Over the last several years, I’ve come across a lot of negative opinions about (federal) student loan forgiveness. Not just the ‘Oh well, you signed the loan paperwork so you are legally obligated to pay it back’ sort of pushback…..although that makes up a good portion of it. There are also those that say that student loan forgiveness is a scam….or that you’ll be bankrupted by the tax bill….etc., etc. And just a lot of misinformation in general.
Now, I am not a personal financial planner. But I am someone with student loans. Over $200K worth of them. Nope…that is not a typo. And the balance keeps growing and growing and guess what. I’m not worried about them in the least. I’ll get to the reason why in a bit. But first, I want to link this article which is from a personal financial coach. And she pretty much gives the exact opposite end of the spectrum compared to what I will share. I’m not saying that she is wrong….just that I have an entirely different take. I actually commented on her blog post, but my comment was marked as spam. So I will share my comment in the hidden area below — to safely document my response to her article.
Click here to read my (unpublished) comment
Full disclaimer. I am far from being a financial coach. My personal finances are pretty much a dumpster fire in fact. But I disagree with a lot of the conclusions in this post. I have over $200K in student loan debt. I took out my first student loan back in 1997 and I’ve had my loans sold, consolidated, moved, etc. The sentiment of ‘you borrowed it….you should pay it back’ I get. But, there is a ton of inequity out there in regards to the access to college education and the aid programs that are available. I graduated at the top of my class. I had the maximum need based aid awarded to me thanks to being raised by my retired grandparents who had minimal income. They barely could scrape by and pay for necessities, so I borrowed the maximum amount I could every year I was in school so that they wouldn’t need to have the stress of paying for my college. I also worked 3 part-time jobs and ultimately ended up dropping out due to costs. The ONLY way I was able to finish my BA and later my MBA, is that I was in a car accident and got a decent settlement and was able to pay enough to get my loans out of default and be eligible for financial aid again.
The crazy thing is — IF I could do turn back the clock; I would have switched my guardianship/residency to FL where my Dad lives. Because there, a student with my student profile would have received free tuition at any public university in FL. But anyway..that’s neither here nor there. I went on to work at a public state university. I saw first hand that the colleges feel little to no responsibility to keep tuition affordable. Quite the opposite. They increase tuition in the vein of ‘staying competitive/attractive’ among the plethora of other colleges that offer state of the art recreational centers; dorms and on campus eateries. Then couple that with reduced funding from the state for higher education. The students are left footing the bill.
In regards to Public Student Loan Forgiveness — the program has been plagued with problems. But lots of improvements are underway right now. Check out the reddit on the program and people post every day that their loans are being forgiven. (https://www.reddit.com/r/PS… The jobs don’t have to be low-paying or in bad areas. I worked for a local planning commission and now work for an intermediate unit and both jobs qualify. Just about any non-profit employer qualifies (unless you are clergy). Also in regards to the tax bomb, any loans canceled up until 2026 are exempt from that. After 2026, unless something changes in the tax code, you can still avoid if you are considered insolvent by the debt amount. More details on that calculation are discussed here: https://thecollegeinvestor…..
Anyway, I obviously have personal bias on the issue. I don’t deny that. While it is true that full fledged student loan forgiveness can be yanked away at any time, I am thankful that for the past 10 years (since I earned my MBA and went back into repayment the 2nd time around) my payments have been very manageable (< $100/month) due to the income based repayment plan. I only have 3 years of public service work under my belt and personal circumstances (namely the lowish pay) may push me out of that sooner. Especially if my business venture takes off. Either way, I am 7 years from forgiveness if I stay on PSLF; or 14 years if I just stay on IBR. That very sad part to me is the spin on the student loan forgiveness topic makes students out to be the enemy. But the truth of the matter is, if there were more investment on the behalf of the government (mostly state governments), then student loan balances wouldn’t be so high. So here the federal treasury is essentially paying for the inadequate fiscal support of higher education from the states.
Whew – I know that I covered a lot of ground in that comment. But I feel that it needed to be said. There are not a lot of truly low-income bloggers out there. So I feel like many of the bloggers and content creators online are speaking from a position of privilege and to a privileged audience.
Ok, let me get off of my soap box and get back to student loans.
Student Loans Are A By-Product of American Higher Education
Harvard University was founded in 1636….140 years before the United States even existed. Since then….up until 1958, if you didn’t get couldn’t pay for your college tuition or, if you didn’t secure a scholarship or a sponsor to pay your college tuition, then you just didn’t go to college.
It started off as a great effort. A decade before, the federal government was already assisting veterans with things such as buying homes and paying for college. So why not expand these programs to the general public….especially low and middle income families who wanted to pursue higher education and use put it to use in the country’s rapidly expanding post-WWII economy.
Then in 1976, legislation was passed that exempted student loans from being discharged in bankruptcy. With that stipulation and then the power to levy things like personal income tax returns, the barriers to take out a student loan where mostly removed. So while this is great for access (I was able to be approved for a student loan, without a co-signer, for tens of thousands of dollars at age 18 with only a few thousand dollars in income). It is a debt that will essentially follow you for the rest of your life.
Why Are Student Loans Even Needed?
Well, quite frankly, because college is entirely too expensive. In the United States, we have 3 major categories of colleges/universities:
- Public Universities
- Private Universities
- For-Profit Universities (the previous 2 are ‘non-profit’
Public universities, in theory, are the higher education equivalent to public schools. They receive a part of their operational budget from the state. That is why many times, they have two different tuition rates; one for in-state residents, and another for out-of-state residents. In the past, public universities didn’t charge any tuition to in-state students. Today this is still true for some community colleges and public institutions in New Mexico.
Unfortunately most states have decreased their contributions to public universities. The response of these public universities is to raise tuition. The most important thing to understand is that the variables involved with state-funded money vs. tuition vs. endowment varies a lot from state to state and even from university to university. For example, in-state tuition at the University of Pittsburgh is currently $19,679; while in-state tuition at the University of Florida is $6,381. Both are research level, Division I schools that offer bachelor through doctorate degrees.
Private universities are not (directly) supported with public funds. Generally speaking, their tuition levels have always been higher, on average, then public university tuitions. But the also tend to have large endowments, more selective admissions, and a tighter network of alumni. Whether or not the increased cost of attendance is worth it is up for debate. However many private schools have more comprehensive financial aid packages than public schools. For example, if a student’s household income is less than $65,000, then Princeton will waive 100% of the tuition costs.
For-Profit universities, have received an incredible amount of bad press. They really are companies/corporations that are in the ‘business’ of higher education. You can still take out a federal student loan to attend them (and they often offer very little in terms of grants or scholarships to needy students). What for-profit universities do offer are options. They were pioneers in the realm of online education. They often offer classes in various locations that are accessible to working professionals. They also offer many degrees and certificates that are not commonly found at non-profit universities.
Take the information above….and couple that with the fact that college has become the new de rigueur in the professional job world. It leaves low and middle income families and students in a terrible predicament. In fact, Black women, who have some of the greatest higher education attainment rates, also have been especially burdened with student loans.
Income-Based Repayment is a Start; Forgiveness is the Goal
In 1994, there was a plan put in place called the ‘Income Contingent Repayment’ (ICR) plan, that would consider your income in regards to calculating your student loan payment. Today, there are quite a few income-based repayment plans that range from 10-15% of your discretionary income.
This is especially crucial for people who never earned a degree/certificate….but who have student loan debt. I was a college dropout. I had $60K in student loan debt and was making like $24/year. I defaulted because I couldn’t afford the $300/month student loan payments (although looking back, I wonder why no reps offered an income-based, or even hardship forbearance). Yes, you want to take care of your obligations; but you also need to survive.
The End Should Be In Sight
So here’s the truth; based on my current $50,000 (+ a teeny bit more, but not much) annual income…..it would take me forever to pay off $200K. Why? Because my income is my household income. The money I make has to cover every expense that anyone in my household incurs. It is what it is. Yes….I could have majored in engineering. Yes….I could try harder to go out and find a husband with a nice income. Yes…I could have choose to not have any children. All that is true. And all of that is pretty much saying that my own personal desires do not matter. That because of this student loan debt (that I probably wouldn’t even have if I had my Dad, a FL resident, as my guardian instead of my mother, a PA resident) that I have. In my 20s I lost sleep and stressed out incredibly over my student loans. And guess what? It didn’t make them go away. 20 years later I am still there. I get on the phone and online and manipulate and consolidate and re-certify…anything to not make the loans go delinquent. And I’ll keep doing it….for as long as it takes (which for me should be 7 years or 14 years….depending on some choices I make in the near-ish future).
Dispelling the Myths about PSLF and the ‘Tax Bomb’
In the comment I shared above, I talked about pushing aside all of the naysayers about PSLF and incurring a big tax bomb upon having your student loans forgiven. I’m telling you…..do not buy into the negativity. #1 – people are getting Public Service Loan Forgiveness (PSLF) every day. The low success rates in the past were because people did not have their student loans in the correct loan type. Since the pandemic there has been a massive effort to get student loan borrowers up to speed. So go here to the PSLF employer look-up tool; see if your employer is listed. If they are, reach out to your loan servicer before October 31, 2022. For all of the months that there have been a moratorium on student loan payments due to the coronavirus pandemic, those months count towards your overall payments. This is amazing – because that is 29 months and counting of ‘free credit’ towards a forgiveness program that only requires 120 monthly payments.
As also mentioned above, do not lose any sleep over the tax bomb that will come your way once your student loans are forgiven. #1 – any loans forgiven before 2026 will be exempt from it (although there is a chance that will also be extended). #2 – even if it does apply, under the rules of the current tax code, you can still possibly avoid it. Why? Because the concepts of phantom income and insolvency.
This will be a (very) quick & dirty explanation of what is going on here. Phantom income is income that is recognized by the IRS — but that never actually came into your pocket. Business owners are familiar with this….because if you have partners in a business…they all are liable for their share of taxes made against the business’ profits…even if the profit was never paid to them. In business, there are several workarounds to use so that the partner doesn’t have to pay taxes (like putting the money into a qualified retirement plan). Forgiven student loan debt is a type of ‘phantom income’ .
Insolvency is when your liabilities (debts) exceed your assets. You’ll have to consult with a tax professional (wink, wink) to determine what those are in your particular case. But let’s put out a hypothetical scenarios:
| Assets | Liabilities |
|---|---|
| Checking Account – $2,000 | Federal Student Loan – $70,000 |
| Car – $8,000 | Private Student Loan – $65,000 |
| Personal Stuff – $5,000 | Credit Card Debt – $10,000 |
| 401k Value – $45,000 | |
| Total Assets – $60,000 | Total Liabilities – $145,000 |
Insolvent! $0 will be taxed!
Why? Well first, see that your total liabilities are more than your total assets. They are. Ok…by how much? $85,000. How much was the amount of the student loan balance that was forgiven? $70,000. That is less than $85,000 (the total equity gap). So there is no ‘phantom income to tax.
| Assets | Liabilities |
|---|---|
| Checking Account – $2,000 | Student Loan Debt – $170,000 |
| Car – $8,000 | Credit Card Debt – $10,000 |
| Personal Stuff – $5,000 | |
| 401k Value – $65,000 | |
| Total Assets – $80,000 | Total Liabilities – $180,000 |
Partially insolvent! $70,000 will be taxed.
Why? Ok, let’s see. Liabilities are more than assets. Yes! Ok, what’s next. The difference is $100,000. Uh-oh. But the amount of the student loan that was forgiven is $170,000. That total is more than the difference in equity…, so you have $70,000 in phantom income that is subject to taxation.
| Assets | Liabilities |
|---|---|
| Checking Account – $2,000 | Student Loan Debt – $10,000 |
| Car – $8,000 | Credit Card Debt – $1,000 |
| Personal Stuff – $5,000 | Mortgage – $90,000 |
| 401k Value – $95,000 | |
| Total Assets – $110,000 | Total Liabilities – $101,000 |
Not insolvent. $10,000 of forgiven loan is taxable (100%)
Well first things first — the liabilities do not exceed assets. So ‘insolvency’ would not apply at all. But the student loan is also only $10,000. Your ‘tax bomb’ would be, let say (at the high end) 25% — so $2,500. Put that on an IRS payment plan and keep it moving.
Conclusion
If you scrolled to the end because this post was entirely too long and rambling, that is totally fine! But there I two big takeaways I want you to keep in mind:
- You cannot get blood from a stone
- Education is always a worthwhile investment
Indebted and struggling student loan borrowers are collateral damage from a broken higher education system. Capable people who want to pursue a college education that will improve their standing in life should not have to take thousands upon thousands of dollars in loans in order to do so. If you are struggling with student loans, it helps to know that federal student loans have some of the most favorable terms in regards to repayment plans….so please (please) reach out to your loan servicer and tell them you need some relief. In the meantime, keep supporting those legislators who say that they recognize student loans as being a problem.
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