From the Rummel Wealth Management Mailbox, where as always these are real questions from real clients.
(Of course the names are changed to protect the innocent.)
From Alyssa in Frankenmuth:
I'm 26 years old and have about $10,000 left in student loan debt. I also have $10,000 saved above and beyond my emergency fund. Should I pay off the student debt right now?
Hi Alyssa and thank you for the timely question. In most years I'd tell you to pay off the student loan tomorrow. But 2021 leads us to a little different answer.
The short version of the answer is take a wait and see approach. The "why?" takes us to the longer version. Ready?
- The Biden administration extended the Trump administration's COVID related freeze of student loan repayments with the interest rate temporarily reduced to 0%. That freeze runs through September 2021. If you've paused student loan payments due to tight finances, plan to start payment back up no later than October 2021.
- There is a lot of chatter in Washington D.C. about student loan forgiveness. I would expect something to happen on this front before September 2021. Anywhere from $10,000 to $50,000 of federal student loans may be forgiven.
- What does it mean if, for example, $10,000 of student loans are forgiven? Under the CARES Act passed in 2020, student loans owned by the U.S. Education Department and the dollar amounts of those loans forgiven will be considered tax-free. Please double-check with the loan administrator as to the tax impact of any student loan forgiveness.
- Inside the March 2021 stimulus bill signed into law was a provision that allows student debt canceled by the federal government to be income tax free if cancelled before the end of 2025. With this provision in the bill, the cancellation of a debt like federally backed student loans would be considered taxable. Before this provision that is part of the law until the end of 2025, if $10,000 of student loan debt was forgiven, the $10,000 would be taxable as income, on top of any additional income. Tax bill for something like that could be $1,500 to $2,000 based on household income.
So to summarize, Alyssa, here is an outline of a plan:
See what the summer brings with more detail as to student loan forgiveness.
- Your payments are currently frozen and the interest rate is zero.
- If the government decides to cancel some of your student loan debt (before the end of 2025), it will not be taxable.
- If there is no action taken by the government by the end of September, start those student loan payments back up.
- Reach out again in early September and we can talk through what the student loan environment looks like then.
Generally I'm all about kicking those student loans to the curb. However, let's be a little patient. See what the government is going to do. Keep that $10,000 set aside, just in case!
As always, loyal readers, please submit your questions to efoltz@RummelWealth.com where real life meets real people and we give real advice.
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