Tax Preparers’ Role in Student Loan Repayment and Forgiveness

Tax preparer and student loans

As the tax season ramps up, tax preparers have a new opportunity to increase revenue by providing a service that can help millions of people. With over 54% of student debt dollars being repaid using Income-Driven Repayment (IDR) methods, the tax preparers’ role in student loan repayment and forgiveness planning is critical. This is especially true for the tax year 2021 returns. Student loan borrowers have not needed to recertify their income due to COVID for 25 months and will need help.

Since 2016 the number of borrowers using IDR methods has increased by over 75%. This is due to higher college costs, financing of advanced degrees needed for careers, and its required use for loan forgiveness programs. The number of borrowers using IDR methods will continue to increase.  This is due to the number of borrowers entering repayment and the new PSLF Limited Waiver program requirement.

IDR Method Trends

The PayForED’s Student Loan Repayment software helps tax preparers better understand the relationship between tax planning and student loan repayment.  With the trends listed above, tax professionals need the tools to properly compare IDR repayment options and manage the borrower’s AGI for both individuals and couples.

Student Loan Repayment Advice Gap

The accelerated number of borrowers using IDR methods is creating an opportunity for tax preparers and financial advisors to help millions of student loan borrowers get the right advice. Many of these borrowers are high-income, high-debt professionals. To properly maximize the IDR rules and loan forgiveness, a borrower needs to effectively manage their Adjusted Gross Income (AGI).

Most borrowers turn to their student loan servicing company for their repayment advice and options. The problem is the loan service support centers cannot answer or provide any personal financial advice.  With the IDR loan repayment being highly dependent on managing the borrower’s AGI and tax filing options, getting all the answers is not available through the loan servicers.

In the same sense, tax preparers and financial advisors have overlooked this IDR opportunity. A tax preparers’ focus is to find ways to minimize a person’s or household’s tax exposure. With the growing trend of IDR, tax professionals need to take an expanded view of a client’s tax filing decisions and how it relates to their client’s student loan repayment and forgiveness outcomes.   By including tax planning and student loan insights as part of their services, both groups benefit. Tax preparers increase their revenue multiple ways and borrowers get the right advice to lower their student loan payments.

This is the great information gap in the current student loan repayment process.

PSLF Limited Waiver Change

In October 2021, the president signed the new PSLF Limited Waiver Program. This new law fixed many of the problems that have plagued the Public Service Loan Forgiveness approval process. Due to the PSLF Limited Waiver program, over 550,000 individuals will now qualify for loan forgiveness. Many of these borrowers were previously denied and will now qualify for tax-free loan forgiveness.

One of the biggest factors in qualifying for the PSLF Limited Waiver is your need to finish your payments under the PSLF rules. This means a significant amount of these borrowers will need to start using one of the IDR methods. Many of these borrowers may also be married since they have been in repayment for years. A simple tax adjustment to one of these borrowers could mean thousands of dollars in loan forgiveness and lower monthly payments for the upcoming years.

The program is a great step in the right direction but is a little complicated. I have written a 10-step guide to help advisors and individuals navigate the varied reasons and ways to earn PSLF under these rules.

2021 Tax Return Importance to Student Loan Repayment

Part of the IDR process is the annual recertification of the borrower’s income. Due to COVID and the National Forbearance, most borrowers have not recertified their loans in over 2 years.  With repayment starting on 5/1/2022, borrowers will need to confirm their income using their most recent tax information. For recently married couples this will be critical.  If only one of the spouses is using an IDR method and they file their taxes joint, that borrower’s payment could skyrocket.   This occurs because the tax filing decision they selected was focused only on a lower tax bill.

The income verification review method will allow the loan servicer to use tax information that can be up to 18 months old. As the income recertification process also restarts, the tax advisor may improve their clients’ situation by properly using a file extension strategy. The tax professional could review the borrower’s recertification date and determine which tax return should be on file for the IDR review.

As I mentioned earlier, future tax planning will become more important for student loan borrowers. Within the next few years, the IDR recertification will move to an automated renewal. It is currently manual. Borrowers will need better advice to manage their IDR recertification and taxes to avoid costly mistakes. This is another example of the added value you could now provide to borrowers that are not part of your current service.

Summary of the Tax Preparers’ Role in Student Loan Repayment

The current number of student borrowers in actual repayment is approximately 19 million and there are another 20 million borrowers entering repayment shortly.  The Tax Preparers’ role in Student Loan Repayment and Forgiveness is growing. This is especially true with the increasing trend of IDR users.

Tax Preparers have a wonderful opportunity to provide a new service that is directly related to their current core business model.  PayForED has a complete solution that can help tax preparers make this added service easy to implement by having software, training, and outsourcing. You can be part of the solution to the student debt crisis by helping borrowers make the right decision.



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