Student loan forgiveness after 20 to 25 years in a repayment plan often causes people to think, “I’ll just wipe my hands clean” of the debt, according to financial planner Adrienne Davis.
“But that’s not the case,” said Davis of Philadelphia-based Zenith Wealth Partners. Instead, as she and other financial advisors warn clients who aren’t eligible for certain temporary or career-based exemptions from the infamous “student loan tax bomb” tied to income-based repayments, they could be facing surprise payments to Uncle Sam for the forgiven sum.
The tax complexities of those plans and other strategic intricacies surrounding student loan debt include questions about eligibility for deductions on interest payments, 529 plans and employee benefits. With over 43 million Americans holding more than $1.77 trillion in student loan debt set for restarted monthly bills due in October, tax professionals and planners are guiding clients through a plethora of issues on top of the burden to budgets and investment portfolios.
Legislative “sunsets” in particular could carry significant tax implications in a couple of years.
“Paying something off is one thing, but you have to really understand the cash flow,” said Catalina Franco-Cicero, a certified financial planner with Plantation, Florida-based Tobias Financial Advisors. “If we are really going to serve these younger generations, we have to start thinking that, ‘Hey they’re going to come with these loans, and we have to be ready to train them.'”
College admissions, higher education expenses, tuition and student loans are “interlinked with taxes like never before,” according to Rupa Pereira, an IRS-credentialed enrolled agent who is the founder of Raleigh, North Carolina-based FWJ Planning.
She added the new direct transfer of taxpayers’ information from the IRS when filling out the Free Application for Federal Student Aid in the 2024-25 school year to the mix of topics to bring up with clients. Many clients are retiring later or withdrawing money from their nest eggs to pay for college tuition.
For federal student loans, a borrower’s adjusted growth income and filing status determines the size of their payments and how to ensure their household is in the “best position to maximize cashflow while minimizing debt burden,” Pereira said in an email. “Cashflow planning becomes a critical factor for households navigating student loans — something that a tax preparer or loan servicer may not be able to assist with.”
Clients should understand that the type of loan they received often decides their eligibility for various tax deductions and credits, as well as refinancing and repayment programs, according to Emily Stead, founder of the ByMethod Financial Collective, a Phoenix-based office of Cetera Investors. Their best option might look different from the course taken by friends, she pointed out in an email interview, recommending that borrowers with complicated tax situations start by consulting a certified public accountant or an enrolled agent.
“The most efficient way to make sure you are making the best possible financial decisions is to gather all of the information on your current loan(s) from your current loan servicer, and then speak with a licensed tax professional for information on your current tax standing and for advice on potential deductions and credits,” Stead said. “From there you can speak with a financial planner to help you understand what options would be most suitable for you and your goals and put in place an actionable plan based on your financial picture as a whole.”
For seven tax subjects that planners like Stead suggest clients consider when paying off student loans, scroll down the slideshow. To see a listing of three potential strategies in response to the recent Supreme Court decision blocking the Biden Administration’s student loan forgiveness program, click here. And follow these links to find an advisor’s reflection on college expenses as a parent and a discussion of how and when to begin talking to families about higher education.