Public Service Loan Forgiveness: limited waiver opportunity

By Saki Kurose | Student Loan Planning

Public Service Loan Forgiveness (PSLF) is a loan forgiveness program offered by the government for borrowers who work for a U.S. federal, state, local, or tribal government or not-for-profit organization. Under PSLF, public service workers can get their federal student loan balance forgiven after making 120 qualifying payments while working for a qualifying employer.

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.

What is the limited PSLF waiver?

For a limited time, between now and October 31, 2022, borrowers may be able to receive credit for past payments made on loans that would otherwise not qualify for PSLF. The employment requirements have not been changed. To qualify, borrowers must be employed full-time by the government, 501(c)(3) not-for-profit, or other not-for-profit organization that provides a qualifying service.

Who qualifies for the waiver?

• borrowers with Direct Loans
• those who have already consolidated into the Direct Loan program
• those with other types of federal student loans who submit a Direct consolidation application while the waiver is in effect
• students only (no parent borrowers)

Who benefits?

Students who made payments while working for qualifying employers but the loans were previously determined to be disqualified (ex: had FFEL loans instead of Direct Loans or was a wrong repayment plan like Extended Repayment instead of an IDR plan)

Who does NOT benefit?

Borrowers who:

• already refinanced to a private loan
• already paid loans off
• Parent PLUS loan borrowers (will not become eligible even if consolidated before October 31, 2022)

Do this before October 31, 2022

October 31, 2022 is the deadline to qualify for the limited PSLF waiver.

Make sure to:

• consolidate into the Direct Loan Program if you need to (borrowers with older FFEL loans from before 2010 should)
• submit a PSLF form

What payments will count?

-payments made after October 1, 2007 (when the PSLF program was started) and on or before October 31, 2021

What to expect

Automatic adjustments will be made:

• When/if you have consolidated your loans into the Direct Loan Program and submitted the PSLF form, you will see automatic adjustments in your account.

If you’ve already done all the above steps:

• You don’t need to do anything until you receive an update/communication from Student Aid

If you have Direct Loans but haven’t applied for PSLF:

• Submit a PSLF form to see if your current or past employers qualify for PSLF by October 31, 2022 (don’t wait- expect delays)

If you have FFEL loans or Perkins loans:

• submit a consolidation application to get the loan into Direct Loan program
• submit PSLF form by October 31, 2022

Don’t know what types of loans you have?

• log into your studentaid.gov account, My Aid and see your Loan Breakdown section
• ”FFEL” (Federal Family Education Loans) or “Perkins” must be consolidated (it becomes a Direct Consolidation loan afterwards) to qualify for this Waiver

As always, if you are not sure what to do, book a free introductory call with a student loan expert to make sure you don’t miss this opportunity!

Seven Year End Wealth Opportunities

By Chris Chen CFP | Financial Planning , Investment Planning , Retirement Planning , Tax Planning

As we come close to the end of the year, you still have time to make a few smart financial moves.

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.

1. Harvest your Tax Losses

As of October 22, the S&P500 is up 21%, and the Dow Jones is up 16% for the year. Unfortunately, some stocks and mutual funds are still posting a loss for the year. Therefore, it is likely that some items in your portfolio show up in red when you check the “unrealized gains and losses” column in your brokerage statement.

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. 

2. Review your Investment Planning

Tax-loss harvesting can be used effectively for short-term advantage. However, it also provides the opportunity to focus on more fundamental issues. So, in the first place, why did you buy these securities that you just sold? At one time, they probably played an important role in your investment strategy. And now, with the cash from the sale, it’s important to be mindful when reinvesting.

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.

3. Review your Retirement Planning

There is still time to top out your retirement account! In 2021, you can contribute up to $19,500 from your salary, including employer match, to a standard defined contribution plan such as 401(k), TSP, 403(b), or 457, subject to the terms and conditions of your plan. And if you happen to be 50 years old or older, you can contribute an additional $6,500 for this year.

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.

4. Roth Conversions

Our current tax environment is especially favorable to Roth conversions. With the current TCJA law, income tax rates will be going back up in 2026. Therefore, Roth conversions could cost less in current taxes until then. Of course, Congress could vote for tax rates to go up before the end of the year. There is even the possibility that Congress will remove the ability to do a Roth conversion after 2021.

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.

5. Choosing your Health Plan 

With health insurance re-enrollment season, the annual ritual of choosing a health insurance plan is with us. With health insurance getting ever more expensive, this could be one of your more important short-term financial decisions. 

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.

6. Plan your RMDs

Don’t forget to take your Required Minimum Distributions (RMDs) if you are past 70. The penalty for not taking your RMD is a steep 50%. Your first minimum distribution must be withdrawn by April 1 of the year following the year in which you turn 70 ½, and by December 31 for each year after.

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.

7. Charitable Donations

You could also plan for a Qualified Charitable Distribution from the IRA. That distribution must go directly from the IRA to a charity. Unlike a normal RMD, it is excluded from taxable income and may count towards your RMD under certain conditions

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!

 

New Graduates’ Guide to Paying Off Student Loans

By Saki Kurose | Financial Planning , Student Loan Planning

Congratulations on finishing your degree! Now it’s time to study up on the best way to pay off your student debt. You have a lot of options, so choose your strategy wisely.

If you have recently graduated from college or graduate school with student loans, you might be wondering what to do about your loans. How long will it take to pay off the debt? How much would you have to pay monthly? When do you start the repayment?

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.

I’m done with school. Now what?

Before you pick a student loan repayment plan from a list of acronyms you do not really understand, assess your current financial situation and think about your career and goals . You cannot get to your destination if you do not know where you are starting.

First, you need to know what happens when you graduate, leave or drop below half-time enrollment from your college or graduate or professional school. If you have federal loans (such as Stafford loans), you may have a grace period or a deferment period, which is typically six months, before you have to start making payments. If you cannot make the payments, you may apply for forbearance. You are not required to make payments during the grace period, deferment or forbearance. However, be aware that interest may continue to accrue during the period of non-payment.

Take an inventory of your 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 your studentaid.gov account. 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 like annualcreditreport.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.”

Federal student loans are unique and complicated

Federal student loans are different from other types of loans because they come with benefits such as flexible payments, forgiveness, and forbearance or deferment. This plethora of options was put in place to make repayment easier for borrowers, but too many choices can be intimidating and it is easy to get overwhelmed.

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

Pursuing loan forgiveness in an IDR plan can be quite complex and therefore, it is important to know how the system works and have a strategy to navigate through it if you want to save money. If you are enrolled in an IDR plan, you should know that:

1. You must verify your income every year to recalculate your monthly payments.
2. 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.
3. Loans paid under an IDR plan qualify for forgiveness if there is a balance remaining at the end of the term.

Loan Servicers

Also, look for communications from your loan servicer. They handle the administrative tasks relating to your student loans, such as billing, at no cost to you.  However, do not rely on the servicers to choose your repayment plan or strategy because the servicers are not trained finance professionals. There are short- and long-term implications for any student loan repayment option you pick, and they can be significant. Depending on the repayment plan you choose, you can save or lose thousands (or even hundreds of thousands) of dollars. YOU need to know what strategy is best for you!

Beware of scammers

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:

1. Pay your debt off as fast as possible and minimize interest.
2. Pay as little as possible and maximize forgiveness.

Strategy #1: Paying your loans off as fast as possible to minimize interest

By paying off the entire balance of your loans as fast as you can, you can save money because you are minimizing the interest accruing on the loans. You can also reduce the interest rate by refinancing your loans to get a lower interest rate as shown in my blog article: “Private Student Loans: Should I Refinance a Federal Student Loan?“

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

A lot of us are taught to get rid of debt, so this may seem counterintuitive, but if you pursue student loan forgiveness, you can save more money by paying into your loans as little as possible. Those who pursue this strategy should explore all of the planning strategies used to lower their monthly IDR plan payments and make sure they are doing everything correctly to be on track for forgiveness. (To see an example of how IDR plans and forgiveness programs work together, you can take a look at the case studies in this blog article: “The Best Way to Pay Off $250,000 in Student Loans.”)

An alternative strategy: Keeping your loans in the federal system

There is another strategy that is less commonly pursued because it might not necessarily save you money. Let’s call this the “federal insurance” strategy. With the federal insurance strategy, you keep your loans in the federal system even if it costs you more, but you would be protected from any unexpected events, such as losing your income. Think about how federal borrowers who lost their jobs during the pandemic benefitted from the 0% interest and the payment freeze that was put in place in March 2020. This is a good strategy if you are expecting or experiencing big life changes, such as a growing family or job changes, and your cash flow is not stable.

Conclusion

Student loans can be intimidating. You may hear terms such as refinancing, consolidation, income-driven repayment plans and their confusing acronyms and wonder if you should also do whatever it was that your friend did. But questions like “Should I refinance?” or “Should I consolidate?” are not the questions you should be asking first. They are simply tools for managing your finances to live the kind of life you want. If you are not sure about what to do with your student loans, schedule a free 15-minute call with us to find out how you can benefit from working with a Certified Student Loan Professional to get a customized student loan repayment plan!

 

*A version of this article has also been published on kiplinger.com. Read the article here.

Should Your Spouse Join You in a Divorce Workshop?

By Chris Chen CFP | Divorce Planning , Financial Planning , Retirement Planning

Should Your Spouse Join You in a Divorce Workshop?

As a Financial Planner, I participate in many different types of workshops, including divorce. Pandemic obliging, these days they are usually webinars.   Divorce is no exception. Should you suggest to your spouse that they should join you in a divorce workshop? Or do you want to keep the information that you got in a divorce workshop to yourself?

As a Certified Financial Planner, I often answer complicated questions with “it depends.” However, for this question, I will just say, “Heck, yes, bring him or her along”! I recently recommended to a divorce workshop attendee that she come back to other workshops and bring her husband along. As it happens,  they are still talking, and my workshops are still Zooming. So, she might be able to get him there. The primary benefit of bringing your spouse to a divorce workshop is that you will start to get him on the same level of understanding about divorce issues.

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.

If you and your spouse do go to the same divorce workshop, take it a step further and ask the questions on the points you disagree about. At the workshop, you will get a neutral expert opinion that may be helpful. Is it about planning for retirement with a lot fewer assets? Or whether you should keep your inheritance as separate property? The challenge of introducing the “D” word to the kids? The difficulties of comparing pensions to other assets? The potential for a creative solution? It doesn’t matter what the areas of disagreement are. You will both hear the same answer and have a starting point to move forward.

In war, you want to keep to yourself all the advantages that you can. Divorce may be war, but it is different in at least one respect: it pays to make sure that your spouse is as informed as you are because that reduces your legal bills and gets you closer to the finish line. Heck, it is also worth it to find out that your position might be wrong. That too can form the basis for moving on. You should note that what you hear in a divorce workshop can be great information, but it is not “advice.” Because every situation is unique, you will have to go back to a professional for objective advice. However, all journeys start with one step forward. Getting on the same page can be that important first step.

Ways to pay off Parent PLUS loans

By Saki Kurose | Financial Planning , Student Loan Planning

Introduction

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.  

In a case like this, when it is difficult for a federal borrower to afford monthly payments on a standard repayment plan, it’s a good idea to see if loan forgiveness using Income-Drive Repayment plans is an option .  In Nate’s case, his Parent PLUS loans can become eligible for the Income-Contingent Repayment (ICR) plan if he consolidates them into one or more Direct Consolidation Loans.  If Nate enrolls in ICR, he would be required to pay 20% of his discretionary income, or $709 a month.  Compared to the standard 10-year plan, Nate can cut his monthly burden in half by consolidating and enrolling in ICR!

Double Consolidation

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:  

1. 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.  
2. 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.*
3. 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.
4. 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.

As you can see, there are options and strategies available for parent borrowers of federal student loans .  Some of the basic concepts applied in these strategies may work for student loans held by the students themselves as well.  An important thing to remember if you are an older borrower of federal student loans is that paying back the entire loan balance might not be the only option you have.  In particular, if you qualify for an Income-Driven Repayment plan and are close to retirement, you can kill two birds with one stone by contributing as much as you can to your retirement account.  Also, since federal student loans are dischargeable at death, it can be a strategic move to minimize your payments as much as possible and get them discharged at your death .

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.

How You Can Plan to Pay for Long Term Care

By Chris Chen CFP | Financial Planning , Retirement Planning

Student Loan Interest Deduction: How can I claim it?

By Saki Kurose | Financial Planning , Student Loan Planning , Tax Planning

It’s time to do your 2020 taxes!  If you have student loans and paid interest for those loans, you might be eligible for a deduction called the student loan interest deduction. For 2020, the IRS is allowing eligible taxpayers to deduct up to $2,500 of interest paid on a qualifying student loan per return.

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 2020, if you file your taxes as Single, Head of Household, or Qualifying Widow(er), you can deduct the full amount of the interest you paid (up to $2,500) if your Modified Adjusted Gross Income (MAGI) is not more than $70,000. If your MAGI is $85,000 or more, you cannot deduct any of the interest, and for taxpayers with MAGI between $70,000 and $85,000, you can claim a partial deduction.

If you file your 2020 taxes as Married Filing Jointly, the MAGI limits are simply doubled.  You get a full deduction if your MAGI is not more than $140,000   and your deduction is completely phased out if your MAGi is $170,000 or more. 

What is my Modified Adjusted Gross Income (MAGI)?

Don’t look for your Modified Adjusted Gross Income on your tax return…because you won’t find it!  Instead, you have to look for your Adjusted Gross Income (AGI) and do a little math. You can find your AGI on line 11 of Form 1040 or 1040-SR.  Then you have to add back certain deductions found on your Schedule 1, including any IRA contribution deductions, taxable Social Security payments, excluded foreign income, interest from EE savings bonds used to pay for higher education expenses, losses from a partnership, passive income or loss, rental losses, and exclusion for adoption expenses. Some of these deductions can be uncommon, so your MAGI could be the same or pretty close to your AGI.

What do I have to do to claim the student loan interest deduction?

If you go to this IRS page, you can use their interactive tax assistant to figure out if you can deduct the interest you paid on a student loan.

When you get ready to file your taxes, look for Form 1098-E. If you paid $600 or more of interest on a qualified student loan, you should receive a Form 1098-E.  And when you file, since the student loan interest deduction is treated as an adjustment to your income, you don’t have to claim it as an itemized deduction on Scheduled A to claim it.

If you have federal student loans, you may not have paid a lot of interest in 2020 since federal student loan payments were suspended and the interest rate was set to 0% in March 2020.  However, if you did pay interest on any federal or private loans, make sure to look into whether or not you can claim this 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!

Should you value your pension?

By Chris Chen CFP | Divorce Planning , Financial Planning , Retirement Planning , Tax Planning

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.

This highlights how vital it is to seek advice from the right divorce professional for the right issues: lawyers for legal matters and Divorce Financial Planners for financial questions. When mediators and divorce lawyers team up with divorce financial planners, the additional expense often pays for itself.

What About the Pension? 

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.  

Each defined-benefit pension has its own rules. Each pension division should be evaluated individually.

The Value of Pension Division Analysis

A defined-benefit pension such as Jack’s does not have an easily assessable value in the same way as an IRA or a 401(k). Pension statements don’t come with a dollar value. A pension promises to pay the employee a certain amount of money in retirement based on a specific formula. For the pension to be fairly considered in the overall asset division, a professional must value it.

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.

The Best Way to Pay Off Federal Student Loans

By Saki Kurose | Financial Planning , Student Loan Planning

In my previous article about private student loans, I mentioned that students should consider taking out federal student loans before taking out any private loans.  

Federal student loans have protections and benefits that private student loans most likely won’t have .  Federal loans can be discharged if the borrower dies or becomes totally and permanently disabled. Also, borrowers may have access to Income-Driven Repayment (IDR) plans and loan forgiveness programs.  

Income-Driven Repayment Plans

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?

Under the Income-Driven Repayment (IDR) plans, the borrower’s required minimum monthly payment is calculated based on a portion of the borrower’s income.  The borrower may not be required to pay back the full amount of his/her loans. That is unlike the federal Standard repayment plan or private loans, which require the borrower to pay the principal and the interest of the loan in full over a specified term.  For example, if Sarah got married, had a child, and her income temporarily decreased to $150,000, she may qualify for one of the IDR plans, such as the Pay-As-You-Earn (PAYE) repayment plan. Then her monthly minimum payment could be reduced to $978.

IDR and Public Service Loan Forgiveness 

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.

As you can see, it is important to explore your options if you have student loans (especially federal student loans) and have a strategy that aligns with your life and career plans .  It can save you tens or hundreds of thousands of dollars.  Perhaps more importantly, knowing that you have a plan and are in control of your debt can help you prepare for life events and give you peace of mind.  However, it is a complicated process full of traps. If you are not sure what to do with your student loans, schedule a free 15-minute student consultation with me here!

*A version of this article has also been published on Kiplinger.  Read it here.

 

What is Bitcoin, exactly?

By Chris Chen CFP | Financial Planning , Investment Planning

What is Bitcoin, exactly?

What is Bitcoin?

Bitcoin is a cryptographic protocol operating on a peer-to-peer network created in 2009. This protocol is utilized in the form of a currency, allowing for direct transactions between individuals. To put it more simply, Bitcoin is an anonymous digital currency, which circumvents financial intermediaries in transactions.

Four key Bitcoin considerations:

1. How are Bitcoins created? 

Bitcoins are created through a process called “mining.” Fundamentally, Bitcoin is founded upon an algorithm, i.e., a mathematical formula, which regulates the speed at which Bitcoin can be “mined” or created and how it can be used or transferred. Practically, a computer program works to solve an equation. Once the computer solves the equation, a certain number of Bitcoins is generated. The time it takes to solve an equation gets progressively longer, requiring more resources and leading to diminishing returns as the cap of 21 million Bitcoins approaches (i.e., there is no additional money supply).

2. How does Bitcoin work?

[inlinetweet prefix="RT @boston_planner" tweeter="" suffix="#financialinsight #bitcoin #crypto"]Bitcoins have two encryption keys: one public and one private. The public key has a similar role to an account number, and the private one has a similar function to a PIN. Anyone can see the public one, and the private one is stored in a “wallet” on the user’s computer or mobile device. These wallets store multiple Bitcoin addresses created at the users’ discretion. To undertake a transaction, the user would simply give (whether directly or through a Bitcoin client) their private key, which can then be matched to the public key to confirm the transaction’s legitimacy. Transactions are recorded in a public ledger in what is called “blockchains.”

3. Why do people use Bitcoin? 

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).