Over 40 million American have student loans. Regrettably, many of them struggle with payments. What’s even more disconcerting is many are unaware of the options available to them to reduce or temporarily defer their payments. With the relief measures for student loan borrowers from the CARES Act set to expire Jan. 31st, I felt it was important to host this webinar to help educate those with student loans on the options that may be available to them.
My featured speaker on this webinar, Heather Jarvis, is one of the country’s foremost experts on student loans. Heather is a tireless advocate for student loan reform. Her singular dedication to student loans makes her a true authority on the various repayment plans available and the pros and cons of any choice a borrower may consider.
Joining Heather to share his unique perspective was of the world’s top economists, Larry Kotlikoff. Larry’s work in the field of life cycle finance is the foundation his financial planning program, Maxifi. On this webinar, Larry used Maxifi to illustrate the impact of different repayment plans on the long-term financial plans of two hypothetical clients.
Rating: 94% of the live attendees rated this webinar EXCELLENT.
About Tom Dickson and Financial Experts Network: Tom Dickson has hosted over 400 national webinars that have drawn over 140,000 financial advisors and investors. Financial Experts webinars are a draw because they feature true “Best-in-Field experts educating you on topics such as college planning, home buying, Social Security, HSAs, charitable giving, Medicare, tax planning, life insurance and more. Our expert presenters have included thought-leaders like Michael Finke, Harold Evensky, Bob Keebler, Ed Slott, Larry Kotlikoff, Heather Jarvis, Mark Kantrowitz and Kurt Czarnowski. Most importantly, our webinars have an 86% excellent rating.
Key Takeaways from the Webinar
Note: The timestamps are intended to help you find the comment in the full transcript found below.
- If you are struggling to make payments, call your loan servicer RIGHT NOW. You should ask them to present ALL repayment options available to you in an email or letter. This advice applies whether you have a federal or private loan. While you definitely have options available to you with a federal loan, private loan lenders may also work with you if you are struggling to make your payments.
- Heather: They also have access to temporary postponements of their obligation to pay. (4:54)
- You can change repayment plans! For example, if you are in a Standard Repayment Plan with a fixed payment amount you can switch to a plan that determines your payment amount based on your income. These plans are known as Income-Driven Repayment (“IDR”) plans. Much of the webinar is focused on explaining the 4 IDR plans.
- Heather: The main way they're different than normal repayment is that they look at adjusted gross income, family size, and the federal poverty rate that corresponds with the borrower's family size. And these are the only factors that influence the payment amount. So, notably, the balance and the interest rate are not what determine the payment amount under these plans (7:17)
- Heather: borrowers who are working in public service jobs may be able to make income driven payments over 120 months or 10 years and earn forgiveness of student loans (8:15)
- Heather: the way these plans work is they look at the poverty guidelines that correspond with a borrower's family size (9:16)
- Heather: The reason we like ICR is because it's the only plan that's available to parent borrowers under the Parent PLUS program. (11:49)
- Heather: How you file your taxes matters relative to the IDR plan you may qualify for (12:48)
- Heather: 3 factors determine your eligibility for an Income-Driven Repayment plan (18:17)
- Heather: But capitalization can be triggered by different events, including switching repayment plans, but also including having a state where that partial financial hardship no longer exists (27:25)
- Heather: for the most part Income-based Repayment for new borrowers, the new income-based repayment is a plan that should be avoided, because the other options are better. (31:39)
- Heather: New borrower (loans from 2014 on) should consider Pay As You Earn versus Revised Pay As You Earn. And the focus of the decision making needs to be on two factors (33:21)
- Heather: REPAYE is less advantageous for married borrowers, if they both have incomes, unless they both also have student loans. (34:31)
- Larry: There is a big tax on college aid. Save as much as you can! (41:45)
- Larry: Extend the terms of any lower interest rate loans if possible and prepay loans with a higher interest rate (47:00)
- Larry: There is a $53,000 advantage to paying higher interest rates off sooner (51:00)
- Larry illustrates the REPAYE option can be costly! (51:56)
The Question & Answer is a can’t miss. It starts at 55:56 in the replay.
Note: The transcript has been edited to highlight key concepts and make it more readable).
Tom Dickson (0:07)
Well, Happy New Year One in all, it's a delight to be with you again, Tom Dickson. Here, your host and chief organizer for the Financial Experts, Network Webinar Series. I've been researching, getting ready for this session for the last two weeks or so everything and anything about student loans, and I will sum it up this way. It's complicated. It's complicated, right. And yet, there are how many 40 million plus people that have student loans. And I don't know that everyone understands all the options available to them. And that's really our focus today, in particular, for anyone that is really struggling with student loans. And given the fact that the relief measures are going to expire short of any other legislative changes in the in the coming weeks, the relief that came about through the cares act is due to expire at the end of this month. So, set another way that means for anyone that has a federal student loan, that was lucky enough to have that belief, that belief will go away, as of February 1, your payments will start or your requirement to make that payment will start once again. So, in that context, I'm really delighted to have both Heather and Larry here to again, walk through in a detailed way, what's available to any student loan borrower. In particular, we're going to focus on the income driven repayment plans. And again, I'll confess until I've really engaged with Heather, it's the beginning of last year when Heather first did a webinar for us. Not that it was that important, not that it was that fantastic. It was on May 27 of 2020. How's that for memorable knocked it out of the park was the highest rated speaker I've ever had on my webinar series and doing this for over 11 years. I just hope she doesn't get a big head about it. But I'm just so delighted to have her back. Literally a couple decades of focus on the area of student loan, pardon the right place public interest law, geez, what's not the light, and so delighted to have her back. So, Heather, thank you so much.
And, of course, delighted to have my longtime friend Larry Kotlikoff, join us, one of the top economists in the world. Not everybody can say that, I think, and just a student of everything. And I think, you know, it's interesting, Larry has been studying up again on this issue, not that he wasn't familiar with it. But I think he's really been intrigued by it as well and has been kind enough to agree to join us today. And to really watch, there's some interesting case studies or client scenarios for what these various repayment plans mean. So, there you have it with a little bit about our experts. Now, let me just walk through a few housekeeping matters. Before I hand it over to Heather, who's going to kick it off. If you're not following financial experts, network.com make that part of your bucket list for 2021. Because that's where we will post everything and anything about upcoming webinars, replays for sessions like today, blog posts that we're going to put out, post this session today, really summarizing some of the highlights that Heather and Larry walk through today. So, again, all on the website, of course, you should link to me on linkedin.com, because I post a lot of those notices on LinkedIn as well. So, you can make sure that you catch it in one of two places. It's my pleasure to hand it over to Heather.
Thank you, Tom, thank you for that warm introduction. I appreciate it very much. And I'm always happy to talk about student loans, particularly income driven repayment, which is a particularly important feature of federal student loans. So, as Tom said, the cares act provisions have expired, the administration has extended the payment suspension for federally held student loans through the end of January. I think it's likely that the incoming administration will further extend that payment suspension. That's not a done deal yet, but in my view, it would be surprising if it were not extended at least through the end of March. And it's also possible that it could go longer than that. So, that said, sooner or later, payments are going to be due again and when payments are due. Federal student loan borrowers have many repayment plans to choose from.
They also have access to temporary postponements of their obligation to pay. There are deferments and forbearances available, both for borrowers, and the difference being only that a forbearance is a period in which interest continues to accrue on all student loans, including those that would otherwise be subsidized subsidy, meaning that the government pays the interest during certain periods of deferment. So, deferment is a better option than forbearance. But forbearance is also available. And even more useful for most borrowers are the income-driven repayment options. So, to begin, let's just take a very brief look at the kind of plans that aren't income driven. So, many of us are accustomed to terms of repayment that include a specific length of time, for example, 10 years, the so-called standard repayment term for student loans is 10 years but can be as long as 30 years for a consolidation loan, if the balance is $60,000 or more. There are also graduated and extended plans available for borrowers, those are much, much less advantageous than the income driven plans in most instances. So, that's one of the reasons why when Tom said let's focus on the differences between income driven plans, I said, yay, I love that, let's do it.
So, little time history about the way these plans developed, so that you can keep it all straight. Income contingent was the first of the income driven plans. And when I say income driven, I mean that to be an umbrella term that encompasses all of the repayment options that calculate monthly payments by looking at a borrower's income. So, the plans have been developed since the mid-90s. This is all controlled by the Higher Education Act. The plans have been changed by Congress and various administrations for a long number of years. And that's why they continue to introduce new plans with tweaks with the idea being that they'll improve over time in their targeting. And we have seen that too, to a degree.
So, the income driven repayment plans, the main way they're different than normal repayment is that they look at adjusted gross income and family size, and the federal poverty rate that corresponds with the borrower's family size. And these are the only factors that influence the payment amount. So, notably, the balance and the interest rate are not what determine the payment amount under these plans, which is what makes for a lot of confusion. Another reason that the income driven plans are extremely important is that the two primary paths to loan forgiveness within the federal student loan system are linked to the selection of an income driven repayment plan, both public service loan forgiveness, as well as the long-term income driven forgiveness is associated with the selection of one of these plans. So, to summarize, borrowers who are working in public service jobs may be able to make income driven payments over 120 months or 10 years and earn forgiveness of student loans. And people who are not in public service positions may be able to choose an income driven plan and make payments for a long time 20 or 25 years depending on the plan. At the end of the term, they will earn forgiveness or cancellation of any remaining principal and interest. That long term income driven forgiveness is taxable as income to the borrower in the year in which he or she receives that forgiveness. So, income driven repayment plans are useful for making monthly payments affordable. And they are also the primary tool for reaching some kind of loan forgiveness, to the extent that that's available for a given borrower.
How do the plans work?
So, the way these plans work is they look at the poverty guidelines that correspond with a borrower's family size. So, I have a five-person family, I'm married, and I have three children. And so, a five-person family size, the federal poverty rate is a little more than 30 grand. They take 150% of that amount in most cases, which in this case would be 46,000, and some and that first amount that's earned is insulated and no portion of it is required to be sent to the student loans. It's the amount of income that a borrower has over and above 150%, typically of the federal poverty rate that is considered discretionary and of that discretionary income, a percentage of that is what is required as a student loan payment, and if so, this will all become clearer as we compare these plans.
Lots of acronyms
So, there are other acronyms income contingent repayment, ICR, income-based repayment, and it's two versions old and new, as I like to call them, Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE). So, I've got these visuals where I'm trying to focus your attention on the differences between the plans, so that you'll be able to focus on which plan may be best for a given situation. And all of the plans are of use sometimes, but some of them are more likely to be beneficial to a greater number of people. So, the first difference that we're going to compare between the plans is the percentage of discretionary income that is required to be sent as a monthly payment. So, again, discretionary income is the amount by which the borrower's Adjusted Gross Income exceeds 150% of the federal poverty rate that corresponds with the borrower's family size. So, for ICR, the monthly payment is going to be 20% of discretionary income, but under I see our discretionary income is going to be a higher proportion of a borrower's income. And that's because only 100% of the poverty rate is insulated. Whereas under the other plans 150% of the poverty rate is allowed to be earned before any portion is required to be sent to the student loans. So, I see are tends to yield the most expensive monthly payments. The reason we like ICR is because it's the only plan that's available to parent borrowers under the Parent PLUS program. And only then after they have consolidated Parent PLUS loans into a direct consolidation loan. So, ICR has some limited use in the real world, it is not the best income driven plan for most borrowers, particularly for those who borrowed for their own education rather than for their children's education. So, the original Income-based Repayment Plan, or IVR, as I like to call it, sets payments at 15% of discretionary income, whereas the other three newer plans, set it at only 10%.
Tip: So, obviously, new income-based repayment PAYE and REPAYE set monthly payments at a lower amount. So, those tend to be preferred in many situations. Now, all the plans except REPAYE, allow a borrower to make payments based on his or her individual separate income, even if married.
How you file your tax return matters! (13:02)
That the way that that borrower has to accomplish this is by choosing to file a separate tax return even as a married person who may have good reasons to file jointly. So, it is valuable that you as advisors, or as CPAs, be able to recognize that tax filing status, particularly for married people with student loans is a critical determinative of the income figure that will be used to calculate payments under these plans. So, joint or separate income depending on tax filing status. But notably, the Revised Pay As You Earn plan requires payments to be based on joint income in in every case of a married borrower. So, if you can file your tax return separately all day, and that won't make any difference if you're enrolled in the Revised Pay As You Earn plan. And that developed that way because this was the education department's attempt to narrow the benefits to potentially high earning spouses and their partners. So, that's how payment amounts are calculated under the different plans.
Tell me about payment caps
Now we're moving on to talk about payment caps. Let's talk about how the monthly payments are or are not capped. So, under all the plans except ICR and REPAYE there is a monthly payment cap. So, there's a maximum amount that can be due under the bands. And the way it's calculated is they take the standard 10-year payment amount that the borrower would have made on a monthly basis if he or she had chosen the standard 10-year plan to begin with. So, confusingly, there's two potential balances that are used to do that calculation. And that calculation is based either on the balance that the borrower had when we selected the income driven plan. So, the principal balance upon selecting the repayment plan, or the principal balance, when the borrower first entered a repayment status, whichever one works out better for the borrower. So, when you first graduate from school, you choose a repayment plan, you're going to have a principal balance, then that is one thing. And then that principal balance could go up over time, if interest accrues and is added to the principal balance, or it could go down over time, if principal is repaid. Either one could be the case. So, either one of those figures will be what determines the monthly payment.
So, this is different income driven plans, they set the monthly payments a little bit differently, they calculate income a little bit differently, and then they set payments at a slightly different percentages of discretionary income as defined by the plan.
One of the first things to do:
So, as an advisor, one of the first things you want to do and what I always do when considering these cases is, I look to see which of the income driven repayment options are available to a given borrower, because not everyone is permitted to choose between every option. And what determines eligibility is are several things it's the type of loan that a person has, generally whether they have an older federal student loan from a program known as federal family education loans, or FFEL versus having a direct loan, which are those that have been issued more recently, over the last decade by the Department of Education. But also, loan type can refer to things like whether it's a loan, I borrow directly for myself or on behalf of my dependent children, and the like. So, there's more complexity to that. That's beyond the scope of today's presentation. But loan type determines eligibility in part. Also, most of the plans have a sort of need-based testing baked in, which is looking at the debt-to-income ratio, and we'll talk about that. And then finally, eligibility for the income driven plans also depends on the borrowing dates of the individual who is selecting between the plants. So, I'll show you these things are not mentioned. You know, Tom said we have that we have a handout there, which is the income driven repayment application. I wanted to mention, the main reason I include that for you is that there's a particularly useful table of information within the instructions to the forum that summarizes all the things that I'm talking about today. So, I've broken information out of those tables in order to focus your attention on the contrasting provisions of the repayment options. But if you want a quick and dirty resource where you can see it all in one spot, that's a really, really good one. But these visual aids are good too, but that's even better.
What Type of Loans are Eligible (20:01)
So, as far as loan type of what sorts of loans are eligible. Note that only the original income-based repayment plan or old IBR is available for those older FFEL loans. So, many, many 1000s of borrowers 10s of 1000s of borrowers hundreds of 1000s of borrowers have these FFEL loans, and those loans are eligible only for income-based repayment, which sets payments at a slightly higher amount than many of the other plans do. But that's why.
Tip: The old Income-based Repayment Plan is still particularly important and useful. The rest of the income driven plans are only available for direct loans.
The question of need (20:55)
Then there is this need-based question. So, there's this there's this debt-to-income ratio, and we call this a partial financial hardship. So, a partial financial hardship exists when the ball was required monthly payment under a standard 10-year repayment term is greater than their required monthly payment would be under the income driven plan. So, if I owe $100,000, at a 6% interest rate, you amortize that over 10 years, my required monthly payments are going to be what 12 $100, something like that. And if my income-driven payment is calculated at less than that, that's how you know I have a partial financial hardship. So, this kind of debt-to-income ratio is a required showing for IDR plans and Pay As You Earn, but not for ICR, or Revised Pay As You Earn. So, people who have less dramatic debt to income ratios can select from ICR and REPAYE, whereas others may be limited in their options.
Define the Borrowing Date
All right, and then the borrowing dates. So, this is an interesting feature of these plans. And I want to be clear from the beginning that the borrowing dates I'm referring to here are the dates upon which the borrower first acquired a federal student loan. So, this is a borrower specific requirement, not per loan requirement. So, what I'm not saying is that older student loans are eligible for fewer plans. What I'm saying is that people who have some older student loans are only eligible for older plans. So, I started borrowing student loans, you know, a million years ago. And so, I'm not eligible to choose some of the newer income-driven repayment plans, even if I also have newer loans, or even if I've already paid off my older loans. So, for the Pay As You Earn plan, the borrower must not have had an outstanding balance on a federal student loan as of October 1, 2007. So, they must be a new borrower as of that date. And similarly, with new income-based repayment, they must have no outstanding federal student loan as of July 1, 2014. So, be a new borrower as of that date. And then under Pay As You Earn, the borrower also has an additional requirement of having received a federal loan sometime after October 1, 2011. So, that essentially means that if someone graduated in the spring of 2011, and stopped borrowing student loans at that time, he or she would not meet this second prong of the Pay As You Earn eligibility date.
Maximum Repayment Periods (24:13)
As I mentioned at the beginning, all these plans have a maximum repayment period, which is not the same as amortizing their payment over that period of time. Because recall the monthly payments are not calculated based on the balance or the interest rate or any particular length of time. Instead, the monthly payments are calculated based on income, family size and the federal poverty rate. And so, you know, a person could be paying far less each month than even what they owe and interest potentially on their student loans. And so, these plans have a maximum repayment term, after which point the remaining balance if any is cancelled and forgiven.
But that's cancellation again is taxable as income to the borrower, which is somewhat less generous than it would otherwise be.
Public Service Loan Forgiveness is NOT Taxable (25:08)
Whereas Public Service Loan Forgiveness recall is not taxable to borrowers. So, note that Revised Pay As You Earn is the only plan that has a different maximum repayment term, depending on the level of education, the borrower was enrolled in when he borrowed. So, if you have any graduate loans, any loans for professional school, then REPAYE requires 25 years of payment, otherwise 20 years for undergraduate loans only.
And so obviously, it is in a borrower's best interest to have a shorter maximum repayment term. So, that can help guide decision making with regard to which plan is best.
The Tricky Stuff (26:02)
Unlike a lot of kinds of debt of debt, people can avoid paying interest as it accrues, you're permitted to owe money on student loans and not keep up with the interest.
This happens most normally when borrowers are in school, but it also happens when borrowers are enrolled in income driven repayment options.
You know, like, for example, if we have a borrower that has $100,000 at a 6% interest rate, that means that about 500 bucks of interest is accruing in a given month. So, if that borrower has a, a low enough income, he could be assigned a payment under an income driven plan of, let's say, 300 bucks. So, that would be $200 of interest accruing each month, that was not being paid. Okay. And so, what would happen to that interest that's not being paid? Well, initially, it's kept track of in a separate column from the principal balance, which is helpful, so it's not automatically capitalized or added into the principal balance of the loan. It's not immediately and subject to additional interest charges. But capitalization can be triggered by different events, including switching repayment plans, but also including having a state where that partial financial hardship no longer exists. So, if you recall, someone must show that their payment under an income driven plan is less than it would have been under a 10-year plan to have a partial financial hardship and choose the plan. But what happens if their income goes up considerably? Well, then they may no longer have that that income ratio that would establish a partial financial hardship, and that is reevaluated on an annual basis. And if there comes a time when the partial financial hardship is gone, that triggers capitalization of unpaid interest. And so, it is useful to know that under some of these plans, there are limitations to capitalization under ICR. And Pay as you Earn, the amount of interest that can be added to the principal balance is limited to 10% of the original principal balance. So, if you owe 100 grand, they can only capitalize 10,000 in interest. And then after that the interest is still owed, but it hasn't been added to the principal balance. And the reason we care is because it's the principal that is interest bearing or that will generate more costs to the borrower over time. So, ICR and Pay As You Earn have that limitation.
Revised Pay As You Earn has a different, special, and potentially quite valuable interest feature in that.
If you have a period of negative amortization and negative amortization is a is a period where monthly payments do not fully cover the accruing interest. Like the example I gave of $500 of interest accruing a $300 payment $200 of unpaid interest that's called negative amortization, meaning the balance is going up instead of down. And so, under REPAYE and REPAYE only the borrower and negative amortization is only charged 50% of the unpaid interest. So, in our example, $500 of interest $300 a payment $200 of unpaid interest under REPAYE and REPAYE only that borrower would only be charged 100 bucks that month instead of the 200. A REPAYE can be super useful at keeping interest accrual down during periods of lower earnings in the repayment period. So, REPAYE can be super generous in that regard. But it has other downsides, right, as we noted.
And so, what all this amounts to, and I do want to summarize it, because I know it's a lot to take in all at once. But the gist of it is, is that this is if a student or borrower qualifies to choose that Pay as you Earn plan. So, if they don't have loans that are too old, or they and they do have a loan, that's new enough, if they qualify for Pay As You Earn, then the decision making should be generally between Pay As You Earn and Revised Pay As You Earn one or the other is likely to be the best option. Whereas if someone is not eligible for the Pay As You Earn plan, typically because they borrowed a long time ago, then those folks will have to give some consideration to that old original income-based repayment plan. And they should compare that to the tradeoffs available with the REPAYE plan.
Because those are almost certainly going to be the best options for that borrower.
Heather does not like the new IBR plan
And so, what all this means is that I don't like the new income-based repayment plan. And I think it is harmful and not the best choice for virtually every borrower.
There are, there's one sort of really unusual case where it could be useful. But for the most part Income-based Repayment for new borrowers, the new income-based repayment is a plan that should be avoided, because the other options are better. And you can see here on this visual, that income-based repayment for new borrowers and Pay as you Earn are virtually indistinguishable. In terms of the of the way the payment is calculated, the way the forgiveness is accrued the way income can be separated from a spouse's income.
The only difference between these two plans is that Pay as you Earn has a cap on the amount of interest that can capitalize, and Income-based Repayment doesn't.
Distinguishing feature (32:21)
In fact, if that's the only distinguishing feature between the plans, most borrowers who qualify for income-based repayment for new borrowers will also qualify for Pay As You Earn. Re: because Income-based Repayment for new borrowers is only available for people who didn't have loans until after 2014. And Pay as you Earn is essentially just limited to people who didn't have loans before 2007. And so, both would be the same people, if you didn't have loans before 2014, you also didn't have them before 2007. Typically, that's slightly more complicated than that. But that's what it boils down to.
Comparing PAYE to REPAY (33:02)
And finally, comparing the PAYE to the REPAYE plan, because this is the evaluation that many borrowers must make. If they're eligible for Pay As You Earn, there's almost no scenario where choosing Income-based Repayment would be better.
So, they should consider Pay As You Earn versus Revised Pay As You Earn. And the focus of the decision making needs to be on two factors under repay. People with graduate and professional degrees will have five more years until the maximum repayment term is reached 25 years under repay 20 years under PAYE.
Is joint income a deal breaker?
Under REPAYE what a deal breaker for people can be is that if you're married, you're paying based on joint income because it doesn't matter what you do with your taxes, you still must make payments based on joint income. So, there's no option to separate your income.
And then you have that interest accrual versus in interest sort of waiver provisions. So, Pay As You Earn caps the amount of interest that can capitalize, but Revised Pay As You Earn limits the amount of interest that accrues during periods of negative amortization. So, that can be more valuable to some people.
REPAYE is less advantageous to married borrowers (34:27)
And so, you know, what this kind of comes down to is that REPAYE is less advantageous for married borrowers, if they both have incomes, unless they both also have student loans. So, if you're advising someone who has a lot of money in student a lot of debt and student loans and is married to someone who also has a lot of student loans, then REPAYE may be great and the whole joint income thing may not be a deal breaker.
But those are the kinds of considerations come up. So, everybody can benefit from one of these plans at, you know, under some circumstances.
And then the last thing I will say before, I'm looking forward to hearing Larry and his and his case studies, so he can show us sort of how this plays out.
But for those who don't qualify for Pay As You Earn, they will need to look at the original Income-based Repayment Plan and compare that to Revised Pay As You Earn.
And it will be the treatment of married income and the payment calculation that makes the biggest difference. So, REPAYE will set payments at 10% of joint income, whereas old Income-based Repayment will set payments at 15% of either joint or separate income, depending on how the taxes are filed. So, that's how to make those decisions.
Larry was kind enough to model two hypothetical scenarios for student loan borrowers. Larry is the founder of a firm that has an innovative financial planning software. Many of you listening may be aware, I'm sure familiar with Larry and familiar with the program that's called Maxifi. There's a version that's available to financial professionals, as well as consumers. And it's unique in that it's built around some long standing, economic concept, i.e., life-cycle finance. And we can have Larry kind of touch on that. I can say that I've used several different programs out there. So, again, Larry was kind enough to create working with Heather, some scenarios that contemplate various student loan situations and kind enough to use Maxifi to go through that. So, with that in mind, Larry, I will hand it over to you and just let me know when to advance.
It’s a great pleasure to be with you and with Heather and all the participants of the student loans are really a tricky, tricky issue. I mean, Tom is exactly right. Heather's steeped in this, but it's, it's, it's really complicated. It's up there were so security in terms of the details.
So, I just want to say a couple of things, as an economist about how to think about these options.
One is your eligibility for getting student aid for your child. By that I mean grants and scholarships, not to what they call student aid, namely loans. I mean, they call loans student aid, and I don't call them that. That's a cost. To receive grants and the scholarships, you basically must show student need. There is the potential for a merit-based aid, but the calculation is going to start with the student’s financial need. And if the parent has accumulated too much in the way of wealth and too much in the way, it has too much income two years before they actually apply for aid, that's going to reduce their aid. So, there's a big tax on college aid in the form of grants and scholarships. And that means that
it can be this large, it could be that you earn an extra or save an extra dollar, and you end up losing 22 cents of aid for your child over the next four years. So, that's a huge tax on saving, there's also like a 14% tax on earning you earn, another dollar, this year, two years later, your kid gets an award, that's 14 cents lower for that year. If you keep earning that extra dollar, then you're going to lose four to 14 cents each year. So, there's a program that I came across called www.myintuition.org, which an economist named Phil Levine at Brandeis developed, I just learned about this couple weeks ago. And it works with about 70 different leading universities in the country. And you can go in there very quickly. See, hey, if I showed up with more money in my savings account, how much is it going to cost my kid, and if you put money in your retirement account, you can reduce this asset tax dramatically. And, of course, if you earn less income, for whatever reason, or can, let's say not take withdrawals from retirement accounts, a lower AGI. Two years before your kid is in school, and throughout their college period, you can lower their need for, you know, their net costs, if you lower the net costs, that can lower their requirement for borrowing. So, that's why I was going into this, which is, let's start out with how we lower the net cost, and then talk about the borrowing.
Tom’s Tip: Students and parents should evaluate and thoroughly understand the “net price” over 4 years, not one, for any college or university they are considering. The net price is calculated by subtracting any aid or grants (free money) from the cost of attendance. While any school that offers federal financial aid must offer a net price calculator, the accuracy can vary greatly. You want to ask the schools questions like these: How accurate is your net price calculator? Does it calculate the cost over 4 years?
Here is a link to the U.S. Dept. of Education to find the net price calculator for most any college or university: https://collegecost.ed.gov/net-price
So, once you have, you know, the kid in college or grad student in college, or we have all the options that Heather was laying out, depending on your history of interacting with these plans. And it is extremely, as I said, complicated. But let's look at the first slide the economics approach would say to try and get as much aid as real aid as possible, make the costs as small as possible. So, you need to borrow as small as possible. But then the key thing is to try and get the lowest interest rate as possible on these loans. So, this is based on a software program called maxifi.com. And what it does is it takes in the standard inputs of any financial program or take in, but it also figures out the lifetime spending of the household. So, we're going to be thinking about in 20 years, or maybe somebody who's starting out at age 18, and are going to earn a certain amount in college, sorry, in college and after college and the career they're choosing, they're choosing and then they have these loans which are treated in our program, as special expenditures. And the different loans can be set up as different profiles if I use this loan type, what does it mean for my lifetime spending from my bottom line? My discretionary spending capacity? If I use this type, what does it mean for my lifetime spending capacity? So, we'll get to all the taxes and also the loan repayments. It's not automated yet to take into account, the loan. But if you figure out from the loan officer, what the options are, you can just enter them as different alternative profiles in our program if you're running our program, and see what the bottom line, because it's very hard otherwise, to figure out what is more expensive than what then something else, until you really look at this bottom line.
So, let's just look at an example here that ran through the program. Sam Smith, he earns $65,000 and is 30 years old. He's got $200,000 in loans. You can say, well, gee, how did that happen? Well, maybe went to Boston University that has $75,000 in tuition. And he's been borrowing a lot. For a federally, I think the maximum for four years around 31,000. So, he got some other loans. And he might even have had his parents borrow on his behalf. But he knows his parents back under this Parent PLUS, we don't know who the ultimate borrower is. So, that's a big concern I have the kids are getting into more hock because their parents are putting them into hock? Well, it's a real conversation that they're going to handle this. So, back to Same, He owes $200,000 he's got two loans to make it simple, both are $100,000. One's a 3% loan for 10 years, the others 6% loan for 20 years. So, clearly, the return you can get right now on long term treasuries is around one and a half percent. So, paying 3% is bad enough. If you can, if you can only earn one and a half percent paying 6% is terrible. So, maybe there's some value to switching this around, could you say make the 20 year or 10-year loan and a 10 year or 20-year loan by there's a couple ways you could do this, you could try and extend the 10-year loan, make it into an extended loan program.
And then you could also just you could either switch the 30- or 20-year loan into standard the 10-year loan, or I guess you can just prepay that loan more rapidly. And we'll see what this idea of flipping the two loans means. Okay, so here's just to begin with the base plan for the household, keeping the loans that they have the sky fam, keeping his current loans gets to spend 1.85 7 million in lifetime spending from 30 through age 100. And he makes his term that his maximum age life. If he didn't have to borrow at all, if he had no loans, what's whatsoever, he'd be up $247,000. So, you can see that this cost of borrowing this interest rate above the market rate makes these loans more expensive than the principal. And the longer you must pay off the higher interest rate loans are more expensive.
So, let’s look at the next iteration. It just flips the order of the terms of the two loans. So, it makes the 3% loan the 20-year loan and the 6% loan, the 10-year loan rather than vice versa. And this brings in an extra $23,000. It's not a huge amount of money, but it certainly, you know, if he's making 65,000 a year before tax, he's making 45,000 a year after tax. This is like a half a year's net income for Sam so it's not trivial. So, it's worth doing.
So, the next thing I wanted to do was look at a comparison of standard and income-driven repayment plans. Specifically, I am looking at REPYE.
The hypothetical clients are Dave and Sally Fields. They're 27 got two kids five years old. Dave just graduated med school with 240,000 in loans. And this is quite typical of med students if they could have huge amounts of loans. Now for share them a good chunk of them, they get to they go off to work at a nonprofit hospital. And they spent I guess, around 10 years or so they can then have their loan forgiven. So, that's one way out.
But they may get paid less as a result. Anyway, because it's 240,006% rate
So, Dave is going to Sally doesn't work and Dave is going to do a three-year residency $60,000 a year, and then his subsequent salary will be $20,000 a year.
Okay, so the lifetime discretionary spending under these two different ways of repaying. The base plan incorporates a standard 10-year repayment and electronic discretionary spending is the 20-year repayment, the 20-year sorry, I'm sorry, I'm comparing not yet the Yeah, I'm comparing 20-year repayment with 10-year repayment, the base plan is the standard 10-year repayment plan. And the other option is the 20-year extended repayment plan. So, I haven't yet considered the REPAYE option. I'm coming to that in a second. But I want to just to show you that the cost of these things is relatively similar. Well, not that close. I mean, there's about a $53,000 advantage of paying it off sooner. So, that reinforces what I said before about wanting to pay high interest loans off sooner, if you can.
The big concern with both plans is that they don't leave Sam and his wife with enough money to spend when they're in the next three years, because you can see their discretionary spending their living standard for an adult, which is just taking the discretionary spending and dividing by 1.6, which deals with the economies of shared living, they don't have a whole lot for discretionary spending. And then once he gets to his standard job, it jumps way up. So, they're cash constrained quite severely, and clearly extending the loan helps, but it's coming at a cost of what I say around $53,000. So, let's go to the next option.
And the next option is going to this REPAYE plan where you pay 10% of your salary. And he's going to pay it back within 20 years. So, he's going to have there's no forgiveness issue here, which might come up with certain people but not in this case. And you can see that the costs are pretty much the same. But the slide that I should have added to this. But that corresponds to the one you just saw, show that there's a significant improvement in the cash flow, because he's only paying 10%, around 60,000. Because of the repayment is connected to his AGI, and his AGI as low, so during these years, three years when he's in residency, this is helping with his cash flow problem. And so that might be worth it. And he also has the benefit of potentially getting forgiveness, if he doesn't earn that much money as much as he projects, then there'd be potentially failure to repay by 20 years, and then he can get out from under. So, there's that advantage. On the other hand, if he earns more money, while he earns a small amount of money for a while, and then a higher amount of money. And as Heather was indicating this loan balance, which is kind of connected to the standard plan, it's going to keep accumulating. So, there's kind of a separate a bit of bookkeeping, and he has a bigger bill that he has to pay off. So, it's not just taking 10% of his pay, but it's also increasing his balance. So, in some way, this is a risk mitigating policy, but in some ways, it's a risk increasing policy. So, it's not at all clear that this has overall risk mitigation involved in it and, of course, upside risk, having more income, and then having a bigger long balance. Well, you know, that's a bad, bad thing happens in good times. So, maybe it's not so bad. But on the other hand, you must see exactly how much they're taking from you in good times to see whether this is real worth it.
What happens if his wife Sally goes to work?
And now, she goes and earns $100,000 a year, and the college season, the only repayment plan. Her salary gets added to the AGI of the couple, and now she's having to pay 10% of her salary on his loan. So, she he marries her, and he married she marries not just Sam, but she marries his loan. So, this to me seems quite awful.
It means for the couple that they're going to end up paying $200,000. So, they're almost doubling the size of their loan, just by being married. Now, they there are other plans that allow them to file separately as opposed to jointly. But they come with a higher share of your income that they extract. So, these are complicated plans to evaluate. My last word is that the only way we can really see these I compare them, economically speaking, is based on what people get to spend over their lifetime and present value, but also annually, looking at the cash flow issues.
Questions and Answers (55:56)
Great question from John, we'll start with that. Interesting. Should we be advising certain clients to not in all capital letters, not try to pay off student loans, since the Biden administration may do away with them?
So, my theory is that, yeah, I mean, really, right now, it's not the time to take all your life savings and pay off your federal student loans, to refinance your federal loans with a private lender, even at a lower interest rate, because we should at least wait and see what happens here in the first days of the Biden administration, I think it is. And this, I've been gunning for various kinds of cancellation of debt and loan forgiveness for years, this is the first time I actually think there's a real possibility of some debt cancellation, I think it's extremely unlikely that our beat the whole 50 grand that is proposed by Senators Warren and Schumer, I think that could only happen if, and that's only likely to happen or be impossible to happen if the Senate is in democratic hands after tonight's Georgia runoff election. But I think that the Biden administration is likely to cancel some debt, this whole idea of wiping away 10 grand, even it within the absence of congressional action, I think is a real possibility.
So, yeah, I wouldn't advise anybody to be paying off their student loans. You know, right now, I would say, Let's wait and see what's going on in February. Before we do that. I wouldn't just spend the money; I would hold the money to the side. So, that if you need to pay it, and also don't do anything that puts you into arrears, I wouldn't say that's a good idea. Because, you know, if you default on student debt, you're going into financial hell. And, if I were president, I would be letting people borrow the Treasury rate, period. I think that's the best way going forward.
The relief is extended through the end of March, I think you said in your opening comments, you know, does it make sense for folks to continue those that have the means to continue to make payments, you know, try to try to pay down that principal, even if the interest rate is zero? What are your thoughts on that?
Heather: Yes, it makes sense. For some borrowers, I think the way to determine how to direct funds towards student debt right now is to start with a really clear inventory of the student loans. So, to the extent that there's any private student loans outstanding, I would often prioritize repayment of those, even if they're at slightly lower interest rates because of the consumer protections that come with federal student loans. I would also say that, you know, there are many borrowers that have unpaid accrued interest outstanding on their accounts, especially those that are enrolled in income driven plans. So, the first thing an advisor should do is evaluate whether there is any interest outstanding, because if, if I send money to my student loans right now, it will be attributed first and exclusively to my outstanding interest balance and it will reduce the principal balance of my loan unless or until I fully repay all the outstanding interest. So, but yes, Tom, if someone has no outstanding interest or is able to fully repay the outstanding interest and reduce the principal, this is a pretty unique opportunity to, to bring that principle down. And so, if there's truly little likelihood of forgiveness or cancellation for a given borrower, I think that that can be quite smart to do. But alternatively, as Larry saying, you know, if someone has the discipline to just hold on to the money in a safe place, there's no real benefit to paying a loan right now because it's not accruing any interest. You can hold the money in your own account until that interest starts to accrue again and then send it at that moment.
Next from Jolene, Jolene, good to see you on and Jolene. I'll relay this question though; we might need a little clarification. Jolene has a client that as a teacher is on an IDR plan. She is filing married, married filing separate, and versus jointly and says this is this allows her to have her entire student loan be $0, I'm assuming zero monthly payment she has three children? Is this possible that they don't consider the spouse’s income if filing married, filing separately? Does that make sense?
Heather: Yeah, that's that makes perfect sense. And in fact, that does occur with these income driven plans. So, if a person with three children and a spouse because you get to count your spouse in your family size, even if you file separately, so that's like the example I gave at the beginning 150% of the poverty rate is $46,000. So, a person, individual, this married client who's filing separately, could have separate income of $46 grand before any payment was required. And as a teacher, if her payment is calculated at zero, so she's paying zero, that can still count as a payment towards the 120 required for public service loan forgiveness. So, in her role as a teacher, you have to make 120 payments towards forgiveness. But if your calculated payment is zero, then you can be credited for times in which no payment is required.
Next from Victoria, if not married, but living together. Is the other spouse's income included?
Heather: So, you can be living in a household with all sorts of earning people. And if it's not a married person, you know, like, even for example, if an adult child was living with their parents and was financially dependent within that household, that adult child with student loans wouldn't have to count their parent’s income, even if they were being supported by their parent. It's only a spouse and only when you file a joint return under most of those plans except REPAYE.
Larry: I just want to add one little thing to that, which is if you're in a plan that's taking 20% of your salary, and you've got to pay for an open area or something to take care of your kids to daycare, and you've got to pay federal and state income taxes. You may find out that all these things together, you're worse off and not working.
Question: Next from Vicki. If a student has chosen a plan after graduating, but hasn't yet started making payments, can they choose a different plan?
Yes, you can. You can switch repayment plans anytime you want into any other plan that you are eligible to choose. So, the only time that you can't The only limitations to what plans you can choose or how often you can switch would be if you were in a default status on the student loans or if you enrolled more than half time in school, you can't have your loans in a repayment status or you can't select any plan. But yes, you can change repayment plans when you want to.
The important thing to keep in mind, the other point that Heather was making, which is that when you switch plans, that's not that's an opportunity for the federal government to recapitalize your, your loan. So, if you have been, let's say, paying less than the standard plan would say, and now the standard plans balance has been going up, you've been accumulating this interest, it's going on paid. And now you switch to the standard plan or to an extended plan or even a Consolidated Plan, all of a sudden, your principles are going to go up, now they're going to charge interest on the interest in effect was an add interest to the principal and add in charge interest a new on that bigger balance. So, that's the capitalization concern that Heather's raising interest on interest compounding through this mechanism. So, you've got to be careful about switching plans, and seeing if there's ways to pay off, like a longer-term loan. For example, just prepay it rather than I mean, a higher interest rate plan.
Question: If a young person graduated and let's say had a job in 2019, was in a standard repayment plan, then lost their job. Could they then go on an income driven plan while unemployed and later switch to back to a standard repayment plan after, let's say, Google or Facebook or some employee where they made 100 grand a year from now? So, they start at standard repayment, go to income base, and then go back to standard repayment? Is that all feasible?
Yes, Tom, it is but it's important to recognize what Larry was pointing out about switching repayment plans having some sometimes these negative consequences. So, and I'd also like, I think what I'd really like to do is emphasize the relative on importance of switching plans at what is the harder decision is how much to pay. So, your hypothetical as including a situation where someone is earning relatively low amount of money for a while enrolls in the income driven plan to have payment relief so that the monthly payments are affordable, and cash flow still works, then they start making money at Google. So, what should they do? Well, Tom's question implies his knowledge that they should start paying more towards their student loans, because they're able to afford to do so and I agree with that. But you don't have to switch to a standard plan. In order to do that, you can always pay more than what is due you can make extra payments, you can round up, you can prepay with no penalty. And so, switching back to a standard plan is of limited use, in fact, it then it eliminates the possibility of debt cancellation if this person gets, you know, fired from Google later, or, you know, God forbid, becomes unable to work or something. So, the income driven plans are helpful for reasons in addition to the fact that they allow for lower monthly payments than a standard plan. And in fact, the payment is kept right under many of those plans, Tom so that, that there were if they start working at Google would see their payment go up. Under the income driven plan, but it wouldn't go up past where it would have been under a standard 10-year plan. So, they're better off staying in the income driven plan, paying the amount they would have paid under a standard 10-year plan, but not switching to that plan.
Let me just double check on something, if they hadn't paid for, let's say, a couple years because they lost their job, their balance is going to be pushed back up. So, they're going to pay more. It's true, they're not going to make more relative to the new to the center plan based on the new balance, but they will pay more compared to the initial payment plan they were on.
So, that is true. So, certainly, that's exactly right, Larry. So, what you know, what Larry's pointing out to us is that a person who earns more money over time, might have might look back and say, Gosh, I wish I had paid more aggressively at the beginning of my term when I didn't when I was in an income driven plan.
So, I certainly agree that people should not only pay the minimum required under an income driven plan or otherwise, unless they need to, or they have other higher priorities for what to do with their cash flow that they have. Which is often the case, right? Because federal student loans are relatively affordable, their interest rates aren't great, but you know, not terrible, compared to like credit cards and things. And so yeah, you can regret you can regret paying the minimum possible monthly payment amount. But it's not the, it's not to blame the income driven plan for that, in my view, like it's to blame.
Larry: One last important thing, which is on the REPAYE, there's no ceiling on the repayment, right?
Heather: Right, that is true. And that's a risk with that plan because you could have remarkably high payments potentially under REPAYE.
But that's a feature, right? They think it's a feature. Because if you do start earning more money, you should be paying more in most cases, that's often the better thing to do. And but that plan would require you to do so. So, you're right. That's an example where a person in the income driven plan maybe should switch back to a standard plan, but you only benefit from switching to the standard plan. If your payments lower than it would have been under an income driven plan, not higher, because you have to switch in order to pay more.
So, Heather, I know I know you like the calculator from the simulator from the VIN foundation. Does that I've played with that a little bit. Does that allow you to model like the prepayment scenarios like you we were just touching on or not too much.
I can kind of manage into doing a few things, you know, like what I would do in a scenario like you're talking about is start out with the balances and the interest rates in the income and the income driven plans and see where that goes. And then if you want to do a scenario where you say, Okay, well if the income jumps at this point, and then you start paying more, just evaluate what the balance is at that moment in time and then start a new simulation from that point forward. And that's really the only way to do those extra payments for that tool right now.
So, next from Lynn, what happens if you file MFS (married filing separately) and then do an amended return later changing the joint because the tax cost was too much for married filing jointly? Because the tax cost was too much better?
So, it's a little it's a little sneaky, but I don't see anything in the law that prohibits it directly. So, you file a separate tax return used to get your separate tax return as evidence of your income in order to have your monthly payment established for that year.
For the income driven repayment plan, then you file an amended tax return so that you can get the benefits of filing jointly. I know it's obviously it's getting around. It does, it is a loophole to sort of get around the spirit of law.
But it isn't prohibited by anything that I'm aware of. Interestingly, though, we should point out that you're not allowed to amend the tax filing from joint to separate as a married person that's not permitted by the tax code. So, if you get clients this time of year, in your practice, who are who have student loan issues, be the first thing you should tell them is hold off on filing your taxes until we evaluate which way you should do it. Because if they file jointly, you can't do anything to fix that.
You just reminded me of Jantz, Heather's partner in the good cause, i.e. Jantz Hoffman. They have worked together to create a whole designation, the certified student loan professional, a.k.a. CSLP. They have an impressive curriculum to train professionals on how to become true experts on student loans and the various options we’ve touched on. And so again, if you're looking for a resource or expertise, there are a few 150 people I believe that have that designation in various parts of the country. CSLP. Again, I'll put out the website for that. But Jantz, just like Heather, is awesome. And really just as put a bunch of great education together, out there for professionals that can really help clients navigate through these complicated issues. So, the tax perspective may remind me of that.
Questions: Next from Mike. He actually has two questions. I'm going to combine these. First, why have to borrowing dates for eligibility for pay? And then also let me just walk through a scenario Mike has. As a public-school teacher client, who before she became a client was struggling with debt. She consolidated her student loans and did not know about the possibility of qualifying for the public service loan forgiveness. I don't think this is possible. But I'll ask anyway, can she undo or consolidation and reset her payment plan to an IDR in order to qualify for PSL? If so, so there you go. Why don't we start with: Why two borrow borrowing dates for eligibility for PAYE?
Heather: So, that's an interesting one. So, Income-based Repayment was established by Congress. And it's supposed to be Congress that makes laws, as you may recall from your early civics’ classes, right, was that the three branches of government, there was some lack of action on the part of Congress. And so, President Obama during his administration, announced the Pay As You Earn repayment plan, and said that he was going to lower student loan payments from the 15% of discretionary income that was set out by the original Income-based Repayment Plan, the old plan, that he was going to lower those payments to 10% of discretionary income, as Congress had already contemplated doing with an amendment to IVR. But that had not yet taken effect. So, he was essentially fast tracking this reduction in the required payment amount using regulatory authority that is authorized by the Higher Education Act. So, so it was an executive action. And I'm getting to the answer to Mike's question about why two dates. So, it's 2012. And President Obama is campaigning for reelection and is literally on a college campus at the University of Iowa, in the year 2012. And he was speaking to a group of undergraduate students who were gathered there. And he said to the group of undergrads, I'm going to lower your student loan payments, I'm going to make this happen for you. So, then he gets back to Washington and the Department of Education people say like, okay, that's great, Mr. President, but we don't have any budget for this because Congress has not act acted. And so, we're still have the same appropriations we've always had. So, how are we going to lower payments for student loan borrowers? And they did, they determined that they needed to narrow the category of people who were eligible for lower payments. And in determining how to narrow the category of people. They wanted to make those folks who were in the audience that are eligible because the President had promised them, they would be eligible. And they were undergraduate students in 2012. And that's why Mike, there's that section requirement that says you must have a loan from after October 1, 2011. As if you were a senior at the University of Iowa in 2012, you were borrowing in 2012. And you didn't stop borrowing in 2011. And so, what they wanted to do was cut off me and everybody else who had already stopped borrowing by that time so that they could afford to reduce payments for the other cohort of borrowers. So, it's all about narrowing the people who were eligible for pay as you are.
And the second part of the question had to do with consolidating and public service loan forgiveness. So, I think Mike might be referring to refinancing the federal student loans with a private company. If you do that. You can't undo it; you can't make them federal loans. Again, you can't be eligible for public service loan forgiveness. But there's a consolidation loan that is a federal student loan, a Federal Direct consolidation loan, which could have repaid other federal student loans, and direct consolidation loans are eligible for forgiveness. So, she wouldn't have to undo it. She could keep it and just enroll an income driven repayment on the consolidation, loan forgiveness of that loan. It is in fact a federal consolidation loan. So, that'll be the question is did she refinance into the private sector? Or did she consolidate within the federal system?
Question: If I may, I think one sort of relevant question for everybody is, you know, how do all these student loan repayment plans affect the ability of the borrower borrowers to purchase a home? I think that's a question that is on the minds of many.
Larry: Well, this, this has to do with having a complete full lifetime plan that has all your cash flows, because if you need to put down a down payment, you know, like in our software, you can say, okay, in five years, I'm going to buy a house for this type down payment, and this mortgage, then you're going to see that if you pay off your loan rather rapidly, rather than over an extended period of time, you're going to be in much worse, cashflow, shape. So, definitely how buying a house is a good thing.
For sure, it's a safe asset, because if you stay if you're sitting in that, the price can go up and down, you still have the same housing services from that house. So, it's a very safe thing, especially when you're older, to get a new housing, or apartment or condo that you own, but you have to see the whole cash flow story, as well as the level of spending over your lifetime.
Heather: I'll just add that I certainly agree with everything you just said. And I would also say that your student learns from a credit reporting aspect are treated as installment loans so they're not like revolving credit, like a credit card. So, it isn't as important what your balance is, as it is what your monthly required payments are. So, the lenders, when they evaluate debt to income ratio, to assess, you know, their kind of opinion of the prospective borrower, including for mortgages, they consider the required monthly payment, and many borrowers find it difficult to convince the mortgage lenders what their payments are under an income driven plan. Some mortgage lenders will assume you're required to pay 1% of your principal balance, which is which makes sense under a term repayment but doesn't make sense under an income driven repayment. So, people must get official letters from their loan servicers that indicate what their required monthly payment is and often must be more hands on with the underwriter in terms of establishing you know, what they're required to pay on the monthly.
And student loans can in fact help people build good credit over time, if they make on time payments over a period of time or the opposite, if they're late in their payments, and they have a bad history with student loans that can affect their ability to borrow at good rates after that, so those are the essential ways that it factors in but mostly just in a monthly cash flow type of aspect of what you could afford on your mortgage payment.
One last question from Cindy. She has a client who works for a municipality was on a plan to have the loans forgiven after 10 years of payment. He has eight years of qualified payments so far, but will we struggle? I'm sorry to restart paying the full amount in February, assuming that's a restart date, what options does he have?
Okay, so what I understood was that this is a person who's on track for Public Service Loan Forgiveness has been making payments and credit for those payments, and is and so during the period of what I don't not sure I understood from the question, Tom, is, is this person still employed in this public service job? Did they have a reduction in their income?
Based on Cindy saying that this person's going to struggle to make the payments again. So, they could update their income information with the student loan servicer so that their payment amount could be recalculated. Now, if they're struggling because they don't have their public service job anymore, then. So, they can postpone making payments entirely just enough, if they've lost their job, you just update your income and say, I'm not making any money, I can't pay anything. And they say you're right, you can't, your payment is now zero. That doesn't, that doesn't wipe away the progress towards public service, loan forgiveness, but it also doesn't continue to progress and towards the, towards the 120 payments. So, we'd have to go back and be employed and public service again, to complete that.
So, that’s a great point, Heather, and a good reminder. One of the things I again, I've learned in the last couple of weeks, as you know, there's an annual certification that's involved for these income-driven repayment plans. But if your circumstances change at any point in time, guess what you should reach out to your loan servicer. If you have any issues like this or a change in circumstances and look to do that certification, mid-year, whatever whenever right now if you have these issues, but make sure you press your loan servicer to present any and all options that are available to you. That's again, one of the things that I've learned from all the research and listening to you, Heather. So, that's a great point.
Tom: Heather, so great to have you again. And I am so thankful everyone is so thankful and really excited for brighter prospects ahead for you and for everyone this year. So, thank you so much. Thanks again.
Heather: Have a great one. Thanks, everybody!
Tom: If you have any questions or I can be of any help, feel free to drop me an email: firstname.lastname@example.org