By Landon Warmund
If you’re in any sort of public service field, chances are you’ve heard of the program Public Service Loan Forgiveness (PSLF). Either you’ve explored it, someone you know has, or you’ve read a news headline about the massive percentage of student loan borrowers that are getting declined forgiveness under the plan.
Yes, Public Service Loan Forgiveness can be a bit confusing in terms of the eligible repayment plans, eligible loans, submission of documentation, and other rules that are associated with it. Especially for borrowers that don’t typically deal with these kinds of programs on a consistent basis. Those that can get a clear understanding of how the program works can now move onto the next portion of planning. What’s that? How low can we get that student loan payment and how we can further maximize the forgiveness we can receive!
Many of you might know that any balance that is left after fulfilling the 120 qualified payments gets completely forgiven. This is why our typical goal is to pay as little as possible to maximize the amount forgiven at the end. First, let’s do a brief overview of the rules for obtaining Public Service Loan Forgiveness.
Public Service Loan Forgiveness Basics
There’s five main parts of Public Service Loan Forgiveness that MUST be met if you wish to have your loans forgiven under the plan. While there’s intricacies to each of these, we will just go over the basics:
· Correct employment with a government, 501(c)(3), or qualified not-for-profit organization.
· Meet your employer’s definition of full time or at least 30 hours per week, whichever is greater.
· The loans must be Direct Loans since these are the only ones that qualify under the forgiveness plan.
· Loans must be repaid under an Income Driven Repayment Plan. Technically the standard repayment plan qualifies but borrowers would receive no benefit since it’s based on 10 years’ worth of payments.
· Make 120 qualified payments. These must be full- and on-time payments for the stated amount that’s due.
Maximizing Forgiveness & Minimizing Payments
Now that we have an understanding of the basics of the program, let’s go over the fun part - maximizing the forgiveness you could receive on your student loan balance! These strategies will focus on the goal of minimizing income under an income driven repayment plan. Typically, these repayment plans allow you to use 10% or 15% of your discretionary income as your required student loan payment. This could be substantially less (sometimes the payment is zero) than what you would be able to receive on your other repayment plan options (studentaid.gov). We will focus on three areas: Retirement, tax, and insurance planning.
Tax Planning for Student Loan Forgiveness
There are some very unique opportunities for student loan borrowers who are currently married. When it comes to minimizing student loan payments, I find that there is one specific change that typically has the largest impact on student loan payments. (Like with everything tax related, it’s always best to explore the implications of these strategies with a tax professional that can help you weigh the pros and cons of each.)
Borrowers that are married have the ability to explore changing their tax filing status from Married Filing Joint to Married Filing Separate. For those that will be on an Income Driven Repayment Plan, this allows you to exclude spousal income from your payment calculation. You could see massive savings!
Let’s use an example: Let’s say you have a spouse that makes $50,000 a year and you make $40,000 per year. If you’re the only two in the household and have no pre-tax deductions, you could expect a required student loan payment on the Pay as You Earn repayment plan of $532.25/month. If you were to change your tax filing status, this would result in a new payment of $115.58/month. This is a massive savings when you’re able to exclude spousal income!
Of course, when making a change like this, it comes with tax implications. A change like this can impact your ability to save into IRAs, your eligibility for certain tax credits, and you could potentially end up paying more overall in taxes. That’s why it’s always recommended to speak with a tax professional as I am not one and don’t hold myself out as one.
One way to potentially mitigate the tax losses associated with Married Filing Separate would be to explore filing what’s called an amended tax return. An amended tax return could allow you to potentially recoup some of these tax losses in a later year by changing your previous filing status back to Married Filing Joint for that previous year. Keep in mind that you should always make sure that your most recent tax return shows as Married Filing Separate for income recertification purposes for your income driven repayment plan. If this isn’t followed, you could potentially risk paying a higher-than-expected payment or not properly following the rules outlined under the student loan system.
Retirement Planning for Student Loan Forgiveness
Just like with taxes, retirement planning can be of great benefit for individuals looking to lower their student loan payment and maximize their forgiveness. Even if your spouse doesn’t have loans, they should be involved in the planning process. Many of the changes or strategies discussed affect both spouses!
While on an income driven repayment plan, you will receive a savings on your student loan payment by choosing to contribute to pre-tax retirement plans. Contributing to pre-tax retirement plans will reduce your adjusted gross income which is the number that will be used to calculate your required student loan payment under an income driven repayment plan.
Another retirement planning strategy for those that choose to change their filing status could potentially be to transition retirement contributions from a spouse’s plan onto the student loan borrower’s employer sponsored retirement plan. Of course, if the other spouse is receiving an employer match, it’s good to take advantage of that. It’s not uncommon that I find a spouse of a student loan borrower that isn’t being provided a retirement plan or an employer match at their current place of employment. Making this transition allows for the spouse to continue to save on the student loan borrowers plan, the borrower receives the income reduction, and receives the lower loan payment. The caveat would be that both spouses need to be on the same page about retirement planning and comfortable knowing that a majority of the retirement savings would be under only one spouse’s name.
Insurance Planning for Student Loan Forgiveness
Utilizing insurance benefits available through work is another area of opportunity for borrowers pursuing Public Service Loan Forgiveness to assist with lowering their payment under an income driven repayment plan.
Borrowers will receive a larger benefit by utilizing pre-tax benefits that are available to them. This could include health, dental, vision, flex spending accounts, or health savings accounts. Yes, you’ve recognized the theme! The goal is to reduce the income either for the household or for just the student loan borrower depending on tax filing status.
For those that are implementing a tax filing status change, it would be beneficial to compare and contrast the plans that are available to both spouses and when it makes sense, utilize the loan borrower’s benefits to further reduce their income.
Time for Planning
In summary, student loan borrowers do in fact have a lot of opportunities to maximize forgiveness amounts and minimize student loan payments. With these opportunities, there’s a lot of complexities that come with them as well. Borrowers need to do extensive research prior to implementing these strategies so they know the impact they will have with their overall financial situation.
About the author: Landon Warmund, CFP®
Landon Warmund is a Certified Financial Planner™ and Certified Student Loan Professional based out of Kansas City Missouri. Landon focuses on providing help to school district employees throughout the Midwest with their finances including crafting student loan forgiveness plans to help guide them manage their student loan debt. For more information, please visit www.teacherswithaplan.com
Securities and Advisory services offered through GWN SECURITIES, INC. Registered Investment Advisor 11440 North Jog Road, Palm Beach Gardens, FL 33418. (561) 472-2700. Member FINRA (http://www.finra.org)/SIPC. (http://www.sipc.org) Teachers With A Plan LLC and GWN Securities, Inc. are non-affiliated companies. BrokerCheck.