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College Planning Update
188 Plays2 years ago
In the wake of some significant changes the government made to public student loan programs in July of 2023 (with more to take effect in the future), resident student loan guru Arron Cramer is here to talk us through it.
We'll talk about the changes to the various payback options, the impact of consolidation on public service forgiveness, and the inflation-relevant modification to how the payment amounts based upon income are now calculated. Plus, examples and tips on how to sort out the confusion and find help when you need it.
Recommended
Transcript
Introduction to Uncommon Life
00:00:00
Speaker
Everyone dreams of living an uncommon life and the best asset you have to achieve your dreams is you. Welcome to the Uncommon Wealth Podcast. We're going to introduce you to people who are living uncommonly. We're also going to give you some tools and strategies for building wealth and for pursuing an uncommon path that is uniquely right for you.
00:00:26
Speaker
Hello, and welcome, everybody, to an episode of the Un-Commonwealth podcast, where I'm your host, Phillip Ramsey. And I'm Aaron Kramer. Thanks for tuning in. We have a fun update podcast, which is Aaron and
Understanding Student Loans
00:00:39
Speaker
I. We're talking about student loans, the updates that the government has gone through, as all of you know, or maybe you don't know. So let me just remind you, Aaron is amazing at student loans, trying to figure out what programs you should get on.
00:00:52
Speaker
type of different things. Also, how does it all integrate with a financial plan? So Aaron is kind of our resident expert in this. He has a designation. He's got the alphabet soup in the back of his name. Aaron Kramer, everybody.
00:01:05
Speaker
Thanks. I definitely don't like the alphabet behind my name, but I guess it's needed. You've helped a lot of people get out of debt. And it's like life-giving when you have a plan for thousands upon thousands, maybe even hundreds upon thousands of dollars in debt for student loans. And so one, the work that you do is helpful. And two, I love that your approach on this is just to educate people.
00:01:31
Speaker
And we had a conversation yesterday with two clients and you said, listen, my job is to educate you on all your options. So if you're around a campfire and somebody was talking about their student loans and how much they got forgiven and you didn't know that you'd be upset at me. So I just need to tell you what they are. And then you can decide if you want to use them or not. But my job is to educate you, which I thought was so perfect and approachable. And that's kind of like a commercial for how we work because we just don't really
Implications of Loan Forgiveness
00:02:01
Speaker
sell.
00:02:01
Speaker
we educate uh and then we really like to serve people and so that's what we do here at uncommon wealth partners if you don't have any student loans you might want to just skip this episode all together maybe not i don't know you might just want to have as much content as erin and philip as you can get then uh be my guest listen to all this if you want to know what the government's doing with our tax dollars
00:02:21
Speaker
It could be kind of interesting because this is a huge component of the government's debt is student loans. Yeah, it's one of the top ones. I don't want to say it's the biggest one, but it was at one time, but I know it's one of their biggest income
00:02:41
Speaker
Yeah, driving from the United States portfolio is student loans. And so when they are talking about forgiving these things, like you got to really pause because they're at one point it was the biggest asset on the government's books, meaning it was helping them most with cash flow. So forgiving them is like having a truckload of
00:02:59
Speaker
debt on your credit card payments and be like, you know what, let's just not worry about it or just jack it up even more. Like, so it's just really interesting when you talk through this stuff. So I do think there is wisdom in here for everybody, even if you don't have student loans, but you have my green light to pass if you want. That's fine. Yeah. If, if you think, you know, just please no way that I'm not trying to make this political, but like people when they're starting to iron about forgiving student loans do step it back and think like, like Philip was saying,
00:03:30
Speaker
you know, this is a huge income from them. We just printed more money than we ever had before the past few years. But also it's like, the thing about too, like, what are they going to do for the next generations that were, you know, we're in, you know, schools more expensive than it was for the ones that they're forgiving. Right. You know, so that's not fair at the same time as well too. So it's a lot more complicated than people think, but
00:03:53
Speaker
Yeah. And so if you think about my analogy, you have a, you have hundreds of thousand dollars on a credit card, your interest is through the roof and you like walk into your part-time job or full-time job and be like, I quit. Like it's not going to be helpful for paying back that debt.
00:04:09
Speaker
No. So that's kind of what they're talking about when they forgive things. It's just like you're cutting off cash flow that could have been. So there's implications.
Updates on Loan Programs
00:04:19
Speaker
So, Aaron, when did they update this and how often do they update things like this? They don't update these things all that often.
00:04:29
Speaker
So they've updated it and everything went into effect. That was going to do it in July, July 2023. Yep. So, uh, but also the new things, I think won't go into effect again here until.
00:04:48
Speaker
Maybe next year, I don't have the exact date on that, but like I know some things went away. A lot of this is going into effect. It went into effect here this last July. Okay, good. Okay. So let's talk about all these updates and then kind of maybe at the end, a strategy that you have used in the past.
00:05:10
Speaker
in order to help clients get rid of their student loans in a manner that's good for them. Yeah. So real quick, if you guys are new to listening, I know we've done podcasts on student loans before. So what we're going to be talking about is the government aid that they have give you on your student loans. So if you have private student loans, this does not pertain to you.
00:05:38
Speaker
Not the private, not the private loans. These are just the government loans. So for the most part, the new new loans coming out are pretty much all government. Am I right? No, not the new ones. Just like you get private.
00:05:53
Speaker
So as much as like when you fill out your FAFSA, which depends on whatever you take out. So I just met with a young gal a couple of weeks ago. She had half government, half private. Okay. So you're talking about just your government loans. Just your government loans. And then with that, like if you ever get somebody just a little quick tip, sidebar comment, if everyone, if anyone starts telling you you need to refinance to private loans, be real cautious of that.
00:06:20
Speaker
So, yeah, cause the government has done a lot to like help you make things affordable and give you a lot of options. But anyways, to start out, one of the major things they did change is for your public service forgiveness. So that means if you are a teacher working in the public schools or you're a doctor working in the public sector, public hospitals, some sort,
00:06:50
Speaker
before on the old programs and the old regulation, you could not get credit for loans that didn't, like that weren't on the plan. And if you were to, then if you were to like consolidate your loans, you would lose, if you consolidated, like I said, the loans that weren't on the payment,
00:07:14
Speaker
with loans that were on a public service forgiveness track, you would lose all your credit. Ah, that's frustrating. Yeah, it would be frustrating. So they have changed that now. So if you had $30,000 in loans that were, they were on track, you made 60 payments to your 120. And let's say you had another 30,000 that didn't get put on that.
00:07:39
Speaker
Um, and you wrapped those into your payment plan, you would now have 30 payments credited to you. So you lose 30, but they're going to take the average and at least you're going to like not lose everything. Right.
00:07:54
Speaker
Okay, so let me articulate what I just heard. Like in the past with these government programs, you had to be signed up or like telling them that you're on this path. Yeah, you have to apply. You got to apply. And so the new ones, if you didn't apply for all of the
00:08:13
Speaker
loan forgiveness, you can get some of those kind of credited back to you up to 30 payments. Yeah, this is going to take the average. Okay. Yeah. Let's try to do the easy math, like 30,000 and 30,000. If you had 60 payments towards your 120 completed, but your other 30, you had nothing. Your average there's going to be 30. Okay. So
00:08:37
Speaker
So that's good. Still like do know that you have to do your math to make sure that's still good. Cause sometimes it, maybe it's better to like finish it out and get the one on the new track instead of like trying to like lump it all together. Just reach out to Aaron.
Exploring the SAVE Plan
00:08:51
Speaker
You'll figure it out for him or somebody. Yeah. Otherwise the other big changes are going to be the fact that pay as you earn plan.
00:09:03
Speaker
is no longer eligible or gonna be around now for anybody new that's gonna be applying. Oh, interesting. Yeah, so if you are on it now currently, you're fine. You're a Godfather to any, you can keep on it, which is good. The big loss here with the pay as you earn plan is that was a 20 year track. So if you qualify for that program and you have grad classes,
00:09:33
Speaker
Uh, you had it in 20 years and they were gone forgiven, right? Whereas the other one's 25. Okay. So that kind of sucks. And then I, you also, if you were, uh, if you wanted to do, if it worked out, this is rare when it does, but if it did to file taxes separately, you could exclude your spouse's income from your income.
00:09:59
Speaker
And that that in itself has been taken away from a lot of programs Now so too so Anyways, well, no, it hasn't been taken away. It's actually been added in so but that was one of the ones you couldn't do Do that with but now you it's taken away so you can't do it okay, um
00:10:23
Speaker
All right, so now let's get into the fun stuff. The government did make some good changes, we'll say, but now it's the new revised page you earn payment plan, which I think they're calling it the SAVE, the SAVE Plan.
00:10:39
Speaker
Yep. I've heard that. Yep. So the new update is, so we make the calculation off of what your payments going to be. We take what your income is gross income, a hundred thousand dollars, a hundred thousand dollars. Uh, and we'll take what, you know, if you've contributed to any retirement plans that deduct your income, things like that would take your family size into play. And that is going to be the big one. So like we take that and we get times that by the poverty line.
00:11:09
Speaker
Okay, so if you're a single household, we would take you times one and a half, take that number and we can subtract that from your income to give you your discretionary income. Wow. So in the past, it was 150%. So what we got to do, so I think like that one and a half, right? Yeah. The new one is 225%.
00:11:36
Speaker
Oh wow. Yeah. So if you're a single borrower, this could increase you from as a single borrower to increase you from 20,400, uh, to subtract to 30,500 to subtract. Okay. And they're, they're just trying to figure out how much you actually have in order to pay your loans back. So the new save pays your earn. You could have potential to have less,
00:12:04
Speaker
that you'll have to pay back because your number that they're seeing as discretionary will be smaller. Yes. Which I think is good because inflation is real. It's real. Now, if you have a family of four in this example or given, you would in the old system, I have it as at 150%, using that you would be able to route 41,600 towards your income.
00:12:30
Speaker
Okay. With the new 225%, you would be able to subtract 62,400. Okay. So let's just pretend that you had a hundred thousand dollars coming in and you had a family of four and you have the $62,000 going up. So now you have $38,000 is like your potential income for your pay as you earn and pay back your loan.
00:12:54
Speaker
So you can see how it's going to be a lot smaller of what you owe back in your loans. And your big thing on this play is to try to get them forgiven at the end of the rainbow. Am I right? Yeah, it was in the past. Now it changed a few things where that's that's not the full play. That's okay. Okay. Get to that. So let's keep going. I'm sorry. I put the cart before. Oh, you're good. That was a good like for site thing to see here. So yes. So we go say like that same.
00:13:24
Speaker
thing you were talking about, like if you just, if you make a hundred thousand dollars, you have family for maybe $38,000. Now, like what you do and how do you get your calculation as you take that 38,000 time, 10% of that would be your yearly payment. Okay. So you divided by 12 to get your monthly payment, right? Yeah. If you just have undergraduate loans now, it's no longer 10%, it is 5%.
Changes in Payment Plans
00:13:51
Speaker
Oh wow.
00:13:53
Speaker
So they've decreased it out for you. Now, if you have graduate loans that did not change, your graduate loans will be 10%. Okay. I see. I see. So it depends on undergraduate or graduate. Yep. So on that top one, if you have $38,000, 10% of $38,000 would be 3,800 divided that by 12. That's $315 give or take a dollar or two.
00:14:18
Speaker
that's how much your monthly payment would be. Now, if it was undergrad, you would owe half of that because you only owe 5% of that $38,000. Am I doing the math right? You're doing the math right if it was black and white like that. But unfortunately, if you have graduate loans, you probably might, you possibly have both unless your parents paid for your undergrad or not going to pay for your grad. So if you have both, it's going to be,
00:14:43
Speaker
a weighted average between the two to come out with your percentage of what your payment will be. Okay, so it won't be the highest, it won't be the lowest. Yeah, so they'll take your payment off of your undergrad loans, and then they'll take your payments of 10% off your grad loans, and then they'll do the average weighted between the two, and then that's what your payment will be. Okay. So it still gets better, right? Yeah, I think it's helpful. Yeah, and then for anybody that's like on the forgiveness route,
00:15:14
Speaker
Uh, if you're going to get your loans forgiven here in the next two years, it is tax-free. That's huge. Yeah, that's huge. If somehow you got onto one of these programs prior to that and didn't switch because more or anything, which I don't feel like there's going to be too many of them. But if you are planning on getting forgiveness after 2025,
00:15:38
Speaker
Which the majority will. Yep. That will be taxed. Make sure you're saving for that big tax hit. Yeah, so let's say you've had $200,000 of student loans. By the end of it, when you get done with it, there's still $100,000 left. That all gets forgiven. But then it goes on as income for that year when you have got that forgiven.
00:16:00
Speaker
Yes. So you have to save up for the taxes that you will be assuming at that time that those loans are forgiven. Yeah. And in the old system, like you got to think about if you have a really low payment, like the government and the old interest subsidy treatments, like the first three years and the revised page yearn or page yearn, like the
00:16:26
Speaker
Department of Education would pay for whatever you didn't make up. So let's say your payment was $100, but your payment was $30, but you had $100 in interest, then that $70 would get, you know, they would cover that for the first 30 years. Then they'd cover half of it for your subsidized loans, but nothing of your own subsidized loan.
00:16:52
Speaker
Okay. So I guess, but like you can see over a 20, 25 year period that that can start adding up pretty quick. You're right. You get to the end of the 20 years. Like you had a hundred thousand dollars in student loans. Well, by the end of the 20 years, like you're getting forgiven like 200, 250,000, but you got to pay taxes on, right? Right. Also that threw in a wrench for people that like
00:17:18
Speaker
you know, maybe didn't make, don't make a lot of money when you come out of college, but you're going to end up making a lot of money. That makes it a problem. Like, do I get on this program or do I not? Right. I think that was a lot of times what I heard of with all this stuff is like, they were just confused. Like, do I do it or do I not? It kind of is a big deal, but I don't know if I'm going to do it. Like majority of people. And so a lot of times, let's just be honest analysis by paralysis. They didn't do.
00:17:43
Speaker
Anything. Yeah. Well, then it's like, oh man, like, yeah, if you came out of school and he made 40,000, it made sense. But then like, if you're going to end up making $150,000 in the next five to eight years, well, man, now your payments, you know, you're making, yeah, going up. And then like, you should have just like stayed on a normal program, but
00:18:07
Speaker
Um, this is where the government that I think that it really did a good job in this. So now borrowers, um, who are making payments, your interest is not charged to you at all. So it's not going to accrual. So that's huge. Yeah. So that's the nice thing. So meaning like, if you got a hundred thousand dollars and student loan debt,
00:18:35
Speaker
And you're on the new revised page, your own plan, it will stay a hundred thousand dollars. So that's good. I mean, so you can get on a payment plan and.
00:18:49
Speaker
10 years down the road, you didn't make a lot of money, you just need to pay it off, because that's what makes sense. You don't have 200s in there, you still have 100s in there. Yeah, right, because these payers you earn, the problem is that you might not even be covering majority of the interest.
00:19:05
Speaker
Yeah. And so that's a huge problem when you go to the balance is growing, right? It's not ideal, not ideal. So, okay. That's a huge deal. I think for a lot of people and then that makes, that means also like a lot less money needs to be saved up to pay that tax bill. Okay. So I think that's really good. Good point. Um,
00:19:33
Speaker
That will significantly decrease your tax liability at the end of your 2025 years.
New Forgiveness Rules
00:19:38
Speaker
The other big change was, as you can see with that change, it really helped people that had a lower balance if they should jump on this or not. And so they, with that, this change of not like not having the interest be subsidized into your overall payment, it really helps a lot. Good.
00:20:03
Speaker
Right. That's a pretty good overview of the changes. I think, I mean, there's a lot of things that just comes to knowledge. Once you know it, you can, you can have, you can do your best. You can make your best decision, but so that's good. So, um, for your lower balances, like, I don't know who this would have to hit people that like you got student loans taken out and you made very little money. But if you have less than $12,000 in loans,
00:20:33
Speaker
And you get on a program, it can get, it can get forgiven after 10 years, even if you're not public service. Under 12. Under 12. Okay. So let's talk about like a patient type, unless you have other changes that we need to talk through. No, here. Okay. So like that's the thing. So for you guys going, going forward for these plans,
00:20:54
Speaker
Anybody that's looking to get on a plan now, I'm going forward.
Repayment Strategies
00:20:57
Speaker
The two big ones, like I know us advisors will probably be breaking down. It'll be the income based repayment plan, the new for new borrows or the revised page, you earn the new version because, um,
00:21:11
Speaker
There's some differences there, like the 150% to the 225%. But you got to remember the revised page earned does not have a cap. There's no cap on repayments. Like you end up making $500,000.
00:21:26
Speaker
a year, your payment's going to be there, right? Yeah. It's coming up with you. Yeah. Whereas like the IBR plan, there is a cap to your payment. Okay. Good. Okay. So if you're completely confused, um, I think one reach out to somebody who knows, cause it's, I mean, obviously nice to just understand this stuff and then you can make a informed choice. That's all we kind of want to do. So tell me this, if you have $50,000,
00:21:53
Speaker
and you are coming out of school, have some, you know, masters, have some graduate, but you're gonna be making around 200,000. What would you advise them? Ooh, if you're gonna make $200,000, my thing is like, you're gonna go to the good old Dave Ramsey and- Debt snowball. Because that's a good point that a lot of these people don't have just one debt. They don't have one loan. It's like 17 added on top of it, $5,000 a pop.
00:22:22
Speaker
or whatever, or less. So it is nice to just be able to put a little program together to the old, my uncle Dave Ramsey approach, which is an uncle, and then just start zipping through those. So that's a play. But if you want to change that scenario up, yeah, let's change it to change. You have $50,000 in student loans and you make 50,000, you know, and then maybe I'm going to start making a lot more money one day.
00:22:50
Speaker
Yeah, I would go on your, the revised, I'd look at the revised page, your new plan. Yep. So cheapen it up. Cause you know, you're new, you're out of college, right? Like, so I mean, everything sucks. You're a parole officer, which is hard enough. You know what I'm saying?
00:23:09
Speaker
Get either get your payment where it's more affordable for you so you can pay all your bills. Yeah. And buy groceries and stuff like that. But your overall debt is not going to grow. I like it.
00:23:23
Speaker
Okay. I like it. I think we've kind of talked through all that. Anything else in closing that people should, or like you implore for people to do this because it is a big decision. Like there's, this is real debt. Uh, and it does take some strategic planning in order to see which one and the best way to repay
Strategic Planning Emphasis
00:23:41
Speaker
it. It's always like use resources. You like go to the, there's.
00:23:45
Speaker
was it federalloan.gov? Go there, start inquiring, reading up on it, reach out to somebody. It doesn't have to be us. Just find somebody with a CSLP designation because that means we have to do CEs every year. It's annoying. It's helpful when there's changes.
00:24:02
Speaker
Yeah, but like, I mean, that designation is meant like is for financial advisors. So like we're looking at more than just your student loans because things can look super simple and like self-explanatory and you're just looking at one thing, but when you start adding other pictures in there, it can change things. It's good.
Conclusion & Call to Action
00:24:19
Speaker
Okay. Well, you just got the updated on the revised college savings plan. Yeah. You've been listening to the uncommon wealth podcast. Thanks for taking your time. Hopefully you got something out of it. And until next time.
00:24:32
Speaker
Figure out a plan. Yeah, figure it out. Get it done. Get it done. That's all for this episode brought to you by Uncommon Wealth Partners. Be sure to visit uncommonwealth.com to learn more about our services. Don't miss an episode as we introduce you to inspiring people who are actively pursuing an uncommon life.