will lower but not eliminate your loans, there is still plenty of good news. Not only is your loan balance lower, but the amount of interest you pay each payment will decline, which will increase how quickly you can pay off your principal.
Also, as a result of your lower loan balance, your net worth will increase, which is a key indicator of your financial health. (5)
We Can Help
At The Welch Group, we want to help you sort through your options. Regardless of what new plan details come out, it’s important to have a plan on how to pay for higher education and how to maximize the savings you may receive as a result of student loan forgiveness. Schedule an introductory phone call by reaching out to us at 205-879-5001.
About The Welch Group
The Welch Group is a fee-only, employee-owned wealth management firm committed to enriching the lives of its clients. Founded in 1984, The Welch Group helped pioneer the fee-only financial planning and investment management movement and has continued to put the needs of clients first ever since. Offering wealth management and family office services to retirees and young professionals, The Welch Group team strives to simplify financial management and help clients secure their financial future so they can focus on what matters most. Our personalized and comprehensive approach helps clients plan for their goals, needs, and concerns, including estate planning, cash flow, charitable and tax planning, and retirement strategies.
As financial advocates, the financial advising team is made up of educated, experienced, and dedicated professionals, including Certified Public Accountants, a Juris Doctorate (JD), individuals with MBA degrees, and CERTIFIED FINANCIAL PLANNER™, Accredited Estate Planner®, and Chartered Financial Analyst® professionals. The Welch Group is passionate about giving back and creating positive ripple effects in our community by supporting local charitable organizations through The Welch Group Foundation. To learn more about what we do and how we can help, explore our website and schedule a complimentary consultation.
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