By Daniel Staiger, CFP®, CRPC®
On August 24th, 2022, President Biden announced a plan to forgive student loans for borrowers who meet certain criteria. The White House estimates that nearly 43 million individuals will qualify for this relief, and roughly 20 million borrowers will see their entire balances forgiven.[1]
If you’re like many of our clients, you may be a teacher with unpaid student loans, and this relief could make a significant difference in your financial plan. According to a survey conducted by the National Education Association, 45% of all educators have taken out student loans at some point in their career.[2] Of those, 53% still had student loan debt in 2021 and the average open balance was $58,700.[3] That’s more than the national average balance of $39,351.[4]
No matter what your student loans look like, it’s important to understand the details of the forgiveness program before making any plans for your monthly payments. Here’s what you need to know about student loan forgiveness and how it could impact your long-term financial plan.
The plan would provide up to $20,000 of debt forgiveness for students who received a Pell Grant, and $10,000 of forgiveness for non-Pell Grant recipients.[5]
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.[6]
Borrowers are eligible for relief if their individual income is less than $125,000 or $250,000 for households.
Keep in mind that 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.[7]
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 program. 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 when the application opens, you can sign up at the Department of Education subscription page.
The plan also made changes to the repayment of federal student loans, including:
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.[8] 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 and your new student loan balance will be fully paid off, this is a great time to take the next step in your financial life. Instead of immediately spending the money previously contributed to student loans, 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 an 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.[9]
The full details of the student loan program will be provided in the next few weeks and months, and we will be in touch as we learn more.
Regardless of what those details are, it’s still important to assess the impact on your finances and plan for any future college education expenses.
If you are a teacher looking to make the most of this forgiveness program, or if you are a parent planning to send your child to college in the future, we are here to help! To learn more about your options, schedule a no-obligation introductory meeting by emailing me at daniel.staiger@raymondjames.com or calling (631) 319-6777.
Daniel Staiger is a partner at Matarazzo Staiger Wealth Management and Financial Advisor with Raymond James Financial Services. Matarazzo Staiger Wealth Management is an Independent Practice and our team is committed to helping families, pre-retirees, and union employees build a sense of security and confidence around their financial future. With more than 10 years of experience, Daniel is dedicated to providing trusted advice and tailored solutions that help his clients realize their financial potential. He is known for building relationships with his clients so he can better understand their values and the goals they want to pursue. As a CERTIFIED FINANCIAL PLANNER™ and Chartered Retirement Planning Counselor℠ professional, Daniel specializes in serving union employees, such as tradespeople and teachers, with well-thought-out guidance and a personal touch. When he’s not working, Daniel spends his time pursuing interests such as guitar, volleyball, golf, and cooking. He is also an active member of his church. To learn more about Daniel, connect with him on LinkedIn.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
Material prepared by Indigo Marketing, an independent third-party.
As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. Investors should consider, before investing, whether the investors or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors. The tax implications can vary significantly from state to state.
[1]https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/24/fact-sheet-president-biden-announces-student-loan-relief-for-borrowers-who-need-it-most/
[2] https://www.nea.org/sites/default/files/2021-07/Student%20Loan%20Debt%20among%20Educators.pdf
[3] https://www.nea.org/sites/default/files/2021-07/Student%20Loan%20Debt%20among%20Educators.pdf
[4] https://www.credible.com/blog/statistics/average-student-loan-debt-statistics/
[5] https://studentaid.gov/debt-relief-announcement/
[6]https://www.npr.org/2022/08/25/1119343754/what-you-need-to-know-about-bidens-student-loan-announcement
[7] https://www.forbes.com/advisor/student-loans/average-student-loan-statistics/
[8]https://www.usnews.com/education/best-colleges/paying-for-college/articles/paying-for-college-infographic
[9]https://www.cnbc.com/select/what-is-net-worth/
