A Guide to Navigating Student Loan Forgiveness

Student loan forgiveness is changing the financial landscape for millions of Americans. With over $1.7 trillion in outstanding student loan debt across the nation, the Biden administration's proposed plans—including targeted relief for specific groups and expanded income-driven repayment, or IDR, options—may have a significant impact on borrowers and their families.

However, the evolving landscape around student loan forgiveness brings potential uncertainty. Whether you're a grandparent hoping to leave a lasting legacy or a parent balancing your children's educational needs with other financial obligations, understanding the possible outcomes is key to making informed decisions about your financial plans.

The current landscape of student loan forgiveness

Student loan forgiveness is currently in flux. The Biden administration initially proposed a one-time, $400 billion debt relief program, which would have allowed borrowers earning less than $125,000 per year—$250,000 for married couples—to qualify for cancellation of up to $10,000 in federal loans. Pell Grant recipients were eligible for up to $20,000. However, the US Supreme Court rejected this student debt relief program in 2023. Currently, the administration offers several IDR plans.

• Save on Valuable Education, or SAVE: This is an IDR option that lowers payments based on a smaller portion of adjusted gross income and includes an interest benefit to help prevent a borrower's balance from growing due to unpaid interest.
• Revised Public Service Loan Forgiveness, or PSLF: This allows loan forgiveness for those employed full-time by a government or nonprofit. Since 2022, the PSLF program has forgiven approximately $70 billion in debt for over 900,000 borrowers.
• Income-Based Repayment: This plan caps monthly payments at 10 to 15% of discretionary income, depending on the borrowing date. After 20 to 25 years of qualifying payments, the remaining balance is forgiven.
• Income-Contingent Repayment, or ICR: With ICR plans, monthly payments are the lesser of 20% of discretionary income or the amount borrowers would pay under the standard repayment plan during a 10-year repayment period—adjusted to income. After 25 years of qualifying payments, the remaining balance is forgiven.

Legal challenges

In August, a federal appeals court blocked the SAVE plan, placing an injunction on it until the Supreme Court reviews the case. The uncertainty surrounding loan forgiveness will likely continue until after the upcoming election. However, current borrowers' loans may be placed in interest-free forbearance while legal challenges continue.

Next steps

Despite these legal obstacles, the Biden administration is moving forward with IDR plans that cap monthly payments and offer forgiveness after a set period. These plans primarily target borrowers with general income thresholds of individuals earning less than $125,000 and married couples earning less than $250,000 annually.

While many programs focus on lower income brackets, the changing landscape presents both challenges and opportunities for high earners and high-net-worth individuals planning for college savings.

Is saving for college still worth it?

The value of saving for college continues to be debated. However, it's important to understand key considerations, such as shifting job markets where organizations no longer require college degrees for some positions, rising costs versus the return on investment and changing perceptions on the overall importance of a degree.

Despite these, saving for education still provides some key benefits, especially for high earners and high-net-worth individuals.

• Enjoy flexibility: Funds can be used for nontraditional learning options, such as trade schools, certifications or other forms of education.
• Maximize tax advantages: 529 savings plans offer tax-free growth and distributions for qualified educational expenses.
• Expand options for unused funds: Recent legislation in the SECURE Act 2.0 allows for more flexibility with 529 funds, including transferring to Roth IRAs or paying down student loans.
• Hedge against uncertainty: While student loan forgiveness programs exist, their future is uncertain, so having savings can provide protection.

The decision to save for college should be part of a broader financial strategy and the specific amount tailored to your financial situation and beliefs in the value of higher education. Even partially funding your savings can significantly reduce future debt for children and grandchildren.

College savings strategies for parents and grandparents

For grandparents and parents who want to contribute, the potential for reduced or eliminated student loan debt offers some opportunities. You can help ensure your generosity remains impactful by considering some of these strategies for your financial support.

Maximize 529 plan contributions

Using the $10,000 annual allowance for K-12 tuition expenses can help provide some immediate tax benefits while saving for future college expenses. Many states also offer tax deductions or credits for 529 plan contributions, which could lower your state tax burden. And you can make up to 5 years' worth of contributions in a single year without paying gift taxes.

Plan for overfunded 529 accounts

If your 529 has excess funds, consider transferring the balance to other family members for their education or using it for graduate school expenses. The SECURE Act 2.0 also allows you to convert up to $35,000 to a Roth IRA for the beneficiary if the 529 plan meets certain guidelines.

Explore tax-efficient alternatives

Consider looking beyond traditional educational savings accounts. For example, life insurance policies with a cash value can offer tax-free growth and withdrawals, which aren't considered in financial aid calculations. However, any withdrawal may reduce your death benefit on the policy.

Use Roth IRA contributions

While contributions to a Roth IRA aren't tax-deductible, you can use tax-free withdrawals from a Roth IRA to cover qualified higher education expenses. If the account is at least 5 years old, these withdrawals won't incur the 10% early distribution penalty for those younger than 59 1/2.

Being proactive can help you address the continuing uncertainties around student loan forgiveness and adapt your financial plan accordingly.

Managing debt while saving for college

If you're a parent paying student loans and saving for your children's education, you face unique challenges. While savings strategies can work for you, there's also your own debt to consider. Here are some tips for trying to balance both.

• Prioritize debt management. Evaluate eligibility for loan forgiveness programs, and consider applying to available IDR plans. You can also explore consolidation or refinancing to potentially lower interest rates and monthly payments.
• Stay informed. Follow the latest changes in student loan policies, and be prepared to adjust your financial strategy as the landscape changes—especially after the election.
• Explore alternative funding. Research scholarships, grants and work-study programs to help supplement your savings and potentially reduce future debt for your children.
• Balance savings goals. Review your current strategy and determine the right approach to paying down debt, saving for your children's education and securing your retirement. Consider the benefits of tax-advantaged accounts.

Combining these approaches to savings and debt management can help you create a plan to help find a balance that works for your situation.

The bottom line

Student loan forgiveness is more than just a policy change. Whether you're helping with loans, saving for education or managing debt, flexibility and adaptability are key in these uncertain times.

For more personalized guidance on navigating these changes, consider partnering with a trusted wealth consultant. We can help you develop a tailored strategy for college savings, wealth transfer and debt management that aligns with your long-term goals.