I have learned a little over the years. When it comes to capitalism in general. All of your choices have an end effect.
Student loans are a mess. That isn't a secret. When I work with young professionals in Columbus, Ohio it is safe to say this is more than a reoccurring theme. As a financial advisor, when helping my clients with student loan planning I have come across some pretty unbelievable strategies. Some are simple, some are more complex. The strategies are not formed in just an excel sheet, but really by someone's career track and how they want to align their capital with where they are heading in life. That is where the plan is built.
The Public Student Loan Forgiveness Program.
It is a maze for the average human being. There are too many different payment options, with too many different types of loans and to top it off, there is a tax layer. We are going to take this at a high level and not get too complex. This blog will discuss one strategy I use with clients. There are plenty more! Make sure to watch the video if you haven't already.
1. You need to work for a non-profit (501c3) or a government entity for 10 years.
2. Your loans need to be federal direct loans.
3. You have to qualify for Pay As You Earn.
4. Have a spouse with income.
I made an example earlier in the vlog with a higher earning spouse and a lower earning spouse. What you need to know about these different income driven repayment plans is PAYE (Pay as You Earn) and the IBR (Income Based Repayment) have a weird twist to them. If you file your taxes separately, your spouse's income is no longer included in the calculation. That's extremely important because when you join a income driven repayment plan it is based on your adjusted gross income and the federal poverty line. In Columbus Ohio or any other low cost of living state the Federal Poverty Level helps you tremendously. On top of savvy cashflow planning you can push your Adjusted Gross Income very low for that lower income spouse if filing separately makes sense. A Financial Advisor and a CPA could be worth their weight in gold.
In my example, there is at least $200,000 coming in. If the lower earning spouse maxes out a 401k, 403b, FSA, HSA, Dependent Care FSA, really anything that can help lower the spouse's adjusted gross income will lower the payment the spouse is entitled to pay. More money for you - Less money to pay the government. Some of my clients have even gotten it down to $0. Which sounds crazy, because it is crazy. Those few Income Driven Repayment Plans do not take into account the REAL income of the household.
PAYE = (Monthly AGI - 150% Poverty Line) x .1 = Your Payment. It actually is that simple.
Most student loan servicers ask loan borrowers what is your "discretionary income"? Borrowers very commonly state their gross income (income that hasn't even been taxed yet and does not include DEDUCTIONS - HORRIBLE MISTAKE) and get charged a ton more. Does the government care? Nope. Are they going to give the money back to you? Also a nope. Want to see the fine print? Here it is.
So if you meet the 4 criteria points it may make sense to see if this strategy could work for you. And no, student loan servicers are not savvy to many student loan strategies. Even though that is there job, advice is not. If they give advice, especially at a deeper level, it opens them up to liability! See why this whole student loan situation is a giant mess!
1. When you file taxes separately you need to make sure the student loan forgiveness is WORTH filing your taxes separately. If the loan balance is light, it might not be worth it. That is where a pre-vetted CPA can be pretty handy if the numbers will be relatively close.
2. Having a spouse help greatly reduce a loan balance is fantastic! But, you both need to be on the same page. Every relationship treats money differently. The non PSLF spouse should always get their match from the employer plan and if you both make a family decision to max out the PSLF lower earning spouse you better have 2 things locked up. If there is a pre-nuptial agreement obviously that makes money move in one clear direction. The pre-nuptial agreement needs to address this strategy or you should flat out not do it. Don't want anyone to get hosed. Also, if the beneficiary is not 100% the spouse or there is other estate planning wishes, this really needs to be discussed prior to any student loan implementation of this strategy. Yes, estate planning is important for even young people!
Those are the 2 major cons but if executed properly and professionally the upside is tremendous. This is only 1 strategy. The fact is. There is a lot more and some very interesting updates on new guidelines! I set up 15 minute ask me anything sessions. There is no expectation or cost. Just a candid conversation about life and finances. Until next time!
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The opinions voiced are for general informational only and are not intended to provide specific advice or recommendations for any individual.