Envision a line of people 43 million deep seeking $10,000 – $20,000. Is there anyone out there that wants to be on the back end of that waiting process? Probably not, but, that could be the case for those eligible to apply for loan forgiveness.
An estimated 43 million borrowers will qualify for some form of federal student loan relief and 20 of those 43 will have their entire federal loan balance wiped clean. Although the U.S. Department of Education Student Debt Relief Plan is expansive, it will not forgive all debt and leave approximately 25 million people with federal student loan balances on a repayment pause that is scheduled to end on Dec. 31, 2022, and where payments will recommence in January 2023.
With the volume of people impacted, there are steps that all borrowers should take to uncover if they are eligible to achieve the debt relief outlined by the Biden administration and minimize delays:
If unknown (or even as a measure of confirmation), uncover the name and contact information of your federal student loan servicer by visiting www.studentaid.gov with your FSA ID (if you do not have an FSA ID, you can create one on this landing page).
It is estimated that the online application for federal student loan relief will be available in October 2022. The timeline window for the debt relief application will close on Dec. 31, 2023.
While logged on to the site, confirm that your contact information (including email) is correct so that you can receive alerts centered on the release and status of your application.
Reach out to your federal student loan servicer to confirm your contact information and complete a discussion on your repayment options if you have a balance remaining after this forgiveness event.
If you made payments during the payment pause and believe that your loan balance will be completely forgiven under this legislation, inquire with your loan servicer about the possibility of a refund for those payments made during the payment pause.
Consult with your tax adviser to determine whether your home state will assess the loan forgiveness as a taxable event and prepare financially if that could be the case.
For those who will have funds forgiven and have extra money in their pocket each month, this is a prime opportunity to use those same funds to begin tackling other debts or building a retirement fund. Americans have experienced an increase in credit card balances of $46 billion for the second quarter of 2022 and face a $7 trillion retirement savings shortfall. Here are some tips to filter that monthly loan payment into other possibilities:
Consider paying off other debts you have accumulated, possibly targeting obligations with either the highest interest rate (debt avalanche method) or the lowest balance (debt snowball technique)
Contemplate utilizing the additional liquidity to start or increase contributions to an employer sponsored 401(k), 403(b) or a traditional or Roth IRA
If you do not have an emergency fund, this boost in resources could be an opportune time to position additional money in an account that can be relied upon in case of unforeseen expenses
Whether you find favor or benefit with the debt relief legislation, there are still options available that can help optimize finances around the pursuit and completion of higher education.
One tactic is to examine the interest rates of any existing private student loans (even if you are still enrolled in college) and determine whether your existing (or other lenders) can provide a better product by way of a refinance.
Additionally, for families that have saved for the full cost of an undergraduate degree, students can secure federal loans in their own name over their four-year journey. If the loan forgiveness does not re-occur (or for some reason the student does not qualify), the Secure Act of 2019 allows 529 proceeds of up to $10,000 to pay off student loan debt. Parents can use the federal loans in the name of the student as leverage (or incentive) to encourage the student to complete a degree in a certain time frame or maintain a certain GPA before the 529 proceeds are released to pay off the federal student loans. Check with your tax adviser to see if there will be any state tax recapture if you utilize your 529 funds for this purpose.
Another possibility for parents with 529 funds lies in the proposed legislation put forth by Senators Richard Burr (R-NC) and Bob Casey (D-PA) — the College Savings Recovery Act. This is designed to allow owners of 529 accounts with leftover funds to rollover these proceeds into a Roth IRA, another form of retirement savings.
Jerry Inglet, Ed.D., CFT-I, is a Family Legacy Advisor at Wilmington Trust.
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