How the Promising New American Rescue Act Helps Student Loans
Federally owned student loans have been on CARES ACT forbearance since March 27, 2020. Interest rates and payments were temporarily set to zero as part of a response to the COVID pandemic. Biden administrative officials have hinted that they may extend this freeze, but the emergency forbearance is currently set to end on September 30th, 2021.
If you are a federal student loan borrower, you may need to adjust your family's cash flow to resume your student debt payments in October. During this impending madness, FedLoan, the government's largest loan servicer (and dedicated Public Service Loan Forgiveness PSLF servicer), is quitting the job. In a process where customer service was always abysmal, you may also be dealing with a new loan servicer.
Depending on how your circumstances have changed since March 2020 and the impact of The American Rescue Plan's new tax rules on your family, you will need to reassess your optimal tax filing status and retirement savings strategies. Evaluate your plans now! By October, loan servicers will be flooded with millions of requests for changes. The considerations are crucial if you are on an Income-Driven Repayment Plan (IDR) or pursuing PSLF.
So, how do you know if you should make a change? Start by asking yourself these questions.
Did your priorities or goals change?
Covid lockdowns came with remote work flexibility and increased family time. Shifting priorities has prompted relocations, job changes, and new outlooks on work/life balance. How did your pre-Covid feelings about debt and retirement goals change? What changes to your lifestyle are necessary to accommodate your new priorities?
Did your income change?
All borrowers on IDR repayment plans will receive a deadline to recertify income. At that point, the payment amount will be calculated for the next 12 months. Your assigned recertification deadline, income change, and goals will dictate when and with which tax return you should recertify.
If your income fell, you can recertify now to use a recent tax return (or paystub) to show the lower-income, and qualify for a lower payment as soon as possible. But, if your income has risen significantly since March 2020, you may want to wait until the last possible moment to recertify and keep your lower payments for as long as possible. You can recertify as soon as you want, but no later than the deadline provided.
Did you leave (or join) a PSLF/TLF eligible employer?
After years of deliberately minimizing loan payments to pursue PSLF forgiveness, you may have decided that public service isn't for you. So what does this decision mean for your debt paydown timeline?
Alternately, if you found your calling in public service, you should familiarize yourself with the rules of forgiveness. Start at studentaid.gov, and join PSLF Support Groups to be encouraged by success stories and alerted to pitfalls in the forgiveness process.
Did you get married?
Have you considered the impact on your IDR payment of filing jointly with your new spouse? IDR plans usually calculate the required payment on total household income (10%). Therefore, the addition of spousal income could significantly increase a borrower's required payment.
Consider if married filing separate is optimal. Yes, you could pay more in aggregate taxes, but this increase may be worth it compared to the reduction in your IDR payment amount.
Did you have a child?
Married Filing Separately has historically been used by married couples with income disparities to reduce student loan payment amounts, but this filing strategy may no longer be optimal for families with young children.
The American Rescue plan offers enhanced Child Tax Credit and Dependent Care Credit for 2021, but married couples will see these credits reduced or eliminated if they file separately. The reduction in student loan payments may no longer be significant enough to justify paying the higher tax liability from filing separately.
No financial decision exists in a vacuum. Your tax filing status will affect your choice of repayment plan. In addition, your income recertification date will impact which tax return you should submit, which then determines your payment amount for the next 12 months. All of which may alter how much income you have left each month to fund your immediate and long-term goals.