The program has been plagued with issues. Many borrowers who should have qualified have not gotten their loans forgiven for reasons such as being on the wrong repayment plan, payments not being counted for unreasonable reasons, or borrowers provided with wrong information by their loan servicers.
Last month, the Department of Education announced a major change to the program that could fix some of these issues: it will “implement a Limited PSLF Waiver to count all prior payments made by student borrowers toward PSLF, regardless of loan program.”
Here’s a summary of what it means and what you have to do if you qualify.
Maybe because of the year-end deadline, many year-end planning opportunities seem to be tax-related. However, tax moves should be made within the context of your overall long-term financial and investment plan. Hence, make sure to check in with your financial and tax advisors.
Here are seven important areas to focus your efforts on to help you make the best of the rest of your financial year.
You could still make lemonade out of these lemons by harvesting your losses for tax purposes. It is worth remembering that the IRS individual deduction for capital losses is limited to $3,000 for 2021. In other words, if you don’t offset your losers with your winners, you may end up with a tax loss carryforward that could only be used in future years. This is not an ideal scenario!
You can also offset your losses against your gains. For example, suppose you sell some losers and accumulate $10,000 in losses. You could then also sell some winners. Then, if the gains in your winners add up to $10,000, you would have offset your gains with your losses, and you will not owe capital gain taxes on that combined trade!
Bear in mind that Wealth Strategy is not all about taxes! Tax-loss harvesting could be a great opportunity to help you rebalance your portfolio with a reduced tax impact. Beware though of the wash sale rule: if you buy back your sold positions within 30 days, you will have negated the benefit.
You may be tempted to wait for a while to see how the market evolves. We may have been spoiled into complacency with the bull run we experienced since the Great Recession. However, we should not forget that volatility does happen.
It’s almost impossible to predict accurately when the next bear market will start if it hasn’t already. And after more than eighteen months of strong gains, it is time to reassess if you and your portfolio are positioned for a potential downturn.
You will want to ensure that your portfolio risk is aligned with your goals and that your asset allocation is aligned with your risk target. Reach out to your Wealth Strategist to review.
If you have under contributed to your plan, there may still be time! You have until December 31 to boost your retirement planning by topping off your 2021 contributions. This will also have the benefit of reducing your 2021 taxable income if you contribute to a Traditional plan.
As an alternative, you could contribute to a Roth account if your employer offers that plan option.
Many employers offer a Roth in their employee retirement plans. If yours does not, schedule a chat with your HR department!
Many people think of the Roth account as tax-free. However, you should bear in mind that although Roth accounts are popularly designated as “tax-free,” they are merely taxed differently since you would be contributing after-tax funds. Double-check with a Certified Financial Planner professional to determine whether choosing to defer some of your salaries on a pretax basis or post-tax to a Roth account better fits your situation.
To do a Roth conversion, you withdraw money from a Traditional tax-deferred retirement account, pay income taxes on the distribution, and move the assets into a Roth account. Then the assets can grow and be distributed tax-free, provided certain other requirements are met. If you think that your tax bracket will be higher in the future than it is now, you could benefit from a Roth conversion.
Your first decision is to decide whether to subscribe to a high deductible option or stick with a traditional plan with a “low” deductible. The high deductible option will have a cheaper premium. However, if you have a lot of health issues, it may end up costing you more. High deductible plans allow access to Health Savings Accounts (HSA).
The HSA is a special instrument. With it, you can contribute money before taxes to pay for qualified healthcare expenses tax-free. Balances in HSAs can be carried forward to future years. They can also be invested to allow for potential earnings growth. This last feature is exciting to wealth managers because, in the right situation, clients could end up saving a lot of money.
If you choose a high deductible plan, you should plan to fund your HSA to the maximum. Many employers will contribute as well to encourage their employees to pick that option. If you choose a low deductible plan instead, make sure to fund your Flexible Spending Account. FSAs are used to pay for medical expenses on a pretax basis. The unspent amount cannot be rolled over to future years, unlike HSAs.
Perhaps you don’t need the RMD? Then you may want to redirect the money to another cause. For example, you could fund a grandchild’s 529 tax-advantaged educational account. Contributions are post-tax, but growth and distributions are tax-free so long as they are used to pay for education.
Charitable donations can also help reduce taxable income and provide financial planning benefits. However, the Tax Cut and Jobs Act of 2017 (TCJA) has made it more complicated. A significant result of the TCJA is that standard deductions for 2021 are $12,550 for individuals and $25,100 for joint filers. In practice, it means that the first $12,550 or $25,100 of deductible items have no tax benefits.
For example, if a married couple filing jointly (MFJ) pays $8,000 in real estate taxes and $5,000 in state income taxes for a total of $13,000 of deductions, they are better off taking the standard $25,100 deduction. The first $12,100 that they donate to charity would not yield a tax benefit. One way to go around this new situation is to bundle your donations in a given year. Another possibility, within certain limits, is to give directly from an IRA.
As an example, if you plan to give in 2021 as well as 2022, bundling your donations and giving just in 2021 could result in a deduction and the accompanying reduced tax.
If your thinking wheels are turning after reading this article, check in with your Wealth Strategist or financial planner: there may be other techniques that you could or should do before the end of the year!
Those are just some of the questions you may have as you are getting ready to start a new chapter of your life after school. This article will guide you through some of the terms you will need to know, concepts that are unique to student loans, and actions you can take to take control of your student loans.
Use this period of time to take an inventory of all the loans you have taken out during the course of your studies. If you have federal loans, log into or create yourstudentaid.govaccount. You will see all of your federal loans listed there. If you have private student loans, you can get a free credit report to see all of your loans. You can get one from any one of the three credit bureaus or a site likeannualcreditreport.com. If you only have private loans, you can skip to the section titled “Strategy #1: Paying your loans off as fast as possible to minimize interest.”
The most important thing to know is that you do not always have to pay back the full amount of the loans you took out. For federal loans, when you repay under the standard 10-year plan or the extended and graduated repayment plans, you pay back the entire loan including the principal and interest over a set period of time. However, if you enroll in one of the Income-Driven Repayment (IDR) plans, you pay a percentage of your income for a set period of time and then the remaining balance is forgiven. This type of loan forgiveness can either be tax-free or taxable, meaning that the forgiven dollar amount is either counted as part of your income or not in the year it is forgiven.
Special considerations for Income-Driven Repayment plans
You must verify your income every year to recalculate your monthly payments.
If you are married and file your taxes as Married Filing Separately instead of Jointly, your monthly payment is lower in all but one IDR plan (the one exception is the Revised Pay As You Earn plan) because only your income is used to calculate the payment amount.
Loans paid under an IDR plan qualify for forgiveness if there is a balance remaining at the end of the term.
There are a lot of third-party companies that take advantage of borrowers who are confused by the federal options. Some may offer to consolidate your federal loans for a fee, or even worse, offer discounted repayment options that do not exist. There are no fees for changing repayment plans or consolidating within the federal system, and the government will never contact you to offer a “discount” or a “deal” for your student loans . If you get such an offer, ignore them. These scammers often sound professional and knowledgeable. DO NOT, under any circumstances, give out your personal information, such as your Social Security number or your studentaid.gov login information.
Prioritize your career and goals: What’s most important to you?
When you know how much you owe and know what to expect after you graduate, you must assess where you are financially at the moment and where you think you will be and want to be in the short term and long term. If you have a job, what is your income right now? How do you expect your income to change in the next five, 10, or 20 years? What are your career plans and goals? And perhaps more importantly, what is most important to you? Do you want to be debt-free and financially independent as quickly as you can and want to live frugally to achieve that goal? Or do you want to get married, buy a house, and enjoy time with your family while you manage your loans long-term?
There is no right or wrong answer. When you have the big picture of your financial situation and goals, you can start strategizing.
Strategizing based on your goals
If you want to prioritize saving money, there are two main loan repayment strategies:
Pay your debt off as fast as possible and minimize interest.
Pay as little as possible and maximize forgiveness.
Strategy #1: Paying your loans off as fast as possible to minimize interest
You can save a lot of money by shopping around for good rates, and it is often a good idea to refinance multiple times if you can save money. However, if you have federal loans and you are considering refinancing, it’s important to know that you will permanently remove your loans from the federal system, which means that your loans will no longer be eligible for benefits such as IDR plans and loan forgiveness.
Strategy #2: Paying as little as possible in IDR and maximizing forgiveness
The first step is understanding that divorce is emotionally difficult to negotiate for both sides. It is even more challenging if the two sides start from different vantage points. Just remember how you felt the last time you dealt with someone with a completely different perspective. For example, think of the last time you tried to persuade your toddler to eat his or her vegetables. You and your spouse cannot have all your questions answered in one workshop or a dozen. Divorce is way too complex for that. But you will both learn something. And most importantly, you will both hear the same information and may learn the same thing. And that can form the basis for a productive negotiation and path forward.
Young adults are not the only ones saddled with the obligation to pay back massive amounts of student loan debt. Many parents take out loans in their names to help their children pay for college, and in many cases, these loans are getting in their way of achieving their goals like saving for retirement. Under the federal student loan system, parents can take out Parent PLUS loans for their dependent undergraduate students. One of the major differences between Parent PLUS loans and the loans that the students take out themselves is that there are fewer repayment options available for Parent PLUS borrowers. Parent PLUS loans are only eligible for the Standard Repayment Plan, the Graduated Repayment Plan, and the Extended Repayment Plan. However, there are strategies for managing Parent PLUS debt. When consolidated into a Direct Consolidation Loan, Parent PLUS loans can become eligible for the Income-Contingent Repayment (ICR) plan, in which borrowers pay 20% of their discretionary income for up to 25 years. Currently, ICR is the only income-driven repayment plan that consolidated loans repaying Parent PLUS loans are eligible for. However, when a parent borrower consolidates two Direct Consolidation Loans together, the parent can potentially qualify for an even better repayment plan and further reduce the monthly payments.
Nate, the public school math teacher
Let’s take a look at Nate, age 55, as an example to see how a parent can manage Parent PLUS loans and still retire the way he or she wants.
Nate is a public school teacher who makes $60,000 a year and just got remarried to Nancy, who is also a teacher. Nate took out $130,000 of Direct Parent PLUS loans with an average interest rate of 6% to help Jack and Jill, his two kids from a previous marriage, attend their dream colleges. Nate does not want Nancy to be responsible for these loans if anything happens to him, and he is also worried that he would not be able to retire in 10 years as he had planned!
If Nate tried to pay off his entire loan balance in 10 years under the federal system, his monthly payment would be $1,443. Even if he refinanced privately at today’s historically low rates, his payments would be around $1,200, which Nate decides is too much for him to handle every month. Also, since Nate’s federal loans are in his name only, they could be discharged if Nate dies or gets permanently disabled. Therefore, it is a good idea to keep these loans in the federal system so that Nancy would not be responsible for these loans.
For Nate, there is another strategy worth pursuing called a double consolidation. This strategy takes at least three student loan consolidations over several months and works in the following way. Let’s say that Nate has 16 federal loans (one for each semester of Jack and Jill’s respective colleges). If Nate consolidates eight of his loans, he ends up with a Direct Consolidation Loan #1. If he consolidates his eight remaining loans, he ends up with another Direct Consolidation Loan #2. When he consolidates the Direct Consolidation Loans #1 and #2, he ends up with a single Direct Consolidation Loan #3. Since Direct Consolidation Loan #3 repays Direct Consolidation loans #1 and 2, it is no longer subject to the rule restricting consolidated loans repaying Parent PLUS loans to only be eligible for ICR. Direct Consolidation Loan #3 could be eligible for some of the other Income-Driven Repayment plans like IBR, PAYE, or REPAYE, in which Nate would pay 10 or 15% of his discretionary income.
Reducing the monthly payments
For example, if Nate qualifies for PAYE and Nate and Nancy file their taxes as Married Filing Separately, only Nate’s $60,000 income is used to calculate his monthly payment. His monthly payment would be $282. If he had chosen REPAYE, he must include Nancy’s annual income of $60,000 for the monthly payment calculation after marriage regardless of how they file their taxes, so his payment would have been $782. Double consolidation can be quite an arduous process, but Nate decides to do it to reduce his monthly payment from $1,443 to $282.
Parent PLUS borrowers qualify for forgiveness
Since Nate is a public school teacher, he would qualify for Public Service Loan Forgiveness (PSLF) and he would get his remaining loans forgiven tax-free after making 120 qualifying payments.
Since Nate is pursuing student loan forgiveness, there is one more important thing he can do to further reduce his monthly payments. Nate can contribute more to his employer’s retirement plan. If Nate contributed 10% of his income, or $500 a month, into his 403(b) plan, the amount of taxable annual income used to calculate his monthly payment is reduced, which reduces his monthly payments to $232.
Summary of Nate’s options:
With the standard 10-year repayment plan, Nate would have to pay $1,443 every month for 10 years for a total of $173,191.
With a consolidation, enrolling in ICR, filing taxes Married Filing Separately, and PSLF, he would start with $709 monthly payments and pay a total of around $99,000 in 10 years.*
With double consolidation, enrolling in PAYE, filing taxes Married Filing Separately, and PSLF, his monthly payment starts at $282 and his total for 10 years would be around $40,000.
For maximum savings: with double consolidation, enrolling in PAYE, filing taxes Married Filing Separately, PSLF, and making a $10% contribution to his employer retirement account for 10 years, Nate’s monthly payment starts at $232 and his total payment would be just over $33,000. He would have contributed over $60,000 to his 403(b) account in 10 years, which could have grown to $86,000 with a 7% annual return. Comparing this option with the first option, Nate pays $140,000 less in total, plus he could potentially grow his retirement savings by $86,000.
*The projections in Options 2 through 4 assume that, among other factors such as Nate’s PSLF-qualifying employment status and family size staying the same, Nate’s income grows 3% annually which increases his monthly payment amount each year. Individual circumstances can significantly change results.
Also, direct loan consolidation can be beneficial as it was in this example, but if you had made progress toward loan forgiveness with your loans prior to the consolidation, you lose all of your progress! As always, every situation is unique, so if you are not sure about what to do with your student loans, contact us for a student loan consultation!
*A version of this article was also published in Kiplinger. Read it here.
Aware of the potential impact of the cost of LTC, Jill wanted to know if she should purchase a long-term care insurance policy or put her assets in a Medicaid trust. She reasoned that with the first option, the insurance policy would cover her costs up to the coverage limit. However, Jill balked at the cost of the policy. With the Medicaid trust option, all of her expenses would be potentially paid for by Medicaid, but she would have to put all of her assets into an irrevocable trust. She found that unattractive as well.
Caught between two unattractive options, Jill decided that she needed clarity so she could make a decision based on facts and not emotions. She thought she would check in with a fiduciary fee-only Certified Financial Planner professional. Jill found a planner easily enough. She was a little shocked at the cost of a consultation. She was not used to paying directly for financial advice. For example, she never paid her insurance sales representative, Jason, any money, at least directly. After taking a big breath, she agreed to the cost, scheduled a Zoom consultation, and asked her daughter Kim to join.
LTC is unpredictable
Oddly, she was comforted when her planner confirmed that it is difficult to predict the cost of LTC. First, it was not certain that she would need it: about 30% of us end up not needing it. Because Long Term Care can range anywhere from a few hours of home care a day to years in an assisted living facility or a nursing home, it was not easy to calculate how much it might eventually cost.
After thinking a little, Kim suggested that Jill needed to understand what her resources were. Jill owned her own home with about $600,000 in equity using the Zillow valuation as a benchmark. She also had somewhat over $900,000 in retirement assets and other financial assets worth about $150,000. Jill had always thought that if she did not have LTCi, she would have to use her assets to pay for the cost. She was concerned that there would not be enough and that she may not be able to leave anything for Kim and her brother. Kim rolled her eyes slightly.
The planner pointed out that Jill was making a reasonable income. That took her by surprise because somehow, it had escaped her mind that her resources also included her income. Jill received about $35,000 annually in Social Security and $25,000 from the QDRO of her ex-husband’s pension. Also, she had her own pension that paid about $10,000. In total, she had a little over $70,000 in income. Realizing that, Jill smiled.
What about the house?
It dawned on Jill that if she had to move into assisted living, many of her current expenses would go away. That would liberate cash flow to pay for the assisted living facility costs. She realized suddenly that she might also be able to sell her house, cut the related expenses, and use the proceeds. Kim confirmed that she and her brother would not want to keep the house after Jill passed away.
Jill thought about how she might feel about selling the house. She remembered that her aunt went to assisted living, thinking that she would need the house to come back to. Jill knew that she might change her mind and, like her aunt, refuse to sell. But for now, it was an assumption she was willing to make.
Jill could afford LTC
Based on her current income, she could afford to move into assisted living at current rates. Not that she wanted to!
The planner also pointed out that Jill’s income and costs would likely diverge because of inflation, with expenses growing faster than income. Although Social Security has an annual Cost of Living Adjustment, Jill’s pensions did not. At the same time, the cost of assisted living regularly increases, sometimes faster than inflation. However, at first blush, it looked like she could pull through when the time came.
Kim asked how to deal with the increasing cost of living and whether it made sense to continue Jill’s very conservative investment allocation. Excellent question! The planner explained that Jill’s money needed to continue working for her. If she kept it too conservative, her nest egg would lose ground against inflation. To address her safety concerns, Jill would need to differentiate between money that she would need in the relatively short term and money that she would not need for a while. Jill could keep the first pot in a conservative allocation to insulate it from market fluctuations. She could reach for more return with the second pot, thus balancing the need for safety and growth.
The planner made a point to insist that this was all preliminary, that he needed to go fire up his spreadsheets to give Jill a more definite answer. However, Jill and Kim were excited because they could see that Jill could probably afford long-term care, leave something for her children, and maybe even spend a little more on herself. Kim was relieved because she could feel the fear of her expected financial burden dissipate.
Jill and Kim came back a week later to see what their planner had cooked up. He showed them potential cost projections depending on how long Jill might need long-term care. He showed them a range of projections that would capture many of the possibilities. They decided together the range of options that would make Jill feel comfortable.
He also showed them how changing her investment plan would allow her to be secure and potentially increase her assets, thereby aligning better with her Life Plan. Jill felt a little concerned. She asked what if all these projections and assumptions were wrong and all the money went “poof.” However, being one step removed from her Mom’s emotions, Kim saw the logic.
Finally, the planner suggested that Jill should consider purchasing a hybrid life insurance policy that would convert into a long-term care policy if needed. Should the need arise, the insurance policy could serve as a cushion and cover some long-term care costs. If not required, Kim and her brother would benefit from a death benefit free of income tax. The thought of a “death benefit” made Kim a little uncomfortable. However, Jill felt better about using some insurance in her plan. The planner reminded them that he would not get a commission if Jill purchased the policy as a fee-only fiduciary.
Jill trusted the planner. She was grateful for the clarity that he provided. Most importantly, Jill felt more confident about the future. She decided to take the weekend to think about it.
On the following Monday, Jill called the planner and asked if he would continue planning for her. She wanted her modified investment plan implemented. Jill knew that it had to be updated regularly and that she would need help with that. She also needed help aligning her taxes and estate plan to her new perspective. Jill was pleased that her new financial plan fitted better with her Life Plan.
Who can claim the student loan interest deduction?
You can claim the deduction if:
You were legally obligated and paid interest on a qualified student loan (for example, in other words, if your child is the one who is legally obligated to pay back his/her student loans and you had helped him/her with the payment which included interest, you cannot claim this deduction)
You did not file Married Filing Separately (in other words, you filed as Single, Head of Household, or Qualifying Widow(er))
Your Modified Adjusted Gross Income is less than the maximum amount set by the IRS
You (and your spouse, if married) are not a dependent on someone else’s return
What is a qualified student loan?
A qualified student loan is:
A loan you took out for the sole purpose of paying qualified education expenses for you, your spouse, or your dependent
An education expense that you paid or incurred within a reasonable period of time before or after you took out the loan (the expenses need to relate to a specific academic period and a “reasonable period of time” is defined as 90 days before and 90 days after the academic period)
Used for education provided during an academic period of an eligible student
What are qualified education expenses?
Qualified education expenses are:
Tuition and fees
Room and board
Books supplies and equipment
Other expenses like transportation
What is the MAGI limit for claiming the student loan interest deduction?
For more information about the student loan interest deduction and other tax benefits related to education, read IRS Publication 970. And if you need help figuring out what to do with your student loans, schedule a free 15-minute call with us to learn how we might be able to create a custom plan for you!
Jill came to our office for post-divorce financial planning. At 60 years young with two grown children, she wanted to know whether she would make it through retirement without running out of assets. A former stay-at-home Mom and current yoga instructor, Jill did not have a professional career. Her work-life consisted of a series of part-time jobs scheduled around her children’s.
Jill traded her interest in her ex-husband Jack’s 401(k) for half of a brokerage account, her IRA, and the marital home. Their lawyers decided that Jack’s 401(k) should be discounted by 25%. That would account for the fact that the 401(k)’s pretax assets would be taxed by Uncle Sam and her State tax authority upon distribution.
Adjustments to the Value of a 401k
That sounds reasonable on the surface. But was a 25% discount appropriate for Jill? After making some retirement income projections, it became clear that Jill would likely always be in a lower federal tax bracket than 25%. Had Jill consulted a Divorce Financial Planner at the time of her divorce, he or she would probably have advised against agreeing to a 25% discount to the value of the 401(k).
Jill and Jack also agreed that she would keep half of her interest in Jack’s defined-benefit pension that he earned as a pediatrician with a large hospital. When they agreed to divide the pension, Jack was unclear about the value of the pension. He thought that it was probably “not worth much anyway.” Neither lawyer disagreed.
After some research, I found that Jill would end up receiving a little over $33,000 a year from the QDRO of Jack’s pension. This is significant for a retiree with a projected spending requirement of less than $5,000 a month!
Since Jack and Jill planned to retire in the same year, she would be able to start receiving her payments at the same time as Jack. Also, Jack had agreed to select a distribution option with a survivor’s benefit for Jill.
That would allow her to continue receiving payments when Jack passed away. Jill was aware that women tend to outlive men. So, she was relieved that the survivor benefit was there.
In her case, Jill’s share of the pension was 50% of the marital portion. Was it the best outcome for Jill? It is hard to re-assess a case after the fact. However, had she and Jack known the value of the pension, they might have decided for a different division that may have better served their respective interests. Jill may have decided that she wanted more of the 401(k), and Jack could have decided that he wanted to keep more of the pension. Or possibly Jill may have considered taking a lump-sum buyout of her claim to Jack’s pension. Whatever the case, Jill and Jack would have had the explicit information to decide consciously rather than taking the default path.
The news that Jack’s QDRO’d defined benefit pension had value was serendipity for Jill. Increasing her projected retirement income with the pension payments meaningfully increased her chances to live through retirement without running out of assets. But it is possible that a better understanding of the pension division and other financial issues at the time of divorce could have resulted in an even more favorable outcome for Jill.
Sarah was an example from my previous article. She is a physician making $250,000 a year and has a federal loan balance of $250,000 with a 6% interest rate. Sarah learned that she could save a lot of money by privately refinancing her federal loans. But are there any benefits for Sarah to keep her loans in the federal system?
What if she is thinking about starting a family and possibly working part-time but does not know when that might happen? She wants to pay off her debt as fast as she can but does not like the idea of having required payments of $2,776 a month on the federal 10-year Standard repayment plan or $2,413 a month after private refinancing when her income temporarily decreases for working part-time.
By keeping her loans under the federal system, Sarah has some flexibility over the amount she must pay every month. First, she can pay more than her minimum monthly payment in any repayment plan if she wants to pay her loans off faster. She may also have the option to enroll in one of the Income-Driven Repayment plans and make much lower payments when and if her income decreases.
How are monthly payments calculated for the IDR plans?
To see how IDR plans and forgiveness programs work together, let’s look at another example. Jimmy is a recent medical school graduate making $60,000 a year in a residency program with $250,000 of federal student loans. He feels that it would be difficult to pay $2,776 every month in the 10-year Standard plan or $2,413 a month after refinancing. He is wondering if he should apply for forbearance to suspend payments until he can afford the high payments as an attending physician, just as one of his classmates from medical school, Tom, has decided to do after graduation.
Instead of applying for forbearance, Jimmy should consider enrolling in an IDR plan (and so should Tom). For example, in the Revised-Pay-As-You-Earn (REPAYE) repayment plan, he would be required to make monthly payments based on 10% of his income for a maximum of 25 years, and the remaining balance would be forgiven and taxed as income. If Jimmy’s loans are eligible for REPAYE, his monthly payment would start at $337, which would free up $2,439 a month compared to the Standard plan! But why should Jimmy choose to make payments when he has the option to suspend payments using Medical Residency Forbearance?
It becomes apparent when you consider how forgiveness programs work. To see how much money they could potentially save with one of the forgiveness programs, let’s say that both Jimmy and Tom will be working for a nonprofit or a government employer while they repay their loans, making them candidates for Public Service Loan Forgiveness (PSLF).
Under the PSLF program, Jimmy would only make 120 payments in an IDR plan (REPAYE in his case) based on his income and get the remaining balance forgiven tax-free, which means that he should try to repay as little as possible. Assuming that he gets his monthly payments calculated based on his resident salary of $60,000 for five years before he starts making $250,000, he can be done with his loan payments after ten years of payments totaling about $141,00! Compared to the standard 10-year repayment plan in which he pays a total of $333,061, including principal and interest, he would save over $190,000 by pursuing PSLF.
Low IDR payments may be better than no payment
Because Jimmy started his PSLF-qualifying payments based on his lower salary as a resident, he gets his loans forgiven earlier and pays less in total compared to Tom, who chose forbearance and waited to enroll in an IDR plan and pursue PSLF until after residency. Assuming that Tom had the same loans and circumstances as Jimmy but made all of his PSLF-qualifying payments based on a $250,000 salary, Tom would pay a total of around $263,000, which is over $121,000 more than what Jimmy paid in total.
Bitcoin is used for its comparative advantages over other forms of currency and transaction methods. One major attraction of Bitcoin is that it is comparatively anonymous. That has drawn criticism from certain sectors (i.e., the US government). Websites, most infamously Silk Road (which was closed by the FBI in October 2013), can use Bitcoin as a safe currency when dealing with illegal transactions (e.g., drugs, arms). There are continuing concerns that as Bitcoin becomes more liquid and, volumes start increasing, it will become a target for money-launderers. Other comparative advantages that stand out are simply the fact that it is digital – giving it greater flexibility of usage – and freedom from conventional political pressure or externalities. This second point derives from Bitcoin’s decentralization, making market influences by a central bank (e.g., printing money) or a government (e.g., the expansion of the money supply) irrelevant. Furthermore, at least from the financial side, the greatest attraction is that Bitcoin is essentially frictionless: there are virtually no transaction fees, making cross-border transactions a principal driver of future growth and monetization.
Today, Bitcoin continues to have limited usage. Many services allow individuals to obtain Bitcoins through an intermediary or directly on the market. While large retailers do not accept Bitcoin, there are several services for the purchase of gift cards, for example, providing an indirect method of accessing the retail market. Other websites and small-scale retailers also offer goods and services that can be paid with bitcoin. Notably, it is possible to buy Bitcoin directly through Robin Hood.
4. Every Bitcoin has two sides.
Bitcoin suffers from a number of problems, many of which mirror the currency’s positives. The most significant concern people have and the largest hurdle for Bitcoin and digital currencies, in general, is the lack of regulation and consumer protection. Simply put, what people don’t know, they don’t trust. While government and central bank actions can be debated, these institutions provide the authority to back currencies. Similarly, fees for companies such as MasterCard are used to ensure users. The result of the lack of regulation, among other reasons, is a volatile and relatively illiquid currency. Consumer confidence would go a long way to solving many of Bitcoin’s problems, with regulation, a potential platform, market penetration, and less speculation key factors in controlling this.
From a technical perspective, digital currencies and especially Bitcoin have encountered difficulties of scalability and monetization, with deflation a potential concern given the technical limit of 21 million Bitcoins. While perhaps merely growing pains, the currency has not gained any meaningful traction concerning scale and monetization, unlike its price growth as demonstrated in the graph above. Significantly, the pricing of bitcoin in the graph above is in dollars.
(This post is based on research work by Patrick Chen. Insight Financial Strategists LLC does not provide Bitcoin advice or services).