[00:00:00] Speaker A: It's open enrollment time for many people at their jobs, and in this episode, we talk about how to structure those employee benefits to benefit your 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. Hope that you all are enjoying the start of fall. This is the first week in Nashville where we have some hoodie weather in the morning, so it's been a pretty good week. Before we get into this week's episode, I do want to give a quick update on something we've talked about in the past. I'm still determining whether we're going to do, like a full episode on this as a recap, but we did an episode in the past about spousal consolidation loans, and this is like a thing that very few people have dealt with. But the concept of it is you have a married couple who has federal student loans, each of them, and they combine them into one joint loan. And that has been something that has wreaked havoc on couples who are trying to get their loans forgiven through income driven repayment plan forgiveness or public service loan forgiveness. And they have basically been put in a holding pattern for the past significant period of time until an application was released to formally separate those loans. That application has now been released. I'll actually give a thank you to Kimon Hines, one of my friends and our listeners, who alerted us to the fact the application was released. So we will put the link to the application in the show notes. And again, we may, in the next couple of weeks, decide to do a full episode on that in detail.
But if you are one of the few people out there who has a spousal consolidation loan, I would definitely encourage you to check out that link now to this week's episode. October and November not for everyone who has a corporate job or a w two job, but for many people, October November is open enrollment time. It's the time of the year where you have this suite of employee benefits that's put in front of you. You know, your HR rep tells you to read it through carefully, and most people don't. They just kind of wait till the last day or two. They pick a couple employee benefits, they don't read the packet, and they go on about their day. But we talk every single year on both this podcast and the new Money New Problems podcast, which is separate from our work at escape student loan debt, about the benefits of actually optimizing your employee benefits. So in this episode, what I thought I would do is I would take you through some of those benefits, talk about how they impact your student loan payment, or some things that might be impacted by, like, a disability as it pertains to federal and private student debt. And this is actually a companion episode of what we're releasing this week on new money, new problems. So we will also put that link in the show notes. Again, those are two separate podcasts. But in this podcast episode, we're going to talk about primarily, like, high level details about the employee benefit and how it impacts loans. On the new money, new problems episode that's also released this morning, we'll go into more detail about that employee benefit and how it works beyond just the student loans. So what I first wanna start with is structuring or separating the employee benefits. We're gonna discuss between what's called pre tax benefits and post tax benefits. And pre tax means exactly what it sounds like. It is money that is contributed or used to pay for an employee benefit before it is taxed. But when you say pretax, a lot of people hear it and they're like, yeah, but like, conceptually I understand. But what does that mean on paper? Well, let's give an example of what it would look like on paper. Let's say that you have a paycheck that is, let's say $2,000 every two weeks. So you have that $2,000 that you're paid every two weeks. And if you were to not have any money deducted from that paycheck, let's assume that you were going to pay 20% in taxes. Or maybe you have 20% in taxes that are withheld from that paycheck. Well, if I have a $2,000 paycheck, 20% taxes means that $400 would be taken away from what I'm paid and sent to the IR's, and that amount would be my withholding for taxes, 20% of the $2,000 being $400 in that pay period. Now, let's assume that before I have taxes assessed against my check, there are all these things that I have that are pre tax contributions. And instead of me having $2,000 taxed at 20%, maybe I have $300 worth of pre tax contributions and it lowers that check from 2000 to 1700. Well, now I'm still withholding the same percentage of tax from my check. You set that withdrawal percentage typically at the beginning of the year when you fill out your w four. So the 20% in tax is not changing, but instead of taking 20% away from the $2,000, they're now taking it aside from the $1,700 that remains. So instead of you having $400 withheldehen from your check, you have $340 that's withheld from your check, 20% of the $1,700. So you have saved $60 in tax withholdings just by having those things that you had to pay for anyways come out of your check pre tax as compared to post tax. So pre tax employee benefits are really valuable. Now, let's go through some of these pre tax benefits and how they impact people who have federal and private student loans. The biggest impact is going to be seen by those who have federal student loans, especially those who are paying those loans back using an income driven repayment plan. We have discussed at length the fact that a part of what calculates your payment for an income driven repayment plan is your adjusted gross income. And that adjusted gross income is not your total income. It is your income after you have subtracted certain things from your pay, like pre tax employee benefits. Pre tax employee benefits would be things like a flex spending account, a dependent care flex spending account, and a health savings account. So if you're contributing a significant amount toward these benefits in a pretax fashion, it lowers your adjusted gross income by that same amount and it in turn lowers your student loan payment. As a matter of fact, if you're looking on screen, you're looking at the calculator that is built into our guide to income driven repayment plans. We'll put a link to that guide in the show notes. But right now we have a family of four that has an adjusted gross income of $150,000 and $250,000 of student loans they're paying back at a rate of 6.5%. You can see on the right hand side, for example, we will take the pay as you earn plan that under this scenario, this family would be paying as a total household dollar, 860 a month towards their student loans. Now, let's assume that this family puts $10,000 towards some combination of pre tax employee benefits. Could be the 401K, could be the health savings account and the like, but that would take their adjusted gross income from 150,000 down to 140,000. And as you can see, just that amount of contributions takes that monthly payment for the student loans from 860 a month down to about $775 a month. So you are saving 80 $90 a month. Just by putting money towards things that either help you save money on health expenses, they save you money on taxes definitively, or are even in some cases saving towards your retirement. So it's this dual benefit of saving on the taxes and benefiting your future self, and the triple benefit of saving on the student loan payment as well. And now that we've talked about the benefit of it, let's go through some of the ones that you can use. We talked about a 401k or if you work for a nonprofit, a 403 b or a 457 plan. These are accounts where you can put money aside now for your retirement years. You also, if you familiar with Roth retirement plan plans, can put money aside. That's not pretax. You're putting it aside for retirement, but the money comes out after it's already been taxed. That is not something that I would typically recommend. If you have significant student loan debt, if you're trying to maximize your budget definitively, if you have an income driven repayment plan, you want to drive that adjusted gross income number as low as possible. So while in a vacuum or Roth has its benefits, if you are also juggling student loan debt, I would highly recommend using pre tax retirement contributions. And in 2024, in these accounts, you can put up to $23,000 aside per person. You don't have to put aside that much, but that is the contribution limit. That's as high as you can go with these accounts. So that's the significant amount that you can put towards these pre tax benefits. You also have flex mini accounts, dependent care, flex spending accounts, and health savings accounts. We will couple flex spending accounts and dependent flex spending accounts together because for the most part, these are what's called use it or lose it plans, meaning that if you have not used the money in the plan within a certain period of time, time, that money reverts back to the plan. So you want to be careful about how much you sign up to put into them on a bi weekly basis. Because if you put aside more than you can actually use, you run the risk of losing that money. Now, a flex spending account is not a pure use it or lose it plan because you can, at least in 2024, carry over up to $640 from one plan year to the next. But you can't carry over more than $640. But a flex spending account is something that can be used for a whole litany of health expenses. It could be used for co pays, it could be used for deductibles, it could be used for eye exams, dental visits. There's all types of things. And we have discussed that there are even websites at all of your major retailers, Amazon, Walmart, Target, where you can go to a specific part of their website, and everything on that part of the site is something that is eligible to be used and paid for with an FSA. So, for example, if you're looking on screen, we're on the Amazon site. You can see everything from health supplements and vitamins to children's cold and allergy, digestive health. Pretty much everything that you can buy over the counter in terms of a medication, wipes, sun tan, band aids, all types of things can be paid for. And this portion of the Amazon site has nothing but FSA eligible products. And as I said, you can find these same things at your local target site, Walmart site and the like. So if you're worried about getting to the end of the year and not having the ability to pay for those things or use the money that's set aside in the plan, there's all types of things that you can pay for before that deadline ends. A dependent flex pending account is something that is very useful for young parents because the dependent flex spending account is money that you can put aside pre tax, up to $2,500 if you're an individual or a married person filing separately, up to $5,000 if you file married filing jointly. And these are things that can be used to pay for all types of expenses for your children or your dependents. Things like the cost of a day camp, as long as that camp is not a sleepover camp. If your child goes to daycare or pre k, any tuition that is short of kindergarten or higher can be paid for with the dependent flex spending account. If your child has an after school program that they go to every single day, even if they're at public school. If there's a cost to the after school program is something that can be paid for with the dependent care FSA. If you have a babysitter that you pay for, as long as you provide a tax document to that babysitter or au pair or nanny, those are things that can all be paid for or reimbursed by a dependent flex spending account. And you can have that money that you don't pay income taxes on. That lowers your adjusted gross income. That also lowers your student loan payment. Multiple benefits just by having an understanding of how these employee benefits impact your life. And then lastly, on the pre tax side, the health savings account and a health savings account is something that is really unique. And again, I would encourage you if you want more details about these plans, to listen to our companion episode on new money, new problems. But a health savings account is something where it's not a user to lose it account. You can actually roll over money that is left over from one year to the next plan year. It has to be paired with what's called a high deductible health plan. So again, we're talking about things that benefit you. A high deductible health plan typically cost less money, but conversely, it will typically cost you a little more when you go to the doctor. It's a high deductible health plan, but in terms of your budget, saves you money on the health care plan. You have that money that you're putting aside in the health savings account. Anything that you put in that health savings account as a contribution also comes out pretax and lowers your adjusted gross income, lowers your student loan payment, and that money can grow. You can actually invest in it, just like you would invest in a 401k or a 403 b if it's used health expenses. You don't pay taxes on it when you take it out. And there's also some flexibility for how you can use that account in your retirement years for non health related expenses. But this is just a summary of some of the pre tax benefits you can use to have that multiplicity of returns in terms of how it impacts your student loans. After the break, we'll talk about some benefits that are not pre tax. They're post tax, so you pay for them after taxes have been assessed against your check. But still, they are valuable when it comes to how they impact your student loans. So we'll get to that after the break. This is the escape student Loan Debt.
[00:13:30] 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. We'll be right back.
[00:13:46] Speaker A: 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 escapestudentloanedeb.com and join our email list. Now.
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[00:14:23] Speaker A: Welcome back for the break. And now let's get into some post tax benefits that yet and still have an impact on you whether you have a private or a federal student loan. We've given a lot of love to federal student loans, but even private student loan borrowers are impacted by benefits as well. So let's get into some reasons as to why. We're going to start with life insurance. Life insurance is pretty straightforward. If you were to die, your named beneficiaries receive a death benefit as a result of your death. But the way that that impacts your student loans is different based on the borrower and the type of loan that you have. So let's talk about private student loans. Private student loans. In most cases, they die with the borrower with no impact to the loved ones. So, for example, even if there's a co signer on a private student loan, if the person who was the primary borrower were to pass, then that debt in most cases is forgiven. Now, that death release is something that you want to confirm with your current servicer if you have a private student loan. But in almost all instances that I've seen, a modern day private student loan carrier is going to have that debt discharged at death, even if that loan carried a cosigner. A federal student loan is something that dies with you. It doesn't matter if you owe a million dollars. If you die, that a million dollars is not going to be a burden to your family and your loved ones. So it's not something, in most cases where it makes sense to get life insurance. In the event that you die, your family can pay off your student loans. It's not really necessary, but it is something where you might get life insurance if your spouse or loved one has a student loan so they can use that money to pay off their loan. So while your loans will not be a burden to your beneficiaries, you do want to keep in mind that when you accept typically that base life insurance plan through your employer, maybe that's not enough to cover those responsibilities for your remaining loved ones. They typically are going to offer you some supplemental coverage where you can say, hey, I can get up to two times my salary or three times my salary. If you have loved ones who have those responsibilities, you may consider getting a little supplemental life insurance through your employee benefits to cover that eventuality.
Next, we have disability insurance. And disability insurance is paycheck protection. It provides a percentage of your pay in the event that you are ill or unable to work. And this is something that definitively impacts your student loans, whether they are federal or private. Federal loans are discharged in the event that you are totally and permanently disabled. So that's not you can't do your job, that's you can't do any job and you will not be able to do any job in the future. That is also the case with most private student loan carriers, but you want to make sure you understand how that's impacted by having a cosigner. We have mentioned on this podcast that I have seen scenarios where the primary borrower was totally disabled, but the co signer was not. And even though the person who took out the loan for their schooling was disabled, the co signer, who was just being a good friend or a good spouse or a good partner or a good loved one, is still carrying the burden of having it on their credit and having to make the payments, even though it wasn't for their schooling. So you would want to make sure that you have ample disability insurance through your employer, because if you are the co signer and something happens to you and it's still a burden, you still want to be able to pay. But if you have co signed on someone else's loan, you want to make sure that they have the appropriate amount of disability insurance so that in the event that they are disabled and you are still stuck with the payment, there's some type of income that's coming in to make sure that that payment is covered. Now that's in the event of a total disability. With a cosigner, if it's a federal student loan, you wouldn't have to worry about it. But the statistically more likely thing to occur is what's called a partial or a residual disability where you are disabled and you can work less, but you can still work, right? Hey, I have some illness where I can't work five days a week. I can only work three days a week. Or maybe I'm in a situation where I am totally disabled from my job, but I'm not totally and permanently disabled. And as a result, I still have a private or a federal student loan payment. Well, with federal student loans, at least if you have an income driven repayment plan, if there's a reduction in pay, you would see a reduction that is commensurate with that when it comes to your student loan payment because it's based off of your income. So you could call your loan servicer, you could give them updated pay information and they will adjust your IDR payment according. But that's not the case if you have a standard plan or graduated extended plan, and that's definitely not the case if you are not totally and permanently disabled for your private student loan, you would still have to make those payments, which makes it even more important, even if you have to pay for it, that you sign up for the appropriate amount of disability insurance at your job. And if you're a person who consistently depends on things like overtime pay, bonuses, and the like, that type of income is not covered by group disability policies. So there's also the potential that you would need to supplement your plan at work with individual coverage on top of that group policy.
And then lastly, some of these are often grouped into things like what are called cafeteria plans. And the concept of it is you have a certain amount of money that you can use to pay for benefits, but there's a group that you can choose from, almost like choosing things that you want on your cafeteria tray. That's the phraseology that's connected with the cafeteria plan. But many times there are people who have cafeteria plans that have some pretty cool benefits, like credit repair services, like things like cancer insurance, which would cover some things that wouldn't be covered by traditional health insurance, like your co pays, your deductibles if you have cancer, your screenings, if you want to do an experimental treatment that may not be covered by your health insurance. Cancer insurance is something that can pay for things like that. You could have a medical bridge policy that also would pay for things like ambulatory services, like a trip to the emergency room that would be partially covered by health insurance or wouldn't be covered at all because you have yet to meet your deductible or your copay. Medical bridge policies can pay for things like that. You also have things that could help put you in a position with the balance of your finances to potentially improve things like the rate that you might receive on a private student loan so you could have free credit services as an example, as a part of your employee benefits package. And in some cases, if you have a private student loan, your rate can adjust greatly based on the quality of your or your and your cosigner's credit. So I would encourage you to look through all of these services and try to identify things that either benefit you in terms of keeping more cash flow in your budget, which would make it easier to afford student loan payments, or can position you where, after having improved finances, you can also improve the structure of your student loans. So those are some quick things and some quick ways that you can use employee benefits to your benefit in a way that is particularly focused on your student loan debt. Our goal is to help you get your student loans forgiven, reduced, reorganize, and expedited, and we'll be right back here in two weeks with that same mission in mind. I hope to 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.
