437 | Student Loan Forgiveness: Essential Update | Travis Hornsby

0:00Hello and welcome to Choose a fight. We have Travis Hornsby from the student loan planner back on the show. So he was here in episode 391. That was actually his third appearance. So this is fourth. But episode 391 was one of, if not our single most important episodes of all time, because he told us about these real important timelines on getting your student loans potentially forgiven entirely. And at that point, it was, okay, there's potentially 10 % of people with student loans who can get their loans forgiven, which is an astonishing thing. There were some deadlines at the end of 2022. and actually Travis and I just got back in touch, which is why he's here on the show today.

0:37And he said, there is some new news and we need to pass it along. And his kind of interesting hook was, hey, are you old enough to get your loans canceled? So there's some nuance here. Now, potentially everyone who has been paying for a certain time or maybe as old enough can get their loans canceled. So this is going to be really, really interesting and applicable to anyone who has student loans potentially, or you know somebody who has student loans, this is going to be really important. With that, welcome to Chooseify.

1:14Travis, my friend, welcome back to Chooseify. So happy to have you here. Yeah, great to be here. All right. So like I said up in the intro, in my kind of rambling version, there is a lot going on. And I know we've had hundreds of people from the Chooseify community take advantage of this. And we had many, many, many people get in touch with you to help them facilitate this process. But where we last left everyone was, okay, we have these deadlines. So it was October 31st, 2022, and then potentially somewhere in the vicinity of 1231, 2022. So now there's PSLF and IDR, but that was last year. Now we're a third of the way, a quarter of the way through 2023.

1:53Where are we today? So I would say that highlight is 10 % of all people, could get their loans canceled the last time, but this 10 % of people was public servants, right? That had been in repayment of some kind for at least 10 years. But now a separate group, slightly overlapping, but mostly distinct group of 10 to 15 % of all borrowers could also get their loans canceled completely. So effectively, the last episode applied to public servants. If you were not a public servant and never have plans to become one, it didn't really help you, right? This is going to help a much broader group of people because you can apply it to anybody.

2:26The only question is, are you old? And I'm going to joke a little bit about that definition because you don't have to be that old. I think I might fit into the are you old here, Chavez. Well, I started a riot the other day on Twitter because I said five years ago, basically 54 % of all student debt was held by people over 35. And then I said now 78 % of all debt is held by people over 35. Student loan debt is no longer a young person's issue. And that really got people angry because people were like, excuse me, I'm 37 and I feel incredibly youthful. You know, so the reality is the student debt has really aged a lot.

2:59The average student loan borrower age has gone up significantly. And there's a lot of reasons for that. A lot of people are signing up for things like income-based repayment. They're taking out a lot of loans for graduate school. Maybe they're going back and getting a bachelor's degree at an older age after serving in the military or doing, you know, a little bit of time to find themselves, right? And so we've got this debt and a lot of it is not getting paid off. People are doing forbearance or defaulting you're going into, like I said, these income-based payments. And so what's happening is a lot of people have not gotten their loans forgiven yet through income-based repayment.

3:29So the general gist of income-based repayment is you pay your loans for a certain number of years. And at the end of that period of time, your loans get wiped away. So this is very much anti-Susie Orman, Dave Ramsey advice, right? They say, pay off your loans, do whatever it takes, right? And that's reasonable advice for a lot of people. But with this IDR waiver, what the Department of Education is effectively doing is they are saying that they will count your oldest loan if you consolidate. So if you consolidate with studentaid.gov, and I'm going to try to give a lot of the free advice here on the show.

4:02If you consolidate at studentaid.gov, they're going to take your oldest loan, whatever has the most time in repayment, and apply that to your new loan on the whole thing. So let's just give an example. Let's say somebody took out loans from 1998, and they graduated and then they went to grad school years later. And for some reason, they didn't pay off that one loan. So that small undergrad loan gets added into the grad loans altogether. And now that new consolidated loan might be eligible for the 20 or 25 years of credit needed for getting full forgiveness on the IDR waiver. So to put some numbers behind this, Department of Ed says that there's about 4 million borrowers out of the 43 million total that have been in repayment at least 20 years.

4:45And the thing is, is that's an old statistic, Brad. That's from December 2020. And it's been a little time, right? The COVID pandemic, the steel loan pause lasted for over three years. So the new numbers are probably something like six or 7 million people have been in repayment at least 20 years because most people have just left their loans just be paused and not made any extra payments, right? So you've got maybe like 15 % of all borrowers that have loans that were issued a while ago, that if they consolidated everything, some people will get it automatically, but most people won't. We can get into the technical reasons why.

5:20But most people will need to consolidate their loans with the government, not a private lender. That's important. And then they will see their loans automatically canceled without any tax liability, which is just really mind-blowing. And the sad part is What we found from the last episode that we did, that PSLF waiver opportunity, only about one in five people that qualified were actually able to successfully get it forgiven because most people didn't apply. Interesting. Okay. There is a lot of info buried in what you just said. So this is really, really helpful. So right. The no tax liability immediately jumps to mind.

5:52That's phenomenal. It is your oldest loan. That is what counts. So now does that include, let's say you gave the example of, hey, you went back for some more education, et cetera, et cetera, but it goes back to the original loan. What about if a parent took out loans for their kids? I think last time you said parent plus loans, would that all get lumped in as well? Yeah, you have to do it carefully, but yeah, basically they're backing the truck up here. So to kind of explain what the normal process is, the normal process is I graduate, I have a six-month grace period, I sign up for income-based repayment, and I'm paying on an income-based plan for 25 years for grad school and 20 years for undergrad.

6:31That's the normal process. And after you've built up that amount of credit, you get your loans forgiven, right? But what they're doing with the IDR waiver, instead of saying that you had to have been on an income-based plan, we're going to give credit for any repayment plan. We're going to give credit for paying on the standard plan, the extended, the graduated, whatever. We don't care what plan it was. We're going to count all of them. And the second thing they're doing is they're saying any kind of deferment, if it's not an in-school deferment, we're pretty much going to count most all kinds of deferments as payments too.

6:58So you don't even have to have been making payments to have that deferment counted as time and repayment. And then the third thing they're doing is they're saying, if you were in forbearance for at least 12 months consecutively, or at least three years in total over the course of your repayment journey, they're also going to count all that time and forbearance too. So effectively, they're changing the definition of what income-based repayment is temporarily to include effectively anything besides being in an in-school deferment or being in default. So effectively, almost anything counts there.

7:27And then the question is, is why do people have to consolidate? Why is this something that anybody needs to apply for? So the federal student loan program really only got going with direct loans in full after 2010. So if you had loans from before 2010, which most people that have been in repayment for 20 plus years have these loans from before 2010, just for math, right? So those kinds of loans, bank issued loans are guaranteed by the government. Those don't fall under the same direct loan program authority. And so what the Biden administration is cleverly doing is telling people, well, you have to consolidate it so the banks get paid off in full before they're able to wipe them away, right?

8:03So Department of Ed couldn't just wipe out a private investor's loans that they paid money for. So that's why the Department of Ed basically pays those loans off when you consolidate, and then the Department of Ed can wipe those away. And this is not just something for people that are eligible for full cancellation to get benefits from. So the other point is you can get a lot of additional years of credit towards your forgiveness count in general. So let's say that you aren't at 25 years or 20 years if you get this account adjusted. Let's say you could get an extra five years of credit. Well, that's five fewer years that you'll have to pay at the tail end of your forgiveness, right?

8:36So this is not just something that affects you if your loans are being canceled. I would say that the people that could get it canceled, that's millions of people, right? But you're probably looking at more like 10, 15, 20 million people that might get additional credit if they take the smartest action to decide whether or not they need to consolidate. Not everybody needs to, by the way. This is just kind of saying, if I was going to give free advice to people that weren't going to pay for anything, I would say, well, you can hurt yourself by consolidating, but probably not as badly if you don't consolidate, which is why my default would say, if you can do that, if you have not already done that and you have significant student loans, studentaid.gov, you can probably do that and get some big benefits.

9:16Interesting. Okay. Right. This could potentially benefit, like you said, even with just credits of years, 10 to 20 million of the 43 million total borrowers. I mean, this is a massive, massive thing. It's not just, and I say that dripping with sarcasm, 10 to 15 % of all borrowers who could potentially get it forgiven, but 25 to 50 % of people can get five of 20 years. So essentially a quarter of the way there, just potentially for free by knowing this information. So that's massive. Now, where I always get kind of caught up is, is anyone who potentially started, let's say 20 or 25 years ago, has anyone potentially made an irreversible decision by consolidating with X, with a private lender or some such, or for the person out here listening saying, Hey, I've been paying on these darn things for 20 plus years.

10:06I think I'm a candidate. Is there like a bright line test for, Hey, you clearly aren't a candidate because you may have done X, Y, or Z. Yeah. If you sent your, your loans to like a SoFi or Laurel Road or Credible or something like that, then yeah, you don't qualify anymore because those are private loans and those no longer federal loans. Right. But if you have loans from like an Avient or a Nelnet or Mojila or Advantage, you know, Great Lakes, any of those kinds of servicers, if you had your loans through that, that's kind of a giveaway that you've got federal loans. If you go to studentaid.gov and you just log in with your social security number, if you see a balance there, You have qualifying loans.

10:43That's the best fail-safe way to know whether or not you've got the right kind of loans to get credit for this. So I would say studentaid.gov, just sign up to log in and see if a balance shows up under your name. If it does, then you've got loans that could potentially benefit from this. And it's really quite fascinating, all the behind the scenes stuff that's going on. So effectively what's happening with this is the administration would love to cancel student debt, but obviously there's lawsuit over that right now, right? This is a way that they can do very complicated maneuvering to cancel a huge amount of student loan debt, but they can't be too blatant about it or too obvious about it.

11:19If this takes a podcast to explain, that means opponents of this are not really that aware of everything going on. And the reason that the last PSL of waiver that we talked about didn't get overturned is because one in five people took advantage of it because it was very confusing to people. And people that could have gotten the benefits didn't, in many cases, sign up for it. Whereas the cancellation thing, 20-something million people, I think, applied. So you saw it all over social media, right? So I think it's just an example of why this loophole is more likely to survive, whereas the cancellation might get shot down with the Supreme Court.

11:54Okay. So we will come back to this. But just while we're talking about the prior one, the PSLF, what ultimately happened with that? So it was October 31st, 2022 was the date when we last spoke with you. Was that the hard and fast date? and that is essentially over? Or are there any options for people with those public loans? So what's interesting is it was a hard and fast deadline, but they ended up extending it through this IDR waiver slash IDR account adjustment. So basically they took a lot of the provisions of that waiver and they sort of stuffed it into the IDR waiver and said, well, we'll still take the applications because if anything, the IDR waiver that's currently going on is actually more expansive than the PSLF waiver.

12:35So think about it kind of like the, what do they always joke about in school? Like a square is a parallelogram, but not all parallelograms are squares kind of thing. It's kind of like that. So the PS left waiver for the most part fits up underneath this IDR waiver, which is much broader. And so this IDR waiver for somebody with public loans, that program was counting all time in repayment, right? But the PS left waiver wasn't quite talking about things like deferment and forbearance like this new one is. So like a public servant that had a bunch of forbearance and deferment might not have seen her loans forgiven with the PSLF waiver.

13:06But with this new one, they might be able to get it. They might be able to get that full discharge by counting all that forbearance credit too. So it's a both and scenario for this. So somebody that's been working for some random private company and has had loans for a long time could benefit from this. And somebody that's a teacher or firefighter that did forbearance long term could also benefit from this. So it's not like just a public sector thing like the last opportunity was. It's both private and public sector. Okay. So let's dive into that public servant as applicable to this here, right?

13:38Because obviously you live and breathe this and I'm valiantly trying to catch up and it's hard even for me, frankly. So, okay. The interaction between the PSLF and now this IDR waiver. So public servants, I was under the impression there was a 10-year amount. Is that incorrect? Was that ever correct? Is that outdated? So yeah, PSLF is a 10-year program and you need 10 years of total time and repayment, right? And so the PSLF labor was just sort of talking about, well, any kind of repayment plan counts. Well, now they're just changing the definition of time and repayment with this latest program to just become even better, if that makes sense, right?

14:16So it's just even broader what counts as a repayment. And you do for the PSLF program have to be working at a qualifying job during these repayments for the just income-based just in general, right? This is where I think people get confused is the programs are either like really good or kind of good. So like public service, 10 years, really good, right? Paying for 20 or 25 years, you know, not as good, but still pretty decent, right? And so that's what's available to everybody. So the public service stuff, you got to be a full-time public servant employee, whereas the income base, the 20 and 25 year versions, you could literally be sitting on the couch playing Fortnite or something.

14:52I don't know if that's something, it's probably not something a 40-year-old would do that's eligible for this waiver, right? But maybe it's, I don't know, office reruns or something. Yeah. Friends or in my case, playing smart craft on the old school games. So you could literally be doing nothing and still get credit for the income base for 20 and 25 years. So think about it kind of like, what's the best tool to use to get the max benefit? So in other parts of financial planning, right, you're talking about, do I do the Roth IRA or the traditional or do I do like an SEP or do I do this kind of health insurance plan, right?

15:24So it's just, you're trying to pick the right tool to maximize the benefits. So that's what I would say for an individual that's getting really confused about this is there's a lot of super generous stuff going on. It ends December 31st. That's the current state of things. Of 2023, this ends December 31st. Yes. So the PSL waiver ended, but this new one ends December, 2023. And it's very expansive. We can get a lot of people, a lot of benefits through this, and it's going to end because they can't do this forever. The Biden administration has talked about the new plan after this is going to be to use weighted average repayment credit for consolidations.

16:01So for example, if you've got somebody with a$2 ,000 undergrad loan with$400 ,000 of grad school loans, if you do weighted average, she's going to get maybe two months of extra credit. Whereas during this period, you could get to 20 years, which is just a total game changer. So I would say probably the only people who won't benefit from this, I give a couple people who would not benefit from looking into this, right? So somebody who's graduating right now and didn't have loans from before when they were going to school, right? So somebody that's just 18, got their bachelor's degree, 22, got their law degree, they're 25, and they're graduating now, that person really can't benefit from this too much, right?

16:36Because they don't have a long period of time in repayment. Other people that need to be careful are people who have a really low payment. So a lot of people have a really low payment, income-based payment that's on the books. So the last time people certified, Brad, their income for these income-based payments because of the COVID pause is tax year 2018 for the most part. Oh, wow. So think about it. A lot of people made less money in 2018. So for example, we see this a lot with physicians or dentists or veterinarians or something like that, that people made a really small income several years ago.

17:07And if they consolidate, that resets that income-based number. So you have to kind of look and see what your more recent tax return is. And then that might not be worth it, right? Because you could lose a$300 a month payment and get a$1 ,500 a month payment or something like that if you were to consolidate. It is not so simple as to say, oh, everybody should consolidate. There's a couple other kind of nuanced edge cases that I don't think it was worth discussing to everybody. Yeah, I hear you. Well, let's dive into that$300 versus$1 ,500 a month. So that makes sense on the face of it. But talk me through what actually would occur.

17:41So the person paying$300 a month, they were locked in on that amount. Is that accurate for the life of their loan or when would it get reset? You're supposed to recertify your income every year and your income-based payments are supposed to be based on income. And so they're supposed to look at your most recent tax return and they tell you what your payment is for the next year. But because of the COVID pause, everything's gotten totally out of whack. So because of the COVID pause, if you think about like March 2020, that's when things all got paused. You know, a lot of people hadn't filed their 2019 taxes yet.

18:13And so a lot of people certified their most recent payment based on that 2018 tax return. And then what they did is each time they extended the pause, they just kicked out that date when people have to recertify their income. And so every time they extend it, they're saying, well, nobody will have to recertify before this date. And then it's this date. And then it's the next date. And so they just keep doing that. And so the current state is we're thinking that nobody will have to recertify before February of 2024 because of the Supreme Court case kind of stuff going on. And so what's crazy is if your date for certification of income falls before then, that date gets kicked out another year.

18:49So we have people that we're expecting that will not need to recertify their income-based payment until January of 2025. So literally, we'll be in a new presidential administration before they have to recertify their income from like six years ago at that point. So this is all about taking maximum advantage based on the rules to save somebody the most money. And I want to also bring up to this audience too that this waiver is also important to take into context with President Biden's new income-based repayment plan. So we've gotten a lot of new details on that plan that I don't think we had last time.

19:25And this is something that is going to make paying for undergrad a lot more geared towards going for income-based repayment and forgiveness than actually trying to pay it off. So there's an estimate out. I'll try to keep it sort of simple. So three in five people right now with bachelor's degrees are expected to pay off their loans in full. That's the current state of things with today's income-based plans. There is an Urban Institute study that says that when President Biden's new income-based plan comes out later this year, early next, that number of people is going to fall to 20 % of people paying off their loans in full with 80 % of people going for at least some kind of forgiveness.

20:06And you might say, why is that? What are they doing? So what they're doing is they're drastically expanding the amount of income you can make before you have to pay anything. So it used to be that they would give you one and a half times the poverty line that you wouldn't have to pay anything on. Now it's going to be 2.25 times the poverty line before you have to pay anything, right? They're also allowing people to file taxes separately to exclude spousal income. So a family that's each making 100K and has a couple of kids could effectively earn a huge amount of money and not have to pay anything on that until they earn above a certain level.

20:39And then for undergrads, their percent of income that they're going to be asked to pay above this protected income that you can earn before you have to pay anything is changing from 10 % to only 5 % of income. And even better to keep laying it on, the amount of interest - Wait, there's more. Wait, there's more. The amount of interest that you're accruing that your required payment doesn't cover is now going to be paid for in full. So if you think about even somebody who expects to pay off their loans, you could consolidate the loans with student aid, get on to revise pay as you earn when this new plan comes out, and then get, since your payment it'll be zero for that first year, you'd get all of your interest paid for in that first year.

21:20So effectively, if you graduate, it would be kind of a dumb thing to send it to a private lender for that first year because you could get 100 % subsidy, everyone could, for that first year after graduation. This is separate from this IDR waiver. The reason it's relevant is you might have somebody say, oh, I'm getting five extra years towards forgiveness, but I hadn't planned on getting forgiveness anyway. And the reason why it's relevant is because you have to know what's coming next in student loans. You can't just stop at what's going on right now unless you're going to qualify for full cancellation, right?

21:49You've got to say, well, how could this potentially help me down the road? And if you could get those five extra years with this new plan that's coming down the road that's going to cut people's payments so drastically, that's going to really change the game. So I think it's really fascinating because you're effectively taking that typical choose FI person that might have$35 ,000 in undergrad loans that previously might have said, well, this is an interesting episode, but it doesn't apply to me. And when this new IBR program comes out, suddenly that person would actually be a fantastic candidate for forgiveness because that person could travel the world, live off of those dividends and interest, keep their AGI strategically low to get ACA subsidies to qualify for early retirement.

22:27So in that case, somebody that's going for an early retirement lifestyle, maybe the smartest thing you could do is take on as much student loan debt as you possibly can because the incentives are going to reduce the marginal cost of borrowing to nothing for a lot of people. Wow. Yeah. You talk about incentives. That is intriguing. It's bad. It's not good, right? Like, I mean, in terms of - Reverse incentives was obviously the implication there. Well, they're trying to solve a access problem and they're trying to make sure people have access, which is a good thing. But it's kind of like when you don't have bipartisan agreement on something legislatively, you try to do something through the executive order process.

23:04And that's what's going on right now. That's why we're having all these temporary programs with expiring deadlines with all of these confusing rules because they can't just say like if Congress had appropriated$500 billion, it's like, nobody needs to apply. We'll handle it for you. It's a program. Everybody gets it, right? And that's why things are so confusing right now. Yeah, it is a lot. It's a lot to take in. And that's why, thankfully, you're here to help us walk through this. And honestly, my mind is spinning because it is a lot. It's just an an astonishing amount of information, but it seems as if as we talk, and I jokingly said, but wait, there's more.