which generally carry higher interest rates, and those workingtoward loan forgiveness undereither one of the income-driven repayment (IDR) plans suchas Pay As You Earn (PAYE) or Income-Based Repayment (IBR),and those working toward loanforgiveness under the Public Service Loan Forgiveness(PSLF) program.
An interest waiver is worth
most to borrowers whose loans
have higher interest rates and
those who are still able to pay dur-
ing relief periods.
For those borrowers work-
ing toward loan forgiveness, the
10-month suspension of pay-
ments will count as if qualifying
payments were made toward the
20- or 25-year repayment period
for borrowers in an IDR plan and
10 years under PSLF.
Under the current rules, bor-
rowers who are working toward
PSLF and were still able to make
payments during relief periods
were better off not making them
since this would reduce the value
of the tax-free loan forgiveness
they are working toward.
In a nutshell, borrowers who
aren’t working toward or planning
on forgiveness should make pay-
ments during grace periods and
when interest waivers are avail-
able to reduce the overall cost of
borrowing, while those who are
working toward forgiveness may
be better off investing their funds
elsewhere to maximize the value
of loan forgiveness, whether it is
tax-free as is under PSLF or tax-
able as it currently stands for IDR
Borrowers With PrivateStudent Loans
Unfortunately, emergency relief
did not apply to holders of private
and most FFEL loans. Borrowers
of FFEL loans may have consid-
ered consolidating their loans us-
ing a direct consolidation loan to
benefit from the relief measures,
but consolidating takes time and
could have also jeopardized the
borrower’s ability to qualify for
Consolidating can be a good
thing and can make borrowers eli-
gible to participate in certain IDR
plans and work toward forgiveness
under PSLF, but one instance in
which consolidating could be det-
rimental is when the FFEL loan
borrower has already made a sig-
nificant amount of qualifying pay-
ments under the income-based
repayment (IBR) plan.
This is because IBR is the only
IDR plan for which FFEL loan
borrowers can receive forgive-
ness. When a borrower consoli-
dates into a direct consolidation
loan and enrolls into an income-
driven repayment plan, the 20- or
25-year repayment clock resets.
Knowing which type of loansthe borrower has (federal or private) and distinguishing the lender from the servicer are criticallyimportant when advising on student loan matters.
While a borrower may havewanted to benefit from the short-term relief provided by the CARESAct and recent legislative actions,not fully understanding the options available and their consequences could potentially cost theborrower much more in the longrun.
And while private loan borrowers did not receive standardizedrelief under the CARES Act, manyprivate lenders have offered someform of relief for borrowers primarily through forbearance as opposed to interest rate waivers.
This means that even if the
borrower were not forced to
make payments over a short pe-
riod of time, interest on these
loans would still accrue and in-
crease the cost of borrowing over
Despite the lack of standard-
ized relief, many private loan bor-
rowers can take advantage of to-
day’s low interest rates. Borrowers
holding loans with higher interest
rates should consider refinanc-
ing, assuming their credit is good
enough and they weren’t affected
economically by the pandemic.
For employees who aren’t able
to secure better rates on their
loans, it is possible their employ-
ers might start chipping in now to
share some of the cost.
Under the CARES Act and from
recent legislative authority, em-
ployers are now able to establish
an education assistance program
under IRC 127 to help repay prin-
cipal and interest on qualifying
loans for employees. Up to $5,250
per year (through 2025) of assis-
tance is deductible by the employ-
er and excludable from the gross
income of the employee.
This has become an increasingly popular tax-efficient employeebenefit used to retain skilledworkers, and advisors shouldbecome more familiar with enhanced education-related taxbenefits for both employees andbusiness owners.
Borrowers With High-Interest-Rate Federal Loans
What about borrowers who holdfederal loans with higher interest rates, as is the case with manygraduate and parent PLUS loanborrowers? What about prospective students and parents considering financing options for laterthis year or in future years?
Let’s tackle the current borrowers first. The main thing theseborrowers need to determine iswhich benefits are most valuableto them.
Do they value the repayment
plan flexibility and ability to have
monthly payments tied to their
“ability to pay”? Do they value
the prospect of the government
stepping in to provide sweeping
emergency relief? Do they plan
on receiving loan forgiveness
based on their current and pro-
jected debt-to-income ratio? Or
are they planning on repaying
quickly and value obtaining the
loan with the lowest interest rate
In addition, advisors need to
know which type of borrower they
are working with: Undergradu-
ate students? Graduate students?
It may be worth it in the longrun to refinance high-interest-ratefederal loans using private loans(and forgo the benefits) if the primary objective is to repay the debtas quickly as possible, the borrower has the means to do so, and theborrower does not plan on working for a qualifying public serviceorganization.
It is important to remember
that borrowers can refinance a
federal loan to a private loan, but
they cannot go the other way or
revert back once this occurs.
The decision may be simpler for
prospective borrowers since fed-
eral loan rates change each year
and are based on the high yield
of the last 10-year Treasury note
auction in May, so prospective
undergraduate federal loans bor-
rowers generally receive the low-
est rates (currently, 2.75%).
Undergraduates, however,aren’t often the ones accumulating massive amounts of debt dueto federal borrowing limits. Wetypically see six-figure studentdebt totals among graduate students and parents.
A popular form of financingfor this group is the federal PLUSloan. This loan, often referred toas a Grad PLUS or Parent PLUSloan, is available to graduate students and parents of undergraduate students at higher interestrates – currently 5.30% until June30, 2021.
These loans also impose origi-
nation fees of over 4%, have es-
sentially no borrowing caps, and
require that the borrower have no
“adverse credit history.”
Advisors will need to deter-
mine whether it’s better to borrow
through the PLUS loan system or
the private market by comparing
interest rates and other loan costs
as well as repayment plan options.
This requires an understanding of
the borrower’s projected future
earnings to evaluate whether
loan forgiveness will be a realistic
Generally speaking, federalstudent loans provide more flexibility and benefits than privatestudent loans. President JoeBiden has also proposed severalnew changes that will affect bothprospective and existing studentloan borrowers, including proposed revisions to the IDR plansystem and enhancements forborrowers working in public service and pursuing forgivenessunder PSLF.
According to Biden’s post-elec-tion website, “Individuals making
$25,000 or less per year will not
owe any payments on their un-
dergraduate federal student loans
and also won’t accrue any inter-
est on those loans. Everyone else
will pay 5% of their discretionary
income (income minus taxes and
essential spending like housing
and food) over $25,000 toward
While this may sound great in
theory, several important details
are left out.
First, will the $25,000 thresholdchange based on family size aswell, or will family size affect onlythe calculation for discretionaryincome purposes? If no adjustment is made, this proposal favorsborrowers without families whoare under that threshold.
There is also some ambiguity
as to who the “everyone else” is
in that statement regarding be-
ing subject to payments based on
5% of their discretionary income.
What about parents who bor-
rowed on behalf of undergraduate
students? What about graduate
students? Are they included in
this “everyone else” category?
Will the undergrad loans be
subject to the 5% calculation
while the grad loans remain sub-
ject to the 10% or 15% discretion-
ary income calculation? What
about students who consolidated
their undergraduate and graduate
The automatic enrollment pro-
vision may also create a situation
similar to employer-sponsored
retirement plans where individu-
als don’t realize they may be bet-
ter off contributing more to pay
off the loans more quickly and
save on interest. While the au-
tomatic enrollment feature will
be helpful for most, it may have
an anchoring effect on other
One thing that is likely to passis making forgiveness from IDRplans tax-free, similarly to howbalances are treated under thePSLF program. Most borrowers who will receive a substantialamount of forgiveness under thecurrent IDR plan system probablywon’t be able to pay the lump-sumtax bills in the year of forgiveness.This provision in the tax codewould also likely apply to borrowers on all IDR plans, and not justthose enrolled in Biden’s newlyproposed version of IBR. n
ForgivingCONT. FROM PAGE 1
Y The CARES Act and other legislation enactedin 2020 provides student debt relief.
Y There are important eligibility differencesbetween federal and private loans.
Y President Biden hopes to overhaul the income-based repayment program.