How Has College Planning Changed with Biden’s Debt Forgiveness?
You want to see your children and grandchildren thrive, and graduating from college is an essential part of thriving for many young adults. Yet the cost of higher education can be prohibitive, leaving our youth with a dilemma: Don’t go to college and end up with less income over their lifetime, or go to college and take on thousands (even tens of thousands) of dollars in debt.
President Biden recently addressed the student debt challenges with proposals to cancel some debt and to change income-driven repayment plans. No matter how you may feel about taxpayers paying for debt obligations taken on voluntarily, here are some key things to consider about how the student loan bailout may impact your family.
Debt Cancellation
The details are still being worked out; however, Biden announced last month that most federal student loan borrowers would be eligible for debt forgiveness: up to $20,000 for those who received a Pell Grant and $10,000 for those who didn’t.
Private student loans will not be part of the forgiveness package; however, the Education Department plans to include commercially held federal loans.
How will debt cancellation affect future college students? In a couple of words: Not much. As it stands, Biden’s proposal won’t affect loans taken out after June 30, 2022.
If you have children or grandchildren who may be eligible for debt forgiveness, they can find more details in this CNBC article, “Here’s Everything We Know (So Far) About Biden’s Student Loan Forgiveness Plan.”
Income-Driven Repayments
Although debt forgiveness is unlikely to affect college planning, the income-driven repayment plan can. According to The Hill’s article “How Biden’s Debt Forgiveness Plan Could Transform Income-Driven Repayment,” the president intends to make loan repayment more manageable by:
Limiting the interest borrowers would pay. Most IDR plans cap payments at 10% of the borrower’s discretionary income. That amount would be halved under Biden’s proposal to 5%.
Increasing the amount considered discretionary income. Only income above 225% of the federal poverty level would be discretionary. Anyone making less than that—or the annual equivalent of a $15 minimum wage—would not have to make a monthly payment.
Speeding up the timeline for loan forgiveness. Any remaining balances would be forgiven after 10 years of repayment, rather than 20 years, for borrowers whose original loan balances were $12,000 or less.
Biden also seeks to cover borrowers’ unpaid monthly interest. Reports CBS in “One Overlooked Part of the Biden Student Loan Plan That Could End ‘Horror Stories’”:
“Consumer advocates have long criticized so-called income-based repayment plans, which are supposed to help make student loans more manageable, … for trapping borrowers in debt. The Biden plan addresses the problem by proposing to have the federal government cover unpaid monthly interest for people with income-based repayment plans, which would prevent their loan balance from growing as long as they make their monthly payments.”
The Education Department is still working out the details, and no timeline has been set for implementing Biden’s proposals. Also, lawmakers may challenge the new rules. But as Biden’s proposals stand, the repayment changes would affect college planning going forward, making higher education and the life that comes after more affordable.
What Can You Do in the Meantime?
Sit down with your future college student and discuss ways to reduce the burden of college debt. For example, your student might attend a junior college for the first two years and then transfer to a four-year university. They can also opt for a public university, which is usually less expensive than a private one.
As a parent or grandparent, you might start investing in their college early on. Savings and investment vehicles like the 529 savings plan can help your future college graduate attend school with fewer loans. And, of course, there is federal, state, and private financial aid available.
Our RIA firm works with clients to help make college affordable as part of their overall financial planning. Schedule a complimentary, 15-minute call with a fee-only, fiduciary financial advisor today to discuss your personal situation.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor with offices in Roseville and Folsom, CA, and Lehi and Logan, UT. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country’s leading professional association of fee-only financial advisor.