Episode Transcript
[00:00:00] Speaker A: Hey guys. I recorded this week's episode earlier this week and since that time there's actually been a pretty big update when it comes to federal student loans. That update is that if you log on to your studentaid.gov account and go to the my aid section, you will see a new display that has never been there before. And that display or that counter is a progress tracker for the income Driven repayment plans. There have been a lot of updates that studentaid.gov has made over the course of the past year. It actually started with them radically improving, showing you the progress that you've made not just towards public service loan forgiveness payments, but also the process of verifying your employers. So that's something that was put in place first. Now you can, for the first time ever, see how close you actually are to having your student loans forgiven if you're on the pay as you earn plan or the income based repayment plan that requires 20 or 25 years. So this is actually a pretty big deal and will hopefully for a lot of people out there, clear up a lot of confusion. It also is a sign that they are getting closer to, if not finished for most people, updating their payment counts towards income driven repayment as a process of finishing up that income driven repayment plan waiver. So from reports that they've put out, they haven't finished it for absolutely everybody. But for the majority of people out there, the tracker that you see, the count that's listed is the up to date count for your income driven repayment plan. So pretty big deal. Wanted to make sure that I put this at the front of the episode because the rest of it's already been recorded. That being said, I hope you enjoy this week's episode with some other federal student loan and private student loan updates you need to know.
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. A happy new year to you all. I know we're a couple weeks into the year, but there weren't that many updates over the Christmas season when it came to federal student loans. So that that combined with the fact that in transparency, I was just a little worn out. We took a bit of a break for the holiday season, but we are back because there's information this week that's relevant to your student loans and also information is very relevant to this podcast. So we'll start with that, we alluded to this at the end of last year, but we get, you know, fairly consistently, people reaching out to us saying, hey, love the podcast, which we're appreciative of. Can you look at my individual student loan situation or my and my spouse's federal and private student loans? Obviously, can't we. We can't be with everybody one on one. We do have a financial advisory service. New money, new problems that we operate as well. But we do want to start integrating that more into what we do in the year ahead. But we also recognize not everybody is willing to pay the price point that we charge when we do these types of offerings. So what we thought we were going to do in 2025 is we're going to start to have some episodes of the podcast and on our YouTube channel where we actually walk through someone's student loan situation and go step by step through the recommendations that we make. Now, if you're sitting there, wonder, how are you going to do this in a way where we're not exposing people's information? We're going to set up a link. The link is escapestudentloanedebt.com review Once again, that's escapestudentloanedebT.com review. If you're interested in having your student loans analyzed and having a meeting with me where we talk about what I think you should do at no cost, this is something that we're going to not charge for. Since you're going to be on the podcast, you can go to that link and sign up. The way that we're going to operate this is there's going to be several pieces of information that we require on the front end. We will record the episode offline. It won't be a live recording of the episode. And then we're going to de identify all of your personal information, send you the recording in advance to make sure that you are okay with the level of DE identification. And in that final recording, the audio would have no mention of your name. The video would also not have your face. We will put an audiogram up unless there are any documents that we share on screen. And if we do so, there will be de identified documents that provide just enough basic information for the viewer to see. Student loan balances, student loan interest rates, and the like. So if you're interested in having your student loans reviewed at no cost, then I would encourage you to go to that link. Escapestudentloante.com review and as we start recording these episodes, we will sprinkle these in with our regularly scheduled programming so that you can see, hey, this person is just like me. They earn a similar amount of income, they have a similar loan balance, and here's some recommendations that Brinson thought would be helpful and apply that to your own situation. Now let's get to the federal and private student loan updates that exist separate and apart from that podcast. It's January 2025. There's a lot of stuff going on at the same time that you need to be aware of. We're going to start with one that hopefully doesn't impact a large amount of people listening to this podcast. In an ideal world, it wouldn't impact any of you, and that is that this month is the start of the resumption of reporting when it comes to defaulted student loans. Since the pandemic. Even if your loan was in default status, that status was not being reported to the major credit bureaus and that has been the case since the pandemic. But starting in January they are going back to the old method, which is on a monthly basis they're going to report your federal student loan payment status for your various accounts. So if you are in default status, you have missed the Fresh Start program that was offered for people that was essentially allowing them to get their loans out of default without going through the traditional process. You still have a way to get it out of default if it has never been in default before. The best way to do it is to go through what's called the rehabilitation process, which essentially over a nine or ten month period allows you to make income driven repayment plan payments towards your debts and it will pull your student loans out of default. At the end of that process it will allow you to reapply for other forms of various student debt. It will not take any late payments off your credit report, but it will remove that defaulted status, which is still a tremendous when it comes to the impact on your credit. If you have been in default before, you cannot rehabilitate your loans more than once. So you would be in a situation where you either have to pay that debt off in full or you could consolidate your defaulted federal student loans into a new consolidation loan. It would allow you to again pay your loans back using the various plans. It would allow you to apply for additional federal student loan debt. However, it would not remove the defaulted status from your credit report. Next up is an update regarding income driven repayment plan applications. If you're following along on screen, there's an article up from Forbes that says processing resumes for three RDR plans offering Student Loan Forgiveness Pass as a save Plan is stuck Going further down the article, it says After a lengthy delay, the Education Department announced last week that application processing has officially resumed for several income driven repayment plans, giving borrowers opportunities to pursue long term student loan forgiveness. Processing had been paused for months due to a court order associated with legal challenge to the save plan, leaving millions of borrowers stuck. What they're referencing is you're well aware if you listen to this podcast, the save plan is tied up in the courts. That plan will likely be extinct in the coming months or sometime throughout the balance of 2025. But going further than the save plan, loan servicers had stopped processing applications for income driven Repayment plans in general and for a while they just flat out took the applications offline and they would you to do a paper application, although they wouldn't process it. Then they brought the applications back online and you could submit the application online, but they again wouldn't process it. They are finally going back to processing applications for a select few payment plans. Obviously the save plan is not one of those plans because the save plan is currently blocked by the courts. The income based repayment plans, both old and new, are on the options of applications that will be processed because as we've talked about, those plans were created by Congress and it's highly unlikely that they are at risk at all. But even the plans that are potentially at risk, the pay as you earn plan and Income contingent repayment plans, they are accepting applications for both submission and now processing of those applications as well. And while that's good news, I would temper your expectations a bit. They are processing the applications. I would imagine that they probably have, you know, over three months for sure of applications that have been backed up in the system. So it could take months before they actually get to the processing of your particular application. So again, temper your expectations. But this is good news in terms of at least them getting the ball rolling. And I'm not going to spend a ton of time on this episode going back and forth over whether you should switch from save to the pay plan and things of that nature, I'll put a link to the episodes where we've already discussed those different variables that you should consider. But what I would say is if you're going to look at the possibility that they would potentially shut off the pay plan as well, I would much rather have an application in process hoping that they grandfather in those that have already been received as compared to just waiting and seeing what happens. So if you have decided to make the switch from save to income based repayment or pay as you earn. Don't know why you would switch to icr, but on the off case that that somehow made sense to you, I would still go through that process as soon as possible and get my application in the queue to make sure that I'm not left out if there are any changes that would adversely impact me. Now after the break, we'll hop into what I think is probably the most complicated part of this episode and those are the tax implications that you need to be considering in January based on some changes that are happening to your student loan payments. So we'll be right back after the break to dig into it some more. This is the Escape Student Loan Debt.
[00:09:53] Speaker B: 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.
[00:10:05] Speaker A: We'll be right back.
Are you interested in learning the tools and techniques we use to get student loans forgiven, reduced, reorganized or expedited? Well, great news. We're currently updating our flagship course, Escape Student Loan Debt, to reflect the current changes in the student loan landscape. To stay up to date on the launch of the course and opportunities to sit in on our live recording Sessions, head to escapestudentloedebt.com and join our email list now.
[00:10:37] Speaker B: You're listening to the Escape Student Loan Debt Podcast.
[00:10:41] Speaker A: Subscribe now at escapestudentloedebt.com welcome back.
Welcome back. In this half of the episode, we're going to talk about some of the tax implications you need to be aware of. They're really, really important for 2025 and I would say more so in this year than in past years when it comes to the impact on your student loans. The reason that's the case is because federal student loan payments were paused initially for the pandemic in March of 20 been a series of extensions to the time that you have to update your income. There's a large group of people out there where March of 2020 was the most recent income they had on file, but because they go off past tax returns and tax returns are typically for most people not available for the previous year in March of the following year. March of 2020 means that it's highly likely that the 2018 tax return is the income on file with your servicer. Hopefully you've experienced a significant increase in income from 2018-20.
So it's highly likely that this next time that they update your income it will lead to a significant increase in payments. We're Seeing people go from payments that are currently a couple hundred dollars a month to a couple thousand dollars a month. And that wouldn't be something that you just be completely unaware that it's going to occur. Now, the 2025 tax season right now is about filing your 2024 tax return. So the income that you earned last year. As a reminder, adjusted gross income is the term from your tax return that your servicer will use to calculate your of the things that you would use to lower your adjusted gross income in terms of opportunities, they ended on December 31st. Things like your 401k contributions. The amount of self employment taxes that you pay if you are self employed, the amount that you contribute to your hsa, your fsa, your dependent care fsa. You had to have those dollars in and contributed by December 31st in order for them to count. But there are a couple of opportunities, specifically when it relates to retirement contributions for certain retirement accounts where you can still lower your taxable income from last year if you make those contributions before April 15th of this year. One of those accounts is a pre tax ira. Another if you're self employed would be a SEP ira. A Roth IRA does not lower your taxable income, so that would not count. Although you do still have until April 15th to make a Roth IRA contribution. But really we're focusing on accounts like an IRA where let's say for example, if you make $100,000 of income and you put $5,000 into an IRA, it lowers the income on which you pay taxes by $5,000, thus lowering the amount that they use to calculate your student loan payments. However, before you try to use that tax deduction, a tax deduction is a tool that you use to reduce the income on which you pay taxes. You first have to make sure that you're eligible for the tax deduction. If you're looking on screen, you're looking at a series of tax tables for the tax year 2024. And I want to to a couple of different numbers. The first is what's called an IRA deduction phase out for active participants. You'll see various income ranges based on your tax filing status. Single, married, filing jointly, married filing separately, so on and so forth. What I want you to notice is the term active participants. And active participants means even if you choose not to contribute, that you have access to a retirement plan through your employer, such as a 401k. So if you have access to a 401k at your employer and you earn more than the amounts listed in these tables, then even if you choose to put money into a pre tax ira, you cannot deduct that contribution on your tax return. Not only does it negate a big reason that people do pre tax retirement accounts in the first place, it also means that there's no benefit to putting money into that account if you're doing so with the intent of lowering your student loan payment. So if you're looking on screen and we'll put this in the show notes as well, if you are considered an active participant, you want to make sure that you're not over these ranges. Because if that's the case, there is no benefit from a student loan perspective to making these contributions. I also want to point you on this table to the section that says spousal IRA. And a spousal IRA is a unique concept. Technically, if you have an IRA, you're not able to contribute more than 100% of your income, meaning that even if the IRA contribution limit for the year is $7,000, if you only made $3,000 for the year, you can't contribute $7,000 because it more than 100% of your income. However, if you're married to a person that makes a significant income, you can use their income as justification for you contributing to your own spousal ira, even if you earn nothing at all. However, if your spouse is an active participant and you earn too much money as a household, it even negates your ability to do a spousal ira. So again, make sure you take a good look at these tables. My recommendation is to always use a tax professional when you earn a high income and have student loans, and I would encourage you to seek out that professional if you have not already. And lastly, for our married borrowers who have student loans, you want to think of the impact of your spouse's income on your tax return and your student loan payment. As an example, if you're looking on screen, you're looking at a calculator from our Escape Student Loan Debt Guide to Income Driven Repayment Plans. We will put the link to this guide in the show notes if you'd like to download it. We have a family of four with an adjusted gross income of 150,000. Doll we're going to assume that one person in this relationship has $175,000 of student loans. You can see under the payments that under the pay as you earn plan or new IBR plan, this would mean they'd have a payment of $860 a month. Under the old IBR plan, it would be $1,290 a month. But now let's assume that of the $150,000 that the household makes, that the person with federal student loans makes $90,000 and their spouse makes 60,000 DOL spouse doesn't have federal student loans of their own, then that $60,000 of income is driving up the student loan payment for the person who makes the 90,000. So let's now take the spouse out of the equation. Assume that they file their taxes separately. We're going to adjust this adjusted gross income to $90,000. We're going to make the family size three. Because if you file taxes separately from your spouse, at least according to the current rules, you can exclude their income, but you also can't include them in your family size. When it calculating your federal poverty level, the student loan balance stays the same. But you can see that for the old IBR plan, it knocks their payment down almost $600 a month. And it knocks it down a few hundred dollars a month as well for the pay as you earn plan and the new IBR plan. So this is something where if you're in a community property state, there's some unique ways that the taxes are impacted by filing separately. Even if you're in a common law state, there are some considerations to be given in terms of how much your spouse's income is going to throw off your student loan payment. But I definitely would not recommend you doing this without a tax professional because in most cases that we see, it can cost you a significant amount more in taxes to file married filing separately as compared to married filing jointly. There are a number of tax deductions that are reduced in terms of your ability to claim them or tax credits that you can't participate in at all based on that filing status. So you would want to make sure that you're saving more in student loan payments than it's costing you in additional taxes before you know whether it's really worth doing it for the benefit of your student loans. Now, I will tell you, depending on how strategic you want to be and what you want to do with your tax returns, one thing to keep in mind is if you want to possibly file separately for your student loan consideration when they calculate your payment. It is possible to amend your tax filing down the line after your student loan servicer has calculated your income and go from married filing separately to married filing joint. However, you cannot amend it to go from married filing jointly to married filing separately. So if you want to go through that, you know, circus of, hey, I'm filing separately so they can calculate my low payment and then later down the line I'll amend it to filing jointly. Again, please do not do this without a tax professional. This is also not tax advice for you to do that strategy. It's just something of which I want to make you aware. Because if you're staring down the barrel of a $1,200 payment or a $600 payment, you may be the person that decides to sign up for those type of maneuvers. So that's all I have for you today. Hopefully this was helpful and gave you some updates as pertains to your federal student loans. Once again, if you're interested in a complimentary review of your student loans, it would then be de identified later, put on the podcast and save you the fee that comes from actually paying for that service as a part of our Escape Student Loan Debt offering. So you can go to escapestudentloedebt.com review and we'll start going through those applications. We already have a couple on file for people that we've told about the program, but otherwise I look forward to seeing you back on our regular schedule two weeks from now with more information to have your student loans forgiven, reduced, reorganized and expedited. See you then from Escape Student Loan Debt. This was the Escape Student Loan Debt 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 homeownership.
