As we approach the beginning of tax season, many student loan borrowers need to be made aware of the impact of their tax filing decisions on the monthly student loan payment. Many borrowers did not need to worry about student loan payments during the National Forbearance period. With repayment restarting, more borrowers are looking for different options to lower their student loan payments. An often-overlooked solution is that better tax advice can lower student loan payments and improve student loan forgiveness possibilities.
The problem is that most borrowers are getting their advice from loan servicers who cannot legally provide these insights. It is not their fault. Due to the increased complexities and the growing number of Income-Driven Repayment (IDR) users, loan servicers cannot provide tax or personal financial advice. Their advice needs to be expanded on by a professional who understands taxes and can manage your taxable income.
An additional problem is that the IRS data will be directly integrated into the Department of Education systems starting in 2024. Many IDR users have their current payments based on income from 2019 or 2020 taxes. Beginning in March, your payment could be based on the income listed on the tax return on file.
Understanding The Income-Drive Repayment Relationship to Your Taxes
Many borrowers need to understand that specific repayment methods are based on their Adjusted Gross Income and the terms of the loans. Most loan repayments, like car or mortgage payments, are based on the amount borrowed, interest rate, and length of repayment. An IDR method is based on your Adjusted Gross Income which is found on your tax return.
When we talk to the loan servicer, most borrowers hear the various methods but don’t understand how that method is calculated. They are just concerned about the monthly payment. The loan servicer can provide you with the proper calculation based on the information you provide but cannot explain how to improve it.
Importance of 2023 Tax Filing Decision for Student Loan Borrowers
Student loan repayment restarted in October after 42 months of non-payments. Over 54% of student loan dollars are repaid using an IDR method. With these repayment methods, the borrower must recertify their income each year. They have an annual IDR income certification date. Starting in March 2024, this annual review process will begin again as part of the repayment restart.
At the same time, the Department of Ed will start using the IRS directly from the tax return. It is not mandatory for loan repayment, but for the FAFSA, it is. We expect the DOE to mandate it within 6 – 18 months. With the timeline and the annual income recertification process beginning, your tax filing decision for 2023 is critical.
Loan Servicer Advice Role in Student Repayment
Many borrowers depend on the loan servicer’s advice since it is free but this advice may be incomplete. With increased complexities and the future integration of the IRS data, borrowers will need to know more specific information. The DOE is expecting significant growth in the IDR methods over the next 36 months and they are designing more programs around the IDR methods.
As an example, the new SAVE program is an IDR method. Any borrower who is pursuing loan forgiveness must use an IDR method. The loan servicer cannot advise on how to lower the borrower’s Adjusted Gross Income (AGI), which may result in a lower monthly payment. This missing piece of advice is one shortcoming.
The college financial aid officers have the same restriction with providing any tax or personal financial advice.
Another problem facing the loan servicer is the reduced service hours. There are no weekend hours and limited evening hours.
Tax Professionals’ Role in Student Loan Repayment
With the new IRS data integration, the tax professional should be prepared for this change. I speak frequently to these types of professionals, and they are overwhelmed with all the COVID-19 rules. To this point this has flown under their radar screen, so borrowers must be proactive.
In addition, student loan repayment strategies typically contradict the tax professionals’ primary focus of lowering your tax bill. Your tax bill will often increase since you will file your taxes as a married and separate couple. Here is where the extra step needs to be investigated. Your student loan repayment will likely offset the tax increase. This strategy will lower your monthly student loan payment and result in a few hundred dollars in net savings.
With this new IRS data integration into the DOE system, it will take another year for tax professionals to see the financial impact on their clients due to the increased repayment amount.
Financial Advisor’s Role in Student Loan Repayment
A financial advisor could be a great option since more advisors take a holistic approach to your financial future. They will not be able to do your taxes but they can work with the tax professionals to help you manage your AGI better. Their combined advice will result in a lower monthly repayment and factor in other financial goals.
They can explain to the borrower various options and help compare these options based on specific situations. The tax planning goes beyond just how you file your taxes. It requires you to understand which saving vehicles to use to lower your AGI, who should claim the dependents, and how it fits your other personal financial goals.
On the PayForEd website, we have a list of trained professionals who are trained in college funding and student loan repayment. Some are tax professionals, also.
Be Careful of Student Loan Repayment Scams
Many borrowers are looking for quick answers due to the confusion and stress of student loan repayment. If you need to hire a professional, ensure the person knows both student loan repayment and personal finances.
Never provide your FSA ID and Password to a cold caller since this will give them access to all your personal information, including your Social Security number, birthday, mailing address, and other contact information.
If the solicitor makes promises before understanding your situation, it is most likely a scam. Be careful if they talk about a specific government program you qualify for.
Better Tax Advice Can Lower Your Monthly Payment Conclusion
This article explained the growing importance of managing your taxable income or AGI. For borrowers using the IDR method this is critical. The current problem is where borrowers can find help and advice. Most borrowers overlook that better tax advice can lower their student loan repayments.
With the new IRS data integration into the DOE system, borrowers may need to start paying for the proper advice. This change for borrowers may be well worth it due to the limitation of the loan servicers. The closest parallel is our income taxes. The IRS sets the rules and ensures we are compliant, but we do not expect them to do our taxes. Most people with complex situations use a tax professional to submit their taxes. Student loan repayment advice is moving in the same direction. PayForED makes it their job to offer comprehensive student loan solutions to help you plan your child’s educational and repayment future.
