Student Loan Forgiveness

Matt: 00:00

Welcome to real financial planning broadcast on WKXL and available wherever you get your podcasts I’m Matt Robison and I’m joined as always by Mike Morton from Morton financial advice, the host of financial planning for entrepreneurs, outstanding podcast, Mike, how you doing?

Mike: 00:17

Good man. Doing well today, Friday, recording this on a Friday and Fridays just always feel good. They just always feel good never gets old.

Matt: 00:24

I agree. I like the idea of not working as much. That's always good. We talked about retirement here all the time. And it's a learning idea. And as far as retirement goes, I was tired the first time, you know, a little nervous about today's episode, because we're going to talk about the big student loan forgiveness plan. And I can just hear, it's like that Star Wars moment, a million listeners suddenly cried out and said, this doesn't apply to me. I don't have student loans, goodbye. That might apply to you. You might be one of those people. That's cool. We get it got a lot of shows in this feed. Don't leave us. But we will try to make this as interesting and salient to everybody as possible deal.

Mike: 01:07

Yeah, deal. Although, to be honest, really, it's going to be a lot about student loans. And if you just don't have any, it really might not apply to your hidden extracts cool.

Matt: 01:16

You know what we're gonna go with that. It's like, I love gaining credibility with listeners by saying, Yeah, go ahead and stop listening. It's fine. Because no one's ever incentivized to do that.

Mike 1:27

No, but this if this one applies to you, man, you're definitely like you clicked on this one. And so let's do it. Student loans. Yeah, that's right.

Matt: 01:33

This grew out of, we were having a conversation during the show a couple of weeks ago. And we were saying, we should really dive into this. Because if this does apply to you, it's confusing. There's a lot of wrinkles to it. There's a lot of uncertainty around it. And at least just understanding the lay of the land, we think could be really helpful to people. And you know, it's not going to answer every single question out there. So we're going to try to do a tight, efficient run through of what's going on here. So let's start at the top, what's the headline here? What should people really know?

Mike: 02:02

Yeah, so of course, you've read this, that student loans are being forgiven, President Biden made some executive orders and the upshot is first, careful, it's not actually all in place, and is going to happen for sure yet. Okay. So there's a little caveat to this whole episode, that there's going to be some challenges in the courts potentially around these. But the headline is, if it does go through that $10,000, or $20,000, of your student loan debt could be entirely wiped out. $10,000, or $20,000, could be entirely forgiven of your student debt could be forgiven. And this could apply up to 43 million borrowers so that we have 43 million listeners that this applies to. And so a bunch of those will be completely forgiven if you have less than the $10,000 or $20,000, in certain instances, completely forgiven. So that's the big headline. And of course, there's also a loan repayment pause through the end of this year, so many student borrowers know that they haven't had to make payments for quite a long time now. And that is continuing through the end of this year.

Matt: 03:06

Let's just pause on that last piece for a second, because that's the piece that is certain. That is definitely true. So if you're in this position, where you have student loan debt, and you have been in a hold, it sounds like on Broadway, right? When Spider Man, whatever, enter the dark, or whatever they call it, like started killing and maiming Spider Man, it's like, alright, we're gonna hold here, people, you're still in a hold. If you've got student loan debt the rest of this though, there may still be some uncertainty, but we're gonna run through it anyway. Because just knowing what might apply to you and starting to have a sense of what you can plan around, I think is useful. So with that said, let's get into the details a little bit. So you were mentioning before it could be $10,000 or it could be $20,000. What's the distinction?

Mike: 03:51

Yeah, so if you have a Pell Grant, there's all different kinds of student loans and grants, right? Different types, so this is if you have a Pell Grant, you could have up to $20,000 forgiven that represents about 60% of student borrowers have Pell Grants, they're really based on lower income. So if you have a Pell Grant $20,000. Otherwise, if you never had a Pell Grant, while in college, it would be $10,000.

Matt: 04:20

Got it, got it. And then probably the most discussed aspect of this is who is included? And there is a there's an income line here, and if so, let's just remind people what that is.

Mike: 04:33

Yep. So before you get too excited, there is an income limit. So lots of things we know about with when it comes to taxes, and different retirement accounts. There's all these income limits. And again, here we're gonna have income limits, trying to try to help people that aren't making as much which is what the US often tries to do. So the income limit here, individuals making less than $125,000 of income will be eligible. And if you're married, it's under $250,000 of income. Now, the curious thing of this, often we're doing a lot of these are tax filing, hey, if you make this amount of income, you could get these credits or these deductions if you're under these different phase out limits. In this case, it's bizarre that it's looking backwards. So if you had that individual $125,000 of income, if you had $125,000, in 2020, or 2021, so on your tax return for either of those years, if you made less than $125,000, as an individual, you would be eligible for having this debt forgiveness. And for married filing jointly, same thing, if it's under can use either your 2020 or 2021, tax return less than $250,000 of income.

Matt: 05:45

What that tees up is some of the criticism that this executive order, this plan has come under. We're not here to deal with that on this show. If you're interested in that topic, and some of the back and forth some of the politics, some of the substantive criticism, I have a couple of shows for you. I had Michelle Dimino from third way that's highly regarded Washington DC Think Tank center left on the show, you can look that up on in the beyond politics podcast a few months ago. And that's a great rundown of kind of the options, the policy options here. And we covered some of that. I also had Brian Riedel, who is a budget expert. He's a conservative, he was the budget expert on the Mitt Romney presidential campaign in 2012. He obviously comes at this from a slightly different perspective, but he raises a number of substantive policy issues to think about, and that's also in the beyond politics, podcast feed. So I commend those to you. We won't handle some of the back and forth about is this. Does it include too many people? Does it include too many rich people? What have you had low income in 2020, because of the pandemic and the recession, and you're sneaking in for that reason? All kinds of questions come up here.

Mike: 07:02

Yeah, bad people just want their loans forgiven. They don't want to care about it and stuff. They're like, hey, I fall into this category. I'd love $10,000 bucks of my loans forgiven.

Matt: 07:10

People on this show want to know is this mean? That's it. Let's get back to that issue. Which loans are eligible here? You're trying to hone in on is this mean?

Mike: 07:21

Yeah, exactly. Which qualified. That's right. Only certain loans. Luckily, there's quite a few of them. So any loans issued before June 30 of this year, so most likely that you you didn't take out a loan just a month ago. So everything before June 30 2022. And this has to be any federal direct loans. So these are not private loans. Or if you've consolidated under a private loan, these have to be federal direct loans. So it could be subsidized or unsubsidized. It could be Grad Plus Parent Plus direct consolidation, it as long as it's a federal loan, some of the Federal Family Education loans are also eligible. There's some certain more rules around that. But if you have a Federal Direct Loan, then those are the ones that are being targeted here.

Matt: 08:06

So the shorthand is if your loan is through the federal government, you’re probably good. If you have a private loan, or you consolidate what used to be a federal loan through a private company, and you've essentially privatized your loan, you probably are not eligible. That's correct. All right. Here's a bizarre one for you. Let's say I have $5,000 in student loan debt. And I already hit the categories that you just mentioned, I had below $125,000 in individual income last year, and I have a direct federal loan, and I otherwise qualify. So when I hear you say, Wait, you can be eligible for $10,000, but I only owe $5,000. Sounds like I get to keep the change.

Mike: 08:52

Yeah, that would be super awesome. We will call those refundable credits. And this is maybe another episode on your tax return refundable credit to actually get refunded back to you. This unfortunately does not work that way. This is a loan forgiveness. And so whatever your loan is, will be forgiven up to $10,000. But if you have less than that, unfortunately, they're not going to make a deposit into your checking account.

Matt: 09:15

I'm glad you mentioned refundable tax credits, because on the surface of it, it seems like I was asking a dumb question there. Probably a lot of people were thinking like, oh, there's another dumb question for Matt Robison. But there actually are tax programs out there where you, like the Earned Income Tax Credit is probably the most famous, where it's a refundable credit. And let's not forget that we just got through several rounds of government financial assistance to low income people or people who had lost their jobs that came in the form of tax refunds. So this is definitely a thing. It's just not a thing in this case. All right.

Mike: 09:50

In fact that’s funny, you mentioned that too. Here, we live in the state of Massachusetts and guess what our state is doing refunding $3 billion of state tax back to state taxpayers. It happens. In Texas UCITS, we'll see what actually happens. But that's the latest happening in our state here.

Matt: 10:12

Wow. Okay, so it is a real thing, just not in this case. Here's another one. What if you have multiple loans going on? That's actually common these days isn’t it? Can you do $10,000 for each?

Mike: 10:24

Yeah, no, it's gonna be 10,000 total. And so you can't get it's not per loan, the 10,000 it's going to be 10,000 per borrower. So yeah, if you have multiple loans, you're not going to get like 10,000 forgiven for each of those loans.

Matt: 10:39

God, all right. Okay. Now, here's an unusual one. We, we had this pause, we were talking about the Spider Man technical hold. And it's possible that some people have been in the position where this is gonna seem weird. But there could easily be circumstances where you maybe had low income and one of those two eligibility years 2020 or 2021. But you otherwise opted on your own to continue making loan payments during the period, where there was a pause, maybe it was the kind of thing where you temporarily had low income, but then you were rehired, and you had better income, and you decided to keep going ahead and making your student loan payments, what happens, then, especially if what's left that you owe could be eligible to be completely forgiven?

Mike: 11:36

Yeah, so that's an unfortunate situation, right? Oh, you didn't have to pay. But you're being great being on top of it and decided, just keep paying it down. And now you're down to a couple $1000 left or even you wiped it out. And then now that would have been forgiven. So the good news is, actually, you can do something about this. Alright, so in this case, you can do something, which is pretty incredible. So you can talk to your loan service provider and request a refund, while those loan payments were on pause. So that's what I recommend you do is if you find yourself in this situation, go to your service provider, ask for a refund of the money that you paid while it was on pause. And then you of course, you'll have the balance again, or a higher balance, and then hopefully, that will be forgiven. Now remember, none of this is quite certain yet. So definitely, when you listen to this, do a little research and see where we are in terms of the court system, or what's actually in place.

Matt: 12:33

Yeah, let me follow up on that for a second. Because this is a really confusing point, let's say, boy, not to get too down in the weeds here. But let's say you were making those payments last year. And here we are September 2022. And we have this uncertainty about whether this is absolutely positively going to happen. Do you run out today? Do you just contact your loan servicer and sort of start to talk it through with them? Do you put a stake in the ground that way? What do you do now? Was it really an individual type thing,

Mike: 13:06

I would definitely contact a provider and start working on this idea. See if what the steps are going to be from their perspective, see how you're going to be able to get a refund, you've got a couple more months here, because this unfolds kind of through the rest of the year, the federal government's still putting things in place like this is going to actually happen. These websites are getting put up, they're starting to roll out the application process. So I would go ahead and just start the groundwork so that you know what's going to be involved. Are you ready to create your ideal lifestyle? Let's discover what's most important to you and design a plan to have more of that in your life. Go to meet Mike morton.com. All one word, meet Mike morton.com.

Matt: 13:49

Nothing you do here is specific financial advice. I'm not allowed to give that out over the radio. It's just general guidance. And I certainly don't give any specific financial advice. I will say that in my own experience with student loans and other forms of loans, working with loan servicers, it is always a good idea to get in contact start processes off early because it can often involve a lot of paperwork. The other sneaky thing that can happen is who knows, it may be that there's a kind of a cut off where they'll issue refunds, or maybe they won't. And so if you're doing a reach back of a couple of years, I mean, my understanding is you're supposed to be eligible to get those refunds anytime after the start of the pandemic, but you just you don't know. So getting that stake in the ground and getting that documentation. I just don't see how that could go bad. Again, not financial advice from Matt Robison. Just kind of good common sense.

Mike: 14:49

Yeah, for sure. It's good to always gathering information is always a good idea.

Matt: 14:53

If we have a listener out there named Pam Podway I apologize for what I'm about to say. But we had a tough time when we were taking out the mortgage on our first home, my wife and I, and our loan servicer was a lovely person named Pam Podway. Sorry for putting you on blast, Pam, you're awesome. But it was always, it was just always very slow. The back and forth of paper exchange was just laborious. This was like back during the fax era, it took for ever. And I used to say that there were three ways to do things in the world, the right way, the wrong way and the Podway, which was basically the wrong way, but slower. Okay. love you, Pam, though. Okay. All right. Now, we've referenced several times that there's a Schrodinger cat aspect to all of this, maybe this is a policy, maybe it's not, you have to open the box and find out if the policy is alive, it kind of was announced. But that doesn't mean it's like fully in effect, and the uncertainty has been resolved. So what is the uncertainty? And when is it going to be resolved?

Mike: 16:00

Yeah. So this came from the executive office from Biden's office. And they use an executive authority permitted under the Heroes Act, which was passed after 911 that allowed for expanded presidential powers during a national emergency. So with that framework, was why the executive office decided they had the powers to wipe out these student loans and say that this can happen. So that is expected to be challenged in the court system that does President Biden actually have that kind of executive power to do this. And so we'll see how it's gonna play out. It's definitely going to be this fall, we'll get some more information, for sure. Because it's all going into effect pretty quickly. I would stay tuned over the next couple months and see where it goes.

Matt: 16:49

All right. We mentioned earlier that there were programs previously, during the pandemic, there were pieces of legislation passed, that allowed the federal government to give people money to give assistance to help people through the pandemic induced recession. You didn't have to do anything around that. Checks just showed up in your mailbox. It was sweet. I'm not, that's awesome. Yeah, that this reminds me of Eddie Murphy and trading places, this kind of thing happens to me every week. But it doesn't happen every week with this program. Do people have to actually do something to get this loan forgiveness?

Mike: 17:24

Yeah, it's a little bit unclear right now. And hopefully, a lot of them will just be on the books in the federal system. So you'll wake up one morning, and in your mailbox will be ‘Congratulations, your loan is now zero’, and your loan will be at zero. So hopefully, that's the way that it works. But the administration is also working on an application process that's going to roll out probably in October. So there's gonna be millions of borrowers that are already part of the system that get wiped out automatically, just like you said, check showing up in the mail. But there's also going to be a system for applications and then you can log into your loan and to track the progress. So they're hoping to roll all that out within the coming weeks.

So it might be both Yes. Yeah. Probably will be both for sure.

Matt: 18:08

That is I don't know, I don't want to use a technical term. But that's funky. I would leave me I'm not in this position currently. But it would leave me in a certain state of uncertainty myself. It's a wonder, again, this is me giving two cents totally not financial advice. If you hear about read about an application process, a form to fill out, I haven't granted don't get like fished on your email to fill out this form. So security number, but if there is a process probably makes sense to get into it. But hopefully, it will go through automatically.

Mike: 18:42

Yeah, I mean, there's just a lot in the database, there's are obviously millions and millions of loans already in the federal database. So hopefully it works that way. But I suspect there's going to be also millions of people that don't have quite the right data and quite the right format. And so you know, having an application process as well.

Matt: 18:59

All right, here's this is a mind bending one. I apologize. What doesn't make sense, it's just alright, bear with me here. What I want to ask you is will people who get debt forgiveness, let's say you get that $10,000 bucks. So you've just gotten $10,000 bucks in value, like you've gotten $10,000 it's functionally like income you no longer owe it? Do you now owe taxes on it? Because sometimes, when you get money from the federal government, like you get Social Security benefits, you owe income taxes, so will you owe taxes on the fact that you've had loan debt forgiven?

Mike: 19:34

I know. It's so bizarre, right? Like I owe somebody $5,000 You know what, don't worry about it, you know, oh, man, it feels great. But you owe $500 in taxes.

Matt: 19:45

By the way, for fans of like 80s and 90s classic movies watch lethal weapon to the Joe Pesci character Leo gets, this is how he launders money is he issues debt to people and then he just writes off the debt. Thank you, keep the money. And he's laundered money. He gives a great explanation of it. But I get the sense that that's not what Joe Biden had in mind here.

Mike: 20:07

Yeah. So fortunately, there will be no federal taxes. So that is part of the system here that forgiving the loan the debt, and there will be no federal taxes owed on that. And you're right, Matt, that brings up for me gifting. It's the same way. If you have a gift, you might have taxes. But if you forgive debt, that is a gift. And you could have taxes. It's funny that you bring that up. So in this case, no federal taxes are owed. But there could be state taxes. For some states, it's still unclear, and so it's something to follow for your state.

Matt: 20:40

Once again, it seems like a weird question. But it's real stuff. All right, we're winding down anything else that people should know, programs, things they should just keep on their radar screen?

Mike: 20:51

Yeah, there's a couple other things just briefly that, you know, this has been the headline, right. And so there's been a lot of news about this. But there are some programs out there that are also happening, that you should be aware of the Fresh Start program is great for Federal Bars are delinquent or in default. And there's more details about that for people who are struggling to make payments. So look up the Fresh Start program. And there's also proposed new income based repayment plan. And there's always been an Income Based Repayment Plan is another refinement to that. And there's lots of great details about that for people that want to use an income based plan to keep their payments really low, if you have low income, for whatever reason, keeps your repayments low as well. So those two are in the works already there. And so definitely make sure to check those out if they apply to you.

Matt: 21:41

Yeah, that particularly that second one has gotten some ink. Again, if people are interested in sort of the policy and political back and forth on this, I commend those other two shows and beyond politics, you but this second point you raised is one of the ones that's gotten a lot of ink, a lot of discussion, because a big aspect of this, that limitation of people only having to pay up to a certain and not very high percentage of their discretionary income and a limitation on interest on what you have to pay. That can really dramatically decrease your outflow of student loan costs and student loan payments. And that can be huge for your own cash flow in your house. So let's bottom line this for people, I actually think you've given a really good synopsis. Despite all the jokes about metal uncertainty out there, you set out some really good parameters. So 125k or 250k, 10k or 20k. Got to be a federal loan and a couple other features. Anything I missed in that rundown?

Mike: 22:39

No, that's it, man. I would just keep it keep an eye on for this. This is the this is an area where if you have student loans, keep an eye out for how this plays out, because there's lots of opportunities to potentially save money on repayments or get it forgiven. So stay tuned.

Matt: 22:53

More than financial advice. Thanks so much. Cheers.

Mike: 22:59

Thanks for joining us on financial planning for entrepreneurs. If you liked what you heard, please subscribe to and rate the podcast on Apple, iTunes, Google Play Spotify, or wherever you get your podcasts. You can connect with me at LinkedIn for Morton financial advice.com. I'd love to get your feedback. If you have a comment or question, please email me at financial planning . Until next time, thanks for tuning in. This recording is for informational purposes only and should not be considered for investment advice or opinions expressed as our of the date of reporting. Such opinions are subject to change. We do not guarantee the accuracy or completeness of the data presented here.