How Biden's Student Debt Plan Affects Advisors' Clients

“Client A has $70,000 in private student loans and $18,000 in federal student loans from her bachelor’s degree. The federal student loan payment pause has been a great opportunity for her because she has been able to direct extra payments towards her credit card debt and private student loans, making real headway on the credit card debt especially. Since she received Pell Grants in college, she is eligible to have her entire federal student loan balance forgiven, helping her continue to pay down other debt and work towards building financial stability.

“Client B has $300,000 in student loans from multiple graduate degrees. He makes a decent income now (his adjusted gross income was $107,000 in 2021), has been working for a nonprofit organization for three years, and will likely remain in a similar job for many years to come. While he is eligible to have $10,000 taken off his total loan balance, this will not change anything about the way he approaches his loans because his payments are based on his income, and he is working towards building 10 years of loan payments to receive forgiveness under Public Service Loan Forgiveness. However, the proposed new income-based repayment plan may bring down his monthly payments, depending on if he is eligible to enroll in the plan when it is finalized.

“Client C has over $150,000 in student loans from law school, and his partner owes an additional $80,000. While his partner works at a non-profit and is close to being eligible for complete discharge under public service loan forgiveness, Client C makes too much money to be eligible for any forgiveness under the current plan. His plan will be to continue making aggressive payments to lower his total balance, with extra payments targeted to his loans with the highest interest rates.”

Limited Relief for Some

Erik Kroll, a certified financial planner and owner of Student Loans Over 50, sees the debt relief program as a positive development overall for his borrower clients, although a limited one in some cases.

“What I see impacting my clients the most is the extension of the payment and interest pause to 12/31,” he said. “For borrowers pursuing forgiveness, they continue to earn credit without having to pay anything.” 

Kroll also said that if income recertification is pushed back six months from when the pause ends to July 1, 2023 — in line with previous precedent — borrowers with recertification dates before then would get pushed back another 12 months. Hypothetically, someone with a June 2023 recertification date would get pushed back to June 2024, he said. 

“So they would likely be making payments, once they start back up, based on 2019 income,” Kroll said. “This can be really helpful in a lot of circumstances.” 

The program doesn’t cover private or privately financed loans, noted Cecil Staton, CFP, president and wealth advisor at Arch Financial Planning. Many borrowers eligible to benefit from the new relief plan already participate in existing student debt forgiveness programs and may see a modest benefit in some cases or none in others, he said.

The two loan forgiveness programs for federal loans are Public Service Loan Forgiveness (PSLF) and taxable loan forgiveness through income-driven repayment plans, Staton explained.

Assuming a borrower is on track for PSLF, “they see no benefit from cancellation in most cases because their loans are on track to be forgiven without income tax due on the amount forgiven. PSLF is for borrowers employed by qualified 501(c) organizations and government entities. Think teachers, doctors and nurses working in hospitals, military, and government employees,” he told ThinkAdvisor.

“Those on track for taxable loan forgiveness through an income-driven repayment plan see a modest benefit,” Staton added. With this program, student loan borrowers can have their debt forgiven if they meet specific requirements. The amount forgiven is taxable. “They may also accrue less interest on their loans and complete the loan forgiveness requirements with a smaller balance thanks to this forgiveness,” he said. “Ultimately, a smaller balance forgiven means less tax due upon forgiveness.” 

Shifting the Burden

Joseph Weber, founder and president, Integrated Financial Solutions, doesn’t consider the plan beneficial for his clients.

“We feel it’s going to negatively affect clients by essentially forcing them to pay for student loans they didn’t take,” he said in an email. “Clients who may not have gone to college or chose to go to a tech or trade school now have the burden of student loan debt put on taxpayers. Not to mention it unfairly affects those who did take out loans and paid those back responsibly. 

“I also feel it will add to the inflationary cost of attending college, plus just add to our national debt.”