Overlooked Student-Loan Repayment and Forgiveness Programs

Summary

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WSJ Your Money Briefing – "Overlooked Student-Loan Repayment and Forgiveness Programs"

Date: March 4, 2021
Host: J.R. Whalen | Guest Contributor: Cheryl Winokur Monk

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Episode Overview

This episode of Your Money Briefing focuses on the array of student loan forgiveness and repayment options already available to borrowers, beyond the high-profile proposals debated in Washington. Cheryl Winokur Monk, a Wall Street Journal contributor, breaks down income-driven repayment (IDR) plans, Public Service Loan Forgiveness (PSLF), tax implications, and provides practical advice for borrowers during the federal loan payment suspension period.

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Key Discussion Points & Insights

1. Status of Student Loan Forgiveness Proposals in Washington

• Current Discussions: President Biden supports $10,000 in student loan forgiveness; some Senate Democrats are pushing for $50,000 (via executive order), but this is less favored by the President.
  • “Right now President Biden has talked about $10,000 in student loan forgiveness. There are Senate Democrats who are really pushing for 50,000… but President Biden has not favored that approach.” – Cheryl Winokur Monk [02:28]
• Uncertainty: It remains to be seen which (if any) proposal will pass, and many borrowers will continue to have significant balances regardless.

2. Income-Driven Repayment (IDR) Plans

• How They Work:
  • Federal student loan borrowers can opt for a standard 10-year repayment, but IDR plans recalibrate payments based on income and family size.
  • Not limited to those with low incomes—borrowers with higher salaries may still benefit depending on their situation.
  • “When borrowers sign up for repayment plans with the federal government…[one] option people can take is payment based on their income…” – Cheryl Winokur Monk [03:03]
• Types & Eligibility:
  • Most federal student loan holders qualify for at least one of four government IDR plans.
  • Distinct from other programs like Public Service Loan Forgiveness (PSLF), though PSLF requires being on an IDR plan as well.

3. Public Service Loan Forgiveness (PSLF)

• Eligibility Requirements:
  • Must work full-time for a qualifying employer (typically government or non-profit) and make 120 qualifying payments (10 years).
  • “Public service loan forgiveness could be an option for people who work in public service… forgiveness can be attained after 10 years and you wouldn't owe taxes on the forgiven amount.” – Cheryl Winokur Monk [05:54]
• Tax Implications:
  • Unlike standard IDR forgiveness, forgiven balances under PSLF are not taxed.

4. Drawbacks & Tax Implications of Forgiveness

• Biggest Con:
  • Forgiven loan balances under standard IDR plans (after 20-25 years) are considered taxable income.
  • “One of the biggest cons… is that …after 20 or 25 years [the forgiven loan balance] is considered taxable income. So that can be a big, a pretty steep tax bill depending on … how much balance is left.” – Cheryl Winokur Monk [04:41]
• No Tax for PSLF:
  • Forgiveness under PSLF is not taxed, making it more attractive if you qualify.

5. Strategy During Payment Pause

• Advised Approach:
  • With payments and interest paused (through September 2021 at the time of the episode), it may be better to save extra funds in a high-yield account rather than paying off the loan faster right now.
  • “It's probably not worth it… to pay aggressively down your debt now, you know, no interest and the payments are frozen. You may as well take that money and put it into a high yield savings account…” – Cheryl Winokur Monk [06:53]

6. Tools for Borrowers

• Federal Loan Simulator:
  • Available at studentaid.gov. Lets borrowers input their loans, income, and other variables to compare payment plans and predicted loan forgiveness.
  • “The federal government offers what's called a loan simulator… it's pretty interactive and it allows you to see how much you would pay under each plan and how much might potentially be forgiven.” – Cheryl Winokur Monk [07:18]
• Third-Party Services:
  • Private services like Savi and Summer also help borrowers analyze options.

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Memorable Quotes

• On the complexity of choices:
  • “There are reasons even someone who makes more money might consider being on an income driven repayment plan. But you would want to look at all the numbers to figure out which way you're paying more and how your payments look each month.” – Cheryl Winokur Monk [00:56 & 03:03]
• On the importance of considering tax impacts:
  • “...you could end up with a pretty steep balance at the end, and then you'd have to pay tax on that. That's the downside.” – Cheryl Winokur Monk [04:41]
• On managing money during the payment suspension:
  • “You may as well take that money and put it into a high yield savings account and let that grow…” – Cheryl Winokur Monk [06:53]

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Noteworthy Timestamps

• [02:28] – State of student loan forgiveness debate in Washington
• [03:03] – Explanation of income-driven repayment plans and who is eligible
• [04:34] – Tax implications of IDR forgiveness
• [05:54] – How Public Service Loan Forgiveness works
• [06:53] – Advice for managing debt during the federal payment freeze
• [07:18] – Tools (loan simulator and third-party services) to help borrowers assess options

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Tone & Language

The episode is approachable and pragmatic, with Cheryl Winokur Monk and J.R. Whalen using clear explanations to demystify complex programs and offering straightforward, actionable advice for borrowers in uncertain times.

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For further guidance:
Visit the federal loan simulator at studentaid.gov, or explore services like Savi and Summer for personalized analysis.

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Transcript

[Cheryl Winokur Monk]

Access to affordable credit helps me pay

[J.R. Whalen]

my employees, but I don't really need it.

[Cheryl Winokur Monk]

Inflation is killing me, but who cares?

[J.R. Whalen]

Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Cheryl Winokur Monk]

See banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[J.R. Whalen]

they need while increasing megastore profits. They deserve it, don't they?

[Cheryl Winokur Monk]

Tell Congress stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.

[J.R. Whalen]

Here's your money briefing for Thursday, March 4th. I'm J.R. wayland for the Wall Street Journal. Forgiveness of student loan debt has been on the negotiating table in Washington since last year. And while Americans holding more than a trillion dollars in loans wait and see what kind of a deal, if any, emerges, they might not be aware of options they already have.

[Cheryl Winokur Monk]

There are reasons even someone who makes more money might consider being on an income driven repayment plan. But you would want to look at all the numbers to figure out which way you're paying more and how your payments look each month. There are a whole bunch of factors to consider.

[J.R. Whalen]

That's our contributor Cheryl Winokur Monk. Coming up, she'll tell us about several forgiveness programs that are available, including the tax liabilities to go with them. That's after the break.

[Charles Schwab Announcer]

This episode is brought to you by Charles schwab. Decisions made in Washington can affect your portfolio every day, but what policy changes should investors be watching? Washington Wise is an original podcast from Charles Schwab that unpacks the stories making news in Washington right now and how they may affect your finances and portfolio. [e-mail] WashingtonWise.

[J.R. Whalen]

Americans holding federal student loans got some relief earlier this year when President Biden extended the suspension of payments and interest through September. Plus, lawmakers in the White House are debating forgiveness of some amount of federal student debt. But without forgiveness, those holding student loans are going to have to resume making payments sometime. Our contributor, Cheryl Winokur Monk has been looking into some of the forgiveness options that student debt holders already have, and she's here with details. Cheryl, thanks for being with us.

[Cheryl Winokur Monk]

Thanks for having me.

[J.R. Whalen]

So there's been a lot of talk about student loan forgiveness in Washington, and a couple of proposals have been floated. But so what do we know about where things stand as of now?

[Cheryl Winokur Monk]

Well, right now President Biden has talked about $10,000 in student loan forgiveness. There are Senate Democrats who are really pushing for 50,000 in student loan forgiveness, potentially through executive order, but President Biden has not favored that approach. Obviously, it remains to be Seen what happens, but he's really, he seems comfortable with $10,000.

[J.R. Whalen]

Okay. But $10,000 in forgiveness could still leave a lot of people with a hefty balance to pay down. Now, you and I have spoken before about loan forgiveness plans available to borrowers that are based on income. Can you remind us of how these income based forgiveness plans work?

[Cheryl Winokur Monk]

So when you sign up for a repayment plan, when borrowers sign up for repayment plans with the federal government for their federal student loans, we're not talking about private loans, we're talking about federal student loans here. When they sign up for a repayment plan, the standard plan is repayment in 10 years. And there are a couple other options. But one of the options that people can take is payment based on their income called an income driven repayment plan. And that's going to set a monthly student loan payment at the amount that you can afford based on your income and your family size. You don't actually have to make very little money to be on that. There are reasons even someone who makes more money might consider being on an income driven repayment plan. But you would want to look at all the numbers to figure out which way you're paying more and how your payments look each month. There are a whole bunch of factors to consider.

[J.R. Whalen]

Got it. So do people have to qualify to take part in that plan?

[Cheryl Winokur Monk]

Most federal student loan borrowers are eligible for at least one of the four plans that are offered by the federal government, the four income driven repayment plans. That is, unlike some other forgiveness programs, you don't have to be, have a certain, be in a certain profession. So it's not public service loan forgiveness. Even though when you're trying to qualify for public service loan forgiveness, you are on an income driven plan. But here we're really talking about income driven repayment forgiveness, which is after 20 or 25 years, depending on the plan. People can get confused because public service loan forgiveness, you have to be on an income driven repayment plan, but it's a different program.

[J.R. Whalen]

Now, Cheryl, we know there is no such thing in life as a free lunch. So what are the cons, the drawbacks of going down this road?

[Cheryl Winokur Monk]

So one of the biggest cons to trying to seek this type of forgiveness is that you will be the remaining balance after the 20 or 25 years is considered taxable income. So that can be a big, a pretty steep tax bill depending on how, how much is left, how much balance is left. And this can be a little confusing for borrowers because you might not have to make monthly payments at all if your income is low enough. And so the idea is that if you're not making, your balance is still growing. So at the end you could have a significant loan balance. Still, if you haven't been making, if based on your income, your monthly payments haven't been all that high, and because interest is still accruing, you could end up with a pretty steep balance at the end, and then you'd have to pay tax on that. That's the, that's the downside. But for some people, there really is no option because they can't afford anything more than their monthly payment. So that's what they have to do.

[J.R. Whalen]

Is there any way to avoid the tax penalty?

[Cheryl Winokur Monk]

Not if you're going for a pure income driven repayment forgiveness. But if you're seeking forgiveness under the public service loan forgiveness program, then you wouldn't owe taxes on the forgiven amount.

[J.R. Whalen]

Now, you've mentioned public service forgiveness a couple of times. Can you explain a bit about what that is and how it works?

[Cheryl Winokur Monk]

So public service loan forgiveness could be an option for people who work in public service. So for the government, for example, you have to make 10 years of qualifying payments for a qualifying employer, and there are other specifics of the program, but that forgiveness can be attained after 10 years and you wouldn't owe taxes on the forgiven amount. But again, it's only for people who are eligible for that program. It's a significant number of people. But the idea of just going for income driven repayment forgiveness, not under a public service loan forgiveness plan, is that it's available to people of all professions. It's just a longer period of time that you would have to wait for forgiveness.

[J.R. Whalen]

Okay, so there are these various forgiveness programs that borrowers could consider. But also there's a completely different approach that a lot of them might be thinking about and that's aggressively paying down their debt. But if they know that they still have maybe six months until the freezing of payments goes away, wouldn't there be an opportunity for them to, you know, put that money to better use?

[Cheryl Winokur Monk]

Absolutely. It's probably not worth it, in fact, to pay aggressively down your debt now, you know, no interest and the payments are frozen. You may as well take that money and put it into a high yield savings account and let that grow. And then you can have it, you know, have it grow basically for when you're going to need it again.

[J.R. Whalen]

You know, Cheryl, this can get pretty confusing considering all the other personal finances that people are juggling. Are there tools available that can help simplify things for people.

[Cheryl Winokur Monk]

Yes. The federal government offers what's called a loan simulator, and it's available at studentaid.gov you can log in to your account, which is the same account you would use with your FSA ID that you did when you filed the FAFSA initially. And that will tell you you can plug in your actual loans and amounts, and they'll be able to tell you, using the simulator, what you would pay under each type of plan. And then you can even play around with things like income or family size or if you move to another state. It's pretty interactive and it allows you to see how much you would pay under each plan and how much might potentially be forgiven. You can also talk about you can also give them ideas of, like, what? My goal is to pay off my loan as quickly as possible. My goal is to make as small a monthly payment as possible. So it's a pretty interactive tool. There are also online services such as Savvy in Summer that work directly with borrowers or through their employers. And they can help you. They have tools to help you make these decisions as well.

[J.R. Whalen]

All right, that's Wall Street Journal contributor Cheryl Winokur. Monk Cheryl, thanks for coming on the show.

[Cheryl Winokur Monk]

Thanks for having me.

[J.R. Whalen]

And that's your Money briefing. I'm J.R. whalen for the Wall Street Journal.

[Charles Schwab Announcer]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day. Washington Wise from Charles Schwab is an original podcast that unpacks the stories making news in Washington. [e-mail] WashingtonWise.