Student loan debt is one of the most common financial burdens. While education is a personal investment leading to more robust career prospects, the associated debt can feel crippling to those looking to build long-term financial security. As a result, there’s long been talk of eventual loan forgiveness, and how borrowers can optimize the repayment process in the meantime.
Individuals with student loans have always had various options and factors to consider in handling their debt—maintaining a traditional ten-year repayment plan, refinancing the loan, opting into an income-based program to maximize debt forgiveness opportunities. However, as the COVID-19 pandemic began last year, the CARES Act’s passage gave borrowers reprieve as unemployment and forced economic shutdowns began. Under the Act, federal student loans were put into a suspension of payments with a 0% interest rate through January 2022 (after extensions). Any collection on defaulted loans was also put on hold.
Additionally, individuals with federal student loans are waiting for Congress and the Biden administration to follow through on the student loan debt forgiveness campaign promise. Throughout his presidential campaign, President Biden spoke of debt forgiveness of $10,000, while others in Congress lobbied for amounts closer to $50,000. Regardless of political opinions, economic impact, or legal authority to make this happen, it leaves all borrowers in limbo as they attempt to determine how best to maximize their financial position coming out of the pandemic.
As individuals look to the end of 2021, here are a few considerations to bear in mind before making any changes to your repayment strategies.
Maximize Your Student Loan Interest Deduction
You may be able to claim up to $2,500 of qualified student loan interest expense as an above-the-line deduction from income on your 2021 tax return. Qualifying interest payments for this deduction are related to loans issued to you, your spouse, or your dependents to pay for qualified education expenses where the student was attending school at least half-time. The courses taken must also lead to a degree, certificate, or other recognized credential.
The deduction may be limited depending on your tax filing status and modified adjusted gross income (MAGI). The deduction begins to phase out at $140,000 of MAGI for married filing joint taxpayers, and is fully phased out at $170,000. For all other tax filings, except married filing separate, the phase-out begins at $70,000 and is fully phased out at $85,000. Those who are married filing separate cannot claim this deduction, regardless of MAGI*.
To maximize this deduction before the end of the year, you should consider paying off any additional accrued interest, up to $2,500. Loan servicers will apply any payments to accrued interest before principal. This deduction applies to interest paid on both federally and privately held loans.
For Those with Federal Loans
Individuals with federally held debt will want to stay tuned to hear about additional suspension of repayments or outright debt forgiveness. While the suspension is active, you can hold off on making payments without detriment. Although the extra cash flow may be helpful in a pandemic, you should be aware that any deferred payments will ultimately extend the life of the loan. During deferment, it may be an excellent time to consider using the cash to pay down other high-interest debt, start/increase your emergency fund, or earmark the money to be available to service the original loan. Paying off the original debt with 0% interest can be a great way to reduce the long-term interest expense of your student loans.
If your loans are currently suspended, you should be in contact with your loan servicers to ensure the servicer has not changed and your automatic payments are set up correctly. All major loan servicers are actively working to ensure a smooth transition, but the mass reinstatement of millions of collections like this is unprecedented, and hiccups will likely occur.
Those whose debts are less than $50,000 should carefully consider whether or not they should make any payments on the debt while the suspension is in place, or if they should pay off their debts in advance of their payment schedules. If debt forgiveness is on the table, individuals should look to maximize the benefit of debt relief. Actively foregoing paying a debt seems counter-intuitive, but may be highly advantageous considering debt forgiveness. For those with sufficient cash flow and debts over $50,000, individuals should consider continuing to pay down debt or setting the funds aside to be ready to pay down the debt before interest is reinstated.
For Those with Private Loans
The CARES Act did not provide any relief for loans not owned by the federal government. However, many loan servicers have made changes to support those dramatically impacted by the pandemic. Additionally, since these loans are not federally funded, we do not anticipate any loan forgiveness granted will apply to these loans.
Optimizing Your Financial Health with Aldrich
Regardless of loan type, amount, or repayment strategy, it is crucial to look at your debt holistically as you plan for life post-pandemic. Aldrich is here to assist you in exploring your options and making informed decisions. If you have questions about your student loans, or relief options available to you, contact your Aldrich Advisor.
Meet the Author
Matthew Kanter, CPA, CFP®
Aldrich CPAs + Advisors LLP
Matthew Kanter joined the firm in 2017 with five years of experience working with individuals and small businesses at a small accounting firm in the Portland, Oregon area. Here at Aldrich, Matthew assists with tax compliance and planning for individuals, high net-worth clients, and estates and trusts. Matthew enjoys empowering his clients to focus on…
- Certified Public Accountant
- High-net-worth individuals
- Strategic tax planning and compliance