5 MIN READ
There is never a dull moment in the world of student loans. Many of you are hopefully enjoying a student loan payment-free summer thanks to the CARES Act which suspended federal student loan payments until September 30th, 2020.
You may not be thinking about student loans until the payment suspension is lifted, but there are 3 major ways your student loans could be affected in for the remainder of the year that you want to be ready for.
Each of these are unrelated, yet are extremely important for you to know as you continue on the journey of successfully managing your student loan debt.
1) President Trump Issued an Executive Order Extending the Federal Student Loan Suspension until December 31st, 2020
On August 8th, 2020, President Trump issued this executive order suspending student loan interest and payments until December 31st, 2020. Previously under the CARES Act, student loan interest and payments were suspended until September 30th, 2020.
However, this executive order initially seemed different than the CARES Act. Under the CARES Act, there was text specifically saying that this suspension period still counts towards loan forgiveness programs like tax-free public service loan forgiveness (PSLF) or taxable loan forgiveness.
Under this executive order, the period from September 30th, 2020 to December 31st, 2020 seemed to fall under the classification of “economic hardship” which counts towards taxable loan forgiveness, but not public service loan forgiveness!
However, on August 21st, 2020, Secretary DeVos issued a statement clarifying that the period from September 30th, 2020 to December 31st, 2020 will count for PSLF!
This means you essentially have an extra 3 months of an “interest-free” loan from the government. So, what should you do? Should you use this time to make a bigger dent into your student loans or continue to free up cash flow for other purposes?
It really depends on which of the 3 camps you fall into when you think about repaying your student loans. I wish I could give you a concrete answer, but it will vary for everybody .
Personally, my wife and I are not planning to make any payments towards her student loans during this suspension. Why? Well, we’d rather use our cash flow in different ways and it’s an election year, which leads to the next important topic…
2) The Presidential Election in November
This is obviously a massive wild card, but Biden has expressed favorable views for student loan borrowers. He has outlined his plan for student loans here, but we all know there is no guarantee this plan would actually happen if he wins.
Some of the key components of Biden’s student loan proposal to current borrowers include:
- Individuals making <$25,000 per year would not owe payments on their undergraduate federal student loans and no interest would accrue.
- Individuals making >$25,000 per year would pay 5% of their discretionary Income (which would need to be specifically defined). Current repayment plans like PAYE or REPAYE require 10% of your adjusted gross income (a fancy tax term essentially meaning your total income). Biden’s plan would lower the % payment and also lower the amount the percentage is based upon since your discretionary income would be lower than your adjusted gross income. This would significantly lower your monthly student loan repayment overall if you enrolled in this plan.
- If you have a student loan balance remaining after 20 years on this payment plan, your student loans would be forgiven. Under current tax code, this forgiven amount would be considered taxable income, but Biden is proposing to amend the tax code so the forgiven amount would not be taxable!
Biden has also provided support for the $10,000 across-the-board federal student loan forgiveness proposed by Senate Democrats as a result of the Coronavirus, which unfortunately was not passed.
The overall theme here is that Biden has showed support for forgiving small portions of student loan debt and making student loans more manageable for borrowers.
Think about it this way – let’s say there is a 10% chance that $10,000 of federal student loans is forgiven. The expected payout of this would be 10% * $10,000 = $1,000.
You wouldn’t be “penalized” for not paying towards your student loans until December since no interest is accruing which means the “opportunity cost” of not paying towards your loans is $0.
This means the expected payout = $1,000 with a $0 opportunity cost. If you aren’t pursuing PSLF, you may want to wait and see how the election shakes out before making further dents into your student loans. You can always save up money and then decide to make a bigger payment later, but you can’t hit the rewind button if you already make bigger payments into your student loans.
3) Your Federal Student Loan Servicer may be Changing in December
A far lesser known, but possibly greater impact change may take you by surprise come December. The US Department of Education announced in June that 5 new contracts were awarded to new loan servicers.
Those of with you student loans probably know that loan servicers are absolute nightmares to deal with. And it’s not entirely their fault. They are paid low salaries and expected to understand the ins and outs of the extremely complex student loan repayment atmosphere. In addition, they are incentivized to reduce call times and keep your loans serviced at their company. It’s a total recipe for disaster.
You may think “awesome – it can’t get any worse than the loan servicer I have now, right?”. Wrong.
The problem is that your student loan repayment history is crucial information, especially if you are pursuing one of the forgiveness programs. Do you feel confident that your prior communication and payment history will successfully transfer over to the new servicer?
Yeah – me either.
My recommendation is to take it upon yourself to download and record everything (and I mean everything!) related to your student loan record at your loan servicer. This includes all IDR certifications, payment histories, loan servicer communication, etc.
Now, there is the possibility that the current big 4 loan servicer contracts (MyFedLoan, Navient, Nelnet and Great Lakes) could be extended and the change wouldn’t actually happen. However, you don’t want to be caught with your pants down in December and not prepared for this change.
Taking a few hours to document all of your records could save you days and/or thousands of dollars in the future. I’d say that is an investment of time worth making!
- Your student loan strategy should be dynamic. Don’t just continue what you’ve been doing – you should constantly be revaluating your strategy and making sure it’s aligned with your goals.
- If you are pursuing taxable loan forgiveness or PSLF, it’s a no brainer not pay anything towards your student loans until 2021 and keep the clock ticking towards forgiveness.
- If you are not pursuing taxable loan forgiveness or PSLF, you may want to wait and see how the election turns out before further chipping away at your student loans. You can always pay them down faster in the future, but any possible loan forgiveness or more favorable repayment options could change your repayment strategy all together.
- Carve out time to document all records from your loan servicer. It could save you hours of frustration and thousands of dollars if the loan servicers do in fact change!
About the Author
Jake is the founder of Experience Your Wealth, LLC, a virtual, fixed-fee financial planning firm helping young families with student debt find the responsible balance between paying down debt, investing for the future, but also experiencing life now.
Did you know XYPN advisors provide virtual services? They can work with clients in any state! View Jake's Find an Advisor profile.