What physicians with student loans need to know about these changes.
With all the recent changes in the student loan space, we’ve seen many borrowers ignore the latest updates because they’ve already concluded that it probably doesn’t apply to them. On the other hand, we saw other people sitting patiently, waiting for government approval for a national discharge of all student loan debt. With many articles floating around delving into both types of borrower emotions, it’s important to realize that many of them are either trying to get you to refinance your loans with their bank or get you to vote for their political party. The intention of this article is to focus on exactly what the latest legislative updates state so that we can continue to map out the most efficient path to repaying your loans.
For those who don’t know, if a borrower makes payments based on income under an Income Oriented Repayment (IDR) plan for 20 or 25 years (depending on loan type and refund you are on), the loans are cancelled. The catch is that the loan release will be considered taxable income for that borrower in the year of forgiveness. One of the problems with this program is that it has historically been difficult to track how many eligible payments you have for your IDR rebate, unlike the Public Service Loan Rebate (PSLF) program which has a system specific follow-up.
The other problem borrowers face is that many loans made before 2007 are part of the Federal Family Education Loan (FFEL) program. This program was adopted in the early stages of the Department of Education, where they were getting their funding for these federal loans from private banks. After 2007, they launched the Direct Lending Program which now funds all federal loans directly through the government. While these FFEL loans are still federal loans, they don’t qualify for any of these remission programs because the government can’t remit money that isn’t technically theirs. This has made it extremely difficult for those who could have paid off their loans for decades, but were unable to get time off for one of these forgiveness programs. FFEL loan borrowers can consolidate their loans with the Direct program which will allow them to access these rebate programs, but this resets their clock. These borrowers were geared towards forbearance instead of consolidating with the direct lending program as they should have been from the start. The direct loan program not only offers more repayment options, but also offers light at the end of the tunnel with forgiveness, which is not the case with FFEL loans. This created a life sentence for many students.
On April 19, 2022, the Ministry of Education announced a substantial change for those with these old FFEL loans. Believe it or not, after years of mismanagement by loan officers, the Department of Education is stepping in to help borrowers. They decided to make a one-time adjustment to the number of payments for those with direct or FFEL loans and will come back to count all the years they were in repayment status, regardless of the plan they were on or the amount they were paying for the loans. They will also credit years to those who have been in abstention for more than 36 months in total or more than a year at a time, towards these the IDR pardon of 20 to 25 years to correct this malpractice of directing people to abstain. In addition, they will also add all months spent in deferment (except during schooling) before 2013.
To make tracking easier, the Department of Education says it will be working on a new system that will make it easier for borrowers to track how many months they have counted towards IDR remission directly on the StudentAid website. .gov. In the meantime, our CSLP Board is taking proactive steps to develop technology that will help counselors track this number for you directly from your Ministry of Education file as well.
Impacts and concerns
This is a major change that will impact many facets of reimbursement strategies. The tax burden on these IDR plans can be quite significant and we usually have to plan for it years in advance. That said, the tax burden for borrowers who get their loans canceled by January 1, 2026 is eased thanks to the American Rescue Plan Act which included a provision that removes taxation on canceled student loans. This is a major relief for those who are already at or a few years away from their 20-25 year discount, as that big tax bill won’t be a problem for them.
The concern we have with this adjustment is for borrowers who anticipate a forgiveness beyond 2026. After this US bailout law ends, the old rules come back into effect and thus make any IDR forgiveness a taxable event. for borrowers. Many borrowers already anticipate this tax burden, but due to this recount, it could accelerate when this tax burden may arise. For example, if a borrower expects to be hit by the tax burden in 2045 and now plans to forgive it in 2030, it will require a much higher savings rate to ensure they have enough money to cover the tax bill in this last year of pardon.
Effects on PSLF
These adjustments to the count of payments also extend to the PSLF program and therefore further extend the already liberal count of qualifying months under the PSLF waiver to October. Theoretically, this should increase the number of eligible payments that appear on the FedLoan PSLF tracker for many borrowers. Once the Employer Certification Form (ECF) is submitted, this will confirm when you were working full-time with a qualified employer and allow these newly eligible payments to be matched and therefore increase the number of qualified PSLF months towards the 120 month requirement. .
Actions to take
Since they still cannot forgive someone else’s money, they are asking people with FFEL loans to consolidate those specific loans into the Direct program to acknowledge credit toward those forgiveness programs. For those who already have direct loans, this payment recount will happen automatically and no further changes need to be made at this time. It is likely that they will want borrowers to sign up for an IDR repayment plan if they are not already, but that is not yet clear. If this recount puts you beyond the 20 to 25 year mark, your loans will be automatically discharged!
Since this is only a one-time recount, it is critical let this all happen before their January 1, 2023 deadline. Those already with the direct lending program, we suspect borrowers won’t see the effect on their accounts until later this fall.
For those applying for public service loan forgiveness, it will be important to ensure that you are with FedLoan and that you have properly certified ALL periods that you have worked with an eligible, full-time employer. The PSLF program continues to be tax exempt and so although taxes should not be a concern with this program, it may be prudent to have back-up plans in place.
Questions still pending
There are some issues on which we are still awaiting clarification from the Ministry of Education and so we have set them out below. We encourage you to sit down with a PRSP to provide you with updates on these issues as they become available.
- Who is eligible for forgiveness in 20 years versus 25 years given the new adjustment?
- Do the years of training (a residency or fellowship) during deferment now count towards these forgiveness programs or is it only for those who are abstaining?
- Do borrowers need to enroll in an IDR program now to achieve forgiveness and accumulate qualifying months in the future?
With all the changes going on in student loan legislation, it is strongly encouraged to sit down with a Certified Student Loan Professional (CSLP) to take an under the hood look at your loans to make sure you don’t miss out on these opportunities. unique potential forgiveness. . Additionally, even borrowers who have already devised a plan for your loans with a professional, as mentioned above, this could really affect your timelines and game plans and so it would be prudent to review your strategy to ensure that you are always on the most efficient path to effective reimbursement.
Michael Foley, CFP, CSLP is a comprehensive financial advisor who operates his practice in Scottsdale, Arizona under the direction of the North Star Resource Group. Michael was educated at Duke University and holds his Certified Financial Planner designation as well as his CSLP®. Although Michael serves a diverse group of clients with their financial and student loan needs, with two medical parents, Michael has found a specialty in working with those working in healthcare. To schedule an initial consultation, Click here.
Michael is a Registered Representative and Representative Investment Advisor of Securian Financial Services, Inc. Securities and investment advisory services offered through Securian Financial Services, Inc. Member FINRA/SIPC. North Star Resource Group is independently owned and operated. 2701 University Ave SE, Minneapolis, MN 55414. 4726466/DOFU 5-2022