Written by: Saki Kurose, CFP®, CSLP® | Omega Wealth Management
The federal student loan repayment programs have always been complicated. The limited-time rule changes announced by the Department of Education in 2022 allow many borrowers to get their loans forgiven right now or get closer to forgiveness. However, the rule changes also brought confusion, creating opportunities for advisors to provide great value to their clients with federal student loans by knowing what to look for. You may be able to help your clients get thousands of dollars (even tens or hundreds of thousands of dollars) of their federal student loans forgiven in 2022. Here are three questions that will help you figure out who can benefit from these rule changes.
1. Do you have clients with federal student loans?
On October 6. 2011, the U.S. Department of Education (ED) announced a change to Public Service Loan Forgiveness (PSLF) program rules for a limited time. Also, on April 19, 2022, the ED announced more changes to the Income-Driven Repayment program that could help more borrowers achieve forgiveness faster. Both of these rule changes are temporary and are only available to borrowers with federal student loans.
If you have any clients with federal student loans, such as Direct Loans, Federal Family Education Loans (FFEL), or Perkins loans, they may be able to receive credit toward forgiveness or get their entire balance forgiven this year.
For example, if Amy only has private student loans, these rules changes do not apply. For Bob, however, who has been repaying his FFEL loans and Perkins loans, a Direct Consolidation can help him get all of his loans forgiven or get him closer to either Public Service Loan Forgiveness or long-term forgiveness in one of the Income-Driven Repayment plans.
2. Does the client have any employment history with local/state/federal government or 501(c)(3) non-profit organizations?
If your client has federal student loans and has an employment history with the government or a 501(c)(3) non-profit organization, the client may qualify for the Limited PSLF Waiver that was announced on October 6, 2021. Under the Limited PSLF Waiver, a borrower may get some previous qualifying payment history counted toward forgiveness even if those payments did not meet the requirements under the normal PSLF rules.
There is a catch. Only Direct loans qualify for the Limited PSLF Waiver and borrowers need to apply by October 31, 2022. It is, however, possible to consolidate non-Direct loans such as a FFEL loan or a Perkins loan into a Direct Consolidation Loan to make them eligible for the Waiver.
For example, Clint has been working for a non-profit organization and repaying Direct loans under the Extended Repayment plan (the wrong repayment plan for forgiveness). Clint may receive PSLF credit for those five years by submitting a PSLF form to verify his employment by October 31, 2022. If Clint works five more years at a qualifying employer and repays his loans under one of the Income-Driven Repayment plans, he could get forgiveness for his remaining balance in 2027.
On the other hand, Dave has been working at a public school for eleven years while repaying his FFEL loans under the Graduated Repayment Plan (the wrong plan for forgiveness). Dave could get his entire loan balance right now by consolidating his FFEL loans into a Direct Consolidation loan and submitting a PSLF form by October 31, 2022. Dave could also get a refund for one year of overpayment.
3. Do you have clients who have been repaying federal student loans for 20 to 25 years?
Public servants are not the only borrowers who can take advantage of the rule changes in 2022. The temporary rule changes to Income-Driven Repayment plans that were announced on April 19, 2022 (“Income-Driven Repayment and Public Service Loan Forgiveness Program Account Adjustment”) apply to a broader group of federal student loan borrowers who work in the private sector and therefore do not qualify for Public Service Loan Forgiveness under either the limited-time rules or the normal rules.
The Department of Education has not yet announced the exact steps that the borrowers need to take to qualify. However, many borrowers are supposed to get credit for forgiveness under the Income-Driven Repayment plans later in 2022 or after January 2023.
These two types of borrowers may benefit from the “Account Adjustment”: 1) a borrower who has been repaying federal student loans for 20 to 25 years; and 2) a borrower who has been in a repayment status under the federal system and is currently or wants to pursue loan forgiveness in an Income-Driven Repayment plan.
Let us take Erin as an example. She works for a private law firm and has FFEL graduate loans that she has been repaying for 26 years. If Erin consolidates her loans into a Direct Consolidation loan before the fall of 2022, she may qualify for total forgiveness of her remaining balance in 2022 or 2023. Erin may get a refund for her overpayment.
On the other hand, if Frank has been repaying his undergraduate loans for 15 years under the 30-year Standard Repayment Plan, the 15 years of payments would not normally count towards any type of forgiveness. Under the one-time account adjustment, Frank will not get the current full balance forgiven, but he could receive 15 years’ worth of credit toward the 20 or 25-year forgiveness path in one of the IDR plans. If Frank qualifies for a 20-year Income-Driven Repayment plan such as PAYE, he should enroll in it and pay 10% of his discretionary income for five more years. In 2027, Frank could have his remaining balance forgiven.
The existing forgiveness programs and repayment options may have been previously associated only with public servants and low-income borrowers, but student loan forgiveness is accessible for more borrowers for borrowers who act in 2022. Any of your clients with federal student loans could be a consolidation away from immediate forgiveness.
The recommended first step for you as an advisor is to take an inventory of federal student loans that your client may have. The second step is to look at Federal Student Aid’s announcement for the Limited PSLF Waiver and/or the Income-Driven Repayment Account Adjustment for the exact steps that your client needs to take. Many client situations are quite complicated, so if it is not immediately clear what your clients need to do, contact a student loan expert such as a Certified Student Loan Professional for assistance.
To stress the point one more time, these new rule changes have added to the complexities of the existing ruleset, making it difficult for clients to see the forgiveness opportunities for themselves. If you, as their advisor, could identify these situations and advise your clients on the required steps, you could provide thousands of dollars of value for your clients this year.
Saki Kurose is a CERTIFIED FINANCIAL PLANNER™ and a Certified Student Loan Professional (CSLP®). As an Associate Financial Advisor at Omega Wealth Management, she is passionate about helping clients gain clarity and achieve financial success by creating a financial plan that aligns with their personal values and goals.