[00:00:00] Speaker A: In this episode, we talk about whether or not you need insurance for your federal or private student loans. Let's get started.
Are your student loan payments or loan balances a major obstacle in your financial life? Then tune in and let's escape student loan debt.
Hello. My name is Brenton Harrison of escape student loan debt and your host for the Escape student loan debt podcast. Over the last few episodes, we've been talking about some of the deadlines that are upcoming with federal student loans. As of yesterday, or I should say two days ago, the income driven repayment plan waiver has expired. Now, there are some people who think that, you know, kind of under the table, they're still going to allow some of those things that came in after the deadline to be honored based on those old rules. But in this episode, we wanted to talk about some things, maybe that are secondary or smaller items that we don't spend as much time on but are still important. So when you hear something like, should I have insurance for my student loans? It probably sounds a little weird. But as I've shared, student loans impact a lot of things. They impact your taxes, they impact your budget, of course. And they also can have an impact or be impacted by different types of insurances. So in this episode, we're going to talk about three different types of insurance that can have an impact on or be impacted by your student loans, starting with life insurance. Now, when it comes to life insurance, you have to understand how federal and private student loans work when you die. Federal student loans die with you. And this is something that a lot of people aren't aware of. So they may have 100,000, $200,000 worth of student loan debt. And in addition to having the stress of having the debt, they have the stress of thinking that their family would have to repay it even if they were to die. That's not the case. Federal student loans die with you, and there are no taxes due on those forgiven loans. Private student loans, in most cases, die with you. It is something where you need to check with your lender. But in almost all cases, I come across a private student loan will die with you as well. So when it comes to calculating how much life insurance you need upon your death, the amount that you owe in student loans is typically not a consideration. Now, if you are married to someone or the partner of someone who has student loans, what a lot of people will do is they will take into consideration their partner's student loan balance when it comes to calculating their life insurance need. And there are three ways in which you can do this. The first is based on just the amount that they owe in the first place. So, for example, let's say that I calculate my life insurance needs separate from student loans, and I need a million dollars worth of coverage, and my wife happens to have $50,000 of student loans. Well, one way of going about it would be to just say, instead of a million dollars, I'm going to add that $50,000 onto what I need. And in the event of my death, my wife would get that 50,000 and can pay off her loan balance. Balance. Now, there is a downside to this if you consider it a downside, which is you're picking an amount based on what your spouse or partner owes now, but you don't know when you will die. So there's always the possibility that at the time of your death, that student loan balance has been paid down if not paid in full, and the amount that you added to your need is no longer necessary. Now, I would argue that's not a downside, because I'm sure that your partner could figure out something to do with an extra $50,000. But the point is that you can't necessarily marry a very specific amount that you need to the balance if you're using this technique. The second way that you can handle this in terms of incorporating your spouse or partner's balance into your life insurance is you can look at the payment that's associated with that amount that they owe. So, for example, instead of looking at the 50,000 that your spouse owes, maybe instead you consider the fact that they have a monthly payment of dollar 400. And when you're calculating based on your life insurance need, how much you want to generate in terms of income. For example, if I die, I want my family to have enough life insurance that they can pull $5,000 a month for expenses and still be okay. Well, that $400 or $450 that your spouse pays towards their loans can be used in that calculation. And instead of planning for your wife to pay off their loans, you would be giving them enough money to make sure that they can make the payment on those loans moving forward forward without having to dip into other sources of income that they may have at their disposal. That's the second way. The third way that you can incorporate is to instead look at the taxes that may be due based on those forgiven student loans. This is something that we've talked about briefly on this podcast. But up until the end of the year 2025, if you have federal student loans forgiven under an income driven repayment plan, then there is no tax due on those forgiven loans after the year 2025. If that moratorium is not extended, and I happen to think it will be extended, but let's assume that it's not, then, if you have loans or your spouse has loans forgiven after the year 2025, those loans under the income driven repayment plan would be taxed to them as income in the year of forgiveness. So if, for example, in the year 2030, your spouse had $100,000 of student loans forgiven under an IDR plan and they were making $50,000 that year when they filed their taxes, it would make it look as if they earned 150,000. That's how much they would have to pay taxes on. And that can be really problematic for a couple of reasons. The first is for most people who are employed, they have their taxes withheld from their check, so they don't have to be responsible for saying, I make $50,000. Let me calculate how much I need to send to the IR's every two weeks. So if a person is making $50,000 and they're employed, it's highly likely that they were going to get a refund, or at the very least, they wouldn't have some big lump sum payment that they didn't save for because the bulk of their taxes were withheld from their check throughout the year. But when you add on a lump sum, in our example, $100,000, it could lead to significant lump sum taxes that they didn't save for. So let's say, for example, that that extra hundred thousand dollars that they didn't get to receive in terms of what came in their pockets, it's just how much was forgiven led to an additional $20,000 in taxes. Well, that $20,000 may be a lump sum that your spouse is not prepared to pay for. So what some people will do when calculating their life insurance need is they will project how much their spouse is due to have forgiven in federal student loans. And based on the taxes that that could potentially generate, that's the amount that they would add to their life insurance need. There's no necessarily right or wrong way to go about it. These are just three options for how you can incorporate or consider your spouse's student loan balance when trying to figure out an amount of life insurance that is right for you. The next type of insurance that we're going to cover in terms of how it's impacted or how it impacts your student loans is disability insurance. There's all different types of ways that you can use disability insurance to make sure that you're protected, because that's what disability insurance is. It's paycheck protection. In most cases, disability providers are trying to replace 60% of your take home pay in the event that you are ill or unable to work and you are totally disabled, meaning that you cannot do your job. Now, when you look at a disability policy, it's very important to understand the taxation of disability policies. If you have a policy that you own separate and apart from your employer, and you pay for it with after tax dollars, then any benefits that you receive from that policy in the event that you're disabled are income tax free. An example would be, if I make $100,000, I have an individually owned disability policy that gives me $60,000 worth of coverage, 60% of what I earn, and I pay for that policy after taxes, then in the event that I'm disabled, I would receive that $60,000 and I would not have to pay income taxes. It would not show up on my tax return. That's very important when it comes to income driven plans, in particular because income driven plans base their payment off of your adjusted gross income from your previous year's tax return. So let's walk through this scenario. Let's say that I'm earning $100,000 and my income driven repayment plan reflects the fact that I'm earning $100,000. I have this disability policy. Heaven forbid I become disabled. Now I'm receiving $60,000 a year of income tax free benefits. But because I don't pay income taxes and it doesn't show up on my tax return, I can actually still ask my loan servicer to recalculate my payments and see if that's something that's considered when calculating the plan that's well within the guidelines. You can request a payment recalculation at any time that it benefits you, and your loan servicer will walk you through the questions and they may ask if you are receiving other benefits like disability benefits. But because that income has decreased, it could still either eliminate or at the very least, lower your student loan payment. With private student loans, because there are no income driven repayment plans, you do not have the ability to recalculate your payment. But many of them do offer the possibility, if you're in an extenuating circumstance, of putting your loans into forbearance, many of them will let you do this for up to three months at a time, or up to twelve to 18 months throughout the course of the entire loan repayment. But it has to be an extenuating circumstance for which a total disability would likely qualify. But not all disabilities are total disabilities. There are some disabilities that are partial disabilities where you are able to work, but you can't work a full schedule. Maybe instead of working five days a week, you have lupus or Crohn's or miss, and you can only stomach working three days a week, as an example. So you are not receiving total disability benefits. You don't qualify because you're still working. Well, individual disability policies also have, in some cases, if you pay for the coverage, what's called partial disability, meaning that if you've lost at least a certain percentage of your income due to the fact that you're working reduced hours, they will replace a certain percentage of that lost income. So, for example, I told you that in most cases, they're trying to replace 60% of your take home pay. Let's say that due to a partial disability, you have lost 40% of your pay. That partial coverage will try to replace 60% of the lost 40% of income. Now, that sounds confusing, but it's how these policies work. So in this scenario, again, it would be something where with an income driven repayment plan, if this were to occur, you can ask for a recalculation of your payment. And this is something where with a private loan, you can request a forbearance, but it would be up to that individual lender to determine whether or not that is constituting an extenuating circumstance to offer the forbearance. The last thing in terms of the disability policy itself that I would want you to be aware of is a student loan rider. And I will tell you, I'm not a big fan of these riders, but the concept of a student loan writer is that you give information to your disability provider, the type of student loans that you have, and also the payments that you have to make. And in the event that you're disabled, you would get an extra benefit in addition to what's replacing your income. And that extra benefit is specifically designed to make your student loan payments on your behalf. Now, I'm not a big fan of this because as we covered with federal student loans, that's not something that you'd have to deal with in the first place, right? You can typically have your payment reduced or eliminated. And adding that disability insurance rider for student loans adds cost to your policy. So it's something that seems like a good idea, but how much extra is it worth paying on a monthly basis for something that's statistically unlikely to occur with a federal student loan. I'm not a big fan of it. If you have a private student loan because you have to pay that loan off in full, it would be something that I'd be more likely to say you should consider because you do not have that fallback option of asking for a recalculated payment under a federal student loan payment plan. Now, in terms of how you would be impacted in terms of your student loan balance with a disability, it has to do with whether that is a total disability or a total and permanent disability. If you have just a total disability, but it's one from which you recover. If you have a partial disability where you're still working, then you'll still have federal and private student loans. But if you have a total and permanent disability, then all federal and most private lenders will discharge your debt in full. But you have to have some documentation to verify that it is indeed a total and permanent disability. And with federal student loans, they will go a step further. And they will a few years after the fact, check your tax returns to see if you have earned income, and in some cases, that debt can be restored if it turns out that your disability is not permanent. But these are ways that life insurance and disability insurance can be impacted by your student loans. And after the break, we'll bring this thing home with how your employee benefits and your health insurance can be impacted as well.
[00:13:03] Speaker B: This is the escape student Loan Debt.
[00:13:05] Speaker C: Podcast, a show for established professionals whose student loan payments or loan balances are impacting their marriage, their business, their credit, or their dream of achieving home ownership.
[00:13:16] Speaker B: We'll be right back.
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[00:13:55] Speaker C: Dot welcome back.
[00:13:58] Speaker A: Alright, so how can something like a health insurance policy or the like or an employee benefit be impacted by your student loans? We'll start with three accounts that I have shared in the past can be really helpful for lowering your adjusted gross income. Again, adjusted gross income is something that's used to calculate your payment under an income driven repayment plan. If you can find a way to lower that adjusted gross income, you can lower your student loan payment. And there are three benefits that many employers offer that can help lower your adjusted gross income in a way that benefits your student loans, health savings accounts, dependent care flex spending accounts, and flex spending accounts. We'll start with flex spending independent care flex spending a dependent care flex spending account is something where you can put dollars aside before they're taxed, which is how it lowers your adjusted gross income. And you can use it for a whole host of reasons. It can be an adult daycare center for a family member, for a child that's dependent on your tax return. It can be paying for a babysitter, it can be paying for an au pair, it can be paying for pre k tuition, it can be for a day camp, it can be registration fees. There's all different types of things that you can pay for that you already had to pay for, but you can do so without paying taxes by utilizing that dependent care FSA in 2024. I think for an individual, you can do up to 2500 in that account, for a family, up to 5000. But it's a really, really good benefit for people who have dependence on their tax return to pay for things that they already needed in a way that's tax beneficial and student loan beneficial. The other account that we said we're going to group together with, this is a flex spending account. And a flex spending account is something that you can use for health expenses. Things like visits to the doctor, visits to the dentist, eye exams, paying for glasses. There's all types of stuff. Matter of fact, if you're looking on screen, you can see that almost every major retailer you can think of, whether it be Amazon, target, Walmart, they have dedicated pages on their site where everything on these pages is something that's eligible to be paid for with an FSA. But an FSA is another really beneficial tool. But these two, the reason that I've paired them together is they are what's called use it or lose it accounts, meaning that for the most part, if you put an amount in that account and at the end of the calendar year, some employers offer like a couple of months of extra allowance. But for the most part, if you don't use it within that period of time, the funds just revert to the plan. So you have to have some forethought into how much you're actually going to spend out of these plans, because most employers will also not allow you to make changes to how much you're contributing each pay period outside of open enrollment. So they may say you have from October to November to pick how much is going to be taken out of your check for the rest of the upcoming year. But you can't go back in next March and say, well, I was putting $150 a paycheck into the this account. Now I want to put $75. You can't make that change until the next open enrollment. So what you don't want to do is put $5,000 in a dependent FSA, only use 2000 of it because the remaining 3000 would revert back to the plan and you would lose your money. An FSA is for the most part very similar, except with an FSA there's an allowance, I think in 2024 it's a little over $600, where you can roll that amount of unused balance over from one year to the next. But in the initial scenario where you put thousands of dollars in this plan, you can't roll over any more from year to year than that $600 or so. So you have to be careful with those accounts. But with the third plan, the health savings account, that is a more flexible plan that actually impacts your health insurance. It impacts your health insurance because you cannot just have a health savings account. You have to pair a health savings account with a high deductible health plan. Now, the benefit to a high deductible health plan on the front end is that it typically costs less on a month to month basis. The downside is it costs less because they are assuming you are putting those funds into your HSA. And in the event that you have to go to the doctor or the hospital, you likely will have to pay more for that primary care visit for that surgery because it's a higher deductible plan. But the benefits to the HSA and in 2024 for a family, you can put over $8,000 in these plans, lowers your adjusted gross income, lowers your student loan payment, also puts you in a position where those funds can roll over from year to year and they can even be invested similar to your four hundred one k. Now, before age 65, those funds have to be used for a dedicated health expense. But after 65, you can use it for whatever you want to. So it can turn into kind of a pseudo secondary retirement account if planned for appropriately. So these are three types of insurance related vehicles or health insurance related vehicles that are also impacted by your student loans in a positive way if you can find a way to use them to your advantage. So that was a lot. I know that's a little deeper into some ancillary or sideline items that we typically don't think about when it comes to student loans. But to my point, student loans impact a lot of stuff, so hopefully this was helpful to you. If you have episodes that you want to hear about or things that we haven't covered. We had a lot of questions about the last few episodes, those we've done. Feel free to reach out to us, and we'll be back in two weeks with more information that will help you have your federal or private student loans forgiven, reduced, reorganized, or expedited. See you then.
