BONUS EPISODE: Student Loan Forgiveness, Repayment, Taxes, and Inflation with a Certified Student Loan Professional®

Katie: Welcome to a special bonus episode of​​ The Money with Katie Show, #RichGirls and Boys. We don't do these very often, but given the huge decision that came out of the White House last week, we decided it made sense to bring a professional on the show, to walk us through everything you need to know about what is likely to happen next in the saga of student loan forgiveness. I will link sources for all the claims in the show today in the show notes, in case you're curious and would like to dig in yourself. So our guest today is Meagan Landress, a student loan consultant and FINRA Certified Student Loan Professional—yes, that is evidently a thing—because obviously this is all pretty complicated. Her specialized education around student loan debt allows her to guide borrowers through informed repayment decisions, taking into account their full financial situation and goals. So Meagan joined the organization Student Loan Planner in 2019, and she’s since consulted on $160 million of student loan debt for more than 900 households. 

So before we chat with Meagan, I want to acknowledge the elephant in the room here. The Biden administration's policy decision was both extremely popular with some people and extremely controversial with others. Depending on your unique experience, political beliefs, perspectives, you may agree and be thrilled, or disagree and be furious with this program. But this episode is about navigating what this means now that it's happening, and address some of the most popular concerns that I have heard since the announcement came down last week, about what this means for the American people in general, not just the student loan borrowers—aka, think taxes and inflation. 

First let's get the lay of the land. There are about 45 million federal student loan borrowers in the US, who hold a cumulative $1.6 trillion of debt, which is the second-largest type of debt in the country, behind mortgage debt. More than 60% of these borrowers, about 27 million of them, are Pell Grant recipients, and according to the Department of Education, of those Pell Grant recipients, 66% of them came from households with an annual income of $30,000 or less. In general, to qualify for a Pell Grant, your household has to make less than $60k, but the majority make less than $30k. That means 40% of all borrowers who will be receiving relief came from households that were living at or below the federal poverty line. 

I include this statistic because I've seen and heard a lot of rhetoric that suggests that this policy is putting a lot of money back in the hands of people who are already wealthy or have a lot of relative privilege. I was speaking with a friend who was really upset about it, and he described to me how a plumber is going to be paying for a Harvard lawyer’s education, which understandably sounds incredibly unfair. Let's look at the data, because it does paint an interesting picture. Friend of the show Nick Maggiulli published a piece on Of Dollars and Data this week that helped us visualize who is going to be helped by forgiveness. According to the 2019 Survey of Consumer Finances, the wealthiest households with the highest net worths are the 22% who have college degrees, but no student loan debt. So assuming that we control for the income threshold of $125k/$250k, and we omit everyone above it from the data that we look at, 13% of households have college degrees and debt, while 8% have college debt but no college degree. So functionally, this means they didn't graduate. So that's roughly 21% of households that are under the income threshold. And Maggiulli found that these two camps basically sandwich the group that has no debt and no degree. Those with debt and no degree generally have lower net worth, less wealth, than those with no debt, no degree, but those with debt and with a degree tend to still have a higher net worth than those without debt and without a degree.

So Maggiulli concludes, “When examining net worth, Biden's program would definitely help those on the lower end of the wealth spectrum that are struggling. Nevertheless, those with student loans and a college degree are for the most part doing better than those with no debt and no college degree. So the policy comes off as benefiting many of those who are already doing better than the vast majority of US households.” I think it's important to dispel this myth that this money is predominantly going to rich white students who got expensive degrees from private universities and work these high-paying jobs today. The White House estimates that 90% of the benefits are going to go toward borrowers earning less than $75,000.

Another concern that I've heard this week pretty ubiquitously is that the average American taxpayer is going to foot the bill for this. So let's address that question. Let's talk about it. Is this going to make our taxes go up? A popular headline I've seen making the rounds suggests that this policy is going to increase taxes for the average American by $2,000 per year. I want to quickly dispel that, because I think it's dangerous to the point of being blatant misinformation. And it's understandably inflammatory. Like if I hear this, I'm probably going to be pissed off too. To provide context to this figure, it's important to understand how the policy think tank—the fiscally conservative National Taxpayers Union that published it—arrived at the number. Estimates suggests that the forgiveness policy is going to cost more than $300 billion over the next 10 years. So the analysts took the $300 billion figure and they divided it by the number of American taxpayers, which was around 158 million as of 2019, arriving at a figure of $2,000 per person. Now, there are a few issues with this calculation, chief among them that we have a progressive tax system in the US. All taxpayers pay different effective tax rates based on their total income. And as you earn more, you pay more, as you should. To divide the total cost of the program evenly amongst every taxpayer, regardless of their income, ignores the fundamental reality of how citizens are taxed. And frankly, it takes advantage of the clickbait potential behind claiming it's an average. In reality, $300 billion represents about 0.5% of our annual spending as a country. 

Newsweek actually investigated this figure as well, and recalculated it based on the progressive tax system, to determine how much it would cost if it were placed on taxpayer shoulders directly, and found that taxpayers who earn less than $50,000 per year would see a tax increase of about $15 per year for the next decade, while those earning above $200,000 per year may pay up to $995 more per year for the next 10 years. That is, if the government raises our taxes at all to pay for this, which historically hasn't been very common. 

Here's why I say that. We have been operating with a pretty strong deficit for the last 20 years. We haven't really had a budget surplus since Clinton's presidency, between '98 and 2001. Last year, we spent nearly $7 trillion and we only earned $4 trillion in tax revenues, which is why my personal attitude toward this expenditure is that it's receiving a disproportionate amount of rage for how relatively insignificant it is, compared to the amount of money our country spent on things like stimulus checks and PPP loan forgiveness. Stimulus checks alone, for example, costs three times as much as student loan forgiveness. Now, that is not to say that you have to be a fan of any of that spending. You may disagree with all of it and think that we're just spending too much in general. My point is merely that comparatively, this amount is not a lot. And as a result, it's very unlikely that this specifically would impact your tax bill much, if at all. Now, there is a new tax proposal floating around right now to help fund Medicare. And from what I've seen via taxfoundation.org and an Ernst and Young tax memo for this 2023 proposal, it aims to increase income taxes for those earning more than $400,000 per year single, or $450,000 per household. (We are seeing conflicting reports for the married filing jointly figure. As of the time of this recording, some sources say $500,000 per household. Others say $450,000. It is likely inconsistent because it's just a proposal at this point and it's subject to change.) The important thing is, it does help us understand the ballpark incomes that we're dealing with. 

There are a lot of different inclusions and inconsistencies in the variations of the proposals I have seen, but in my mind, the most notable that jumped out to me pertain to income and capital gains treatment. For example, the new proposal would also treat realized long-term capital gains on more than a million dollars in a single year as ordinary income, and perhaps the most shocking move, tax unrealized capital gains on households that have more than…drum roll, please…a hundred million dollars in net worth. I'm going to be honest though: I really doubt that it's going to pass, because it would negatively impact the 10 richest members of Congress, who all have net worths of more than a hundred million dollars. And well, we all know what that means. For context, having a net worth of more than a hundred million dollars represents just 0.01%, the richest 0.01% of Americans. And I'm pretty confident that that subset of our country is not actively listening to The Money with Katie Show, though if you are, hi, how are you? My Venmo is Katie Gatti. 

The point is, if you earn less than $400,000, the likelihood that your tax bill is about to measurably increase to pay for any of the government spending that has occurred over the last few years is relatively unlikely. What's more likely is increased taxes in the next few years on the richest 4% to 5% of Americans, and inflation that slowly shrinks the value of our federal debt over many years, which is a trick as old as time. 

Oh yeah. Inflation. That is another popular concern right now. And admittedly, the one that initially seemed the most legitimate to me, but it turns out that one may not be as much of a concern either, if we are to believe The Wall Street Journal’s reporting. Michael Gapen, the head of US economics research at Bank of America, pointed out that federal loan borrowers have had their payments frozen for the last two and a half years, which means they likely have not been making payments. So their disposable income is not necessarily going to go up relative to where it is now. In other words, we have already been living in a reality for the past two-plus years where folks don't make payments on their student loans. And Gapen's theory is that things would stay relatively the same. A Goldman Sachs analysis that was released last Thursday found that student loan payments would fall from 0.4% of personal income to 0.3%. And they aren't projecting debt cancellation to have much of an effect on inflation. The report said, and I quote, “debt forgiveness that lowers monthly payments is slightly inflationary in isolation, but the resumption of payments in January by everybody else is likely to more than offset this.”

Of course, not everyone agrees. Marc Goldwein, the senior policy director for the Committee for a Responsible Federal Budget (LOL, that sounds like a fun job), a nonpartisan think tank, told the Journal that even the 23 million borrowers with remaining balances still have four more months of deferred payments, which will probably continue to boost inflation until January at the least. Now I personally find Gapen’s explanation and the Goldman Sachs report—that federal loan borrowers haven't been making monthly payments for two years, so those who received forgiveness are not actually going to see any change in their expendable income and the fact that everyone else is going to resume payments in January and therefore have less to spend each month—I find that to be a pretty cogent explanation for why inflation fears may be a little bit overblown. Of course, it's also worth noting that this does very little, if anything, to actually solve the problem. A recent think piece I read by a guy by the name of Mike Solana breaks down this, as he calls it, “unmitigated disaster,” by proposing a few solutions that would have actually helped, including, number one, make repayment of all student loans assumed the current year only 100% tax deductible, and retroactively, at least in some part, for people who already paid. So that would be his attempt at making this quote unquote “fair.” Number two, remove all legal barriers to discharging student loan debt in bankruptcy. This is a big one. Student loan debt is the only type of debt that is non-dischargeable in bankruptcy, which means there's literally no way out. Number three, abolish the institution of federal student loans. 

All right. So the thinking goes that if we abolish the federal backing of student loans and make them dischargeable in bankruptcy, well, now lenders have to be more judicious about who they loan to. Gone would be the days of the government handing educational institutions a blank check for however many zeros they can fit on the dotted line. And the hope is, a sort of price signal would be restored in the market, that degrees that have a higher chance of quote unquote “paying off” may allow a borrower to get more, and institutions that have better job placement rates would likely look more favorable to lenders, as opposed to our current system, where it doesn't matter where you're going or what you're studying, you can borrow as much or as little as you want. The government will cut you the check and you're kind of stuck with it for the rest of your life. So choose wisely. If loans are dischargeable in bankruptcy, skin, meet game. We've now made it such that blind lending to any person for any amount is no longer attractive, because a borrower that's likely to default would not receive money in the first place. 

Now that we've got all of that out of the way, we've addressed some of the big concerns, let's talk about the program itself, and the changes that you can expect. Meagan, welcome to The Money with Katie Show. Thanks for being here on such short notice.

Meagan Landress: Of course. Yeah. Lots of news last week. We got a lot to talk about. 

Katie: Yes, we do. So I guess where I want to start today, Meagan, is who is eligible for this repayment? Can you walk us through that? 

Meagan Landress: Yep. So there's up to $20,000 of loan cancellation. So first and foremost, who's going to be eligible for this is if you have federal student loans, or loans owned by the Department of Education. So a quick way to find out if you have Department of Ed-held loans is open up your studentaid.gov account and see if you still have a loan balance there. Now the second part to if you're eligible is if you made less than $125,000 per year for 2021…we believe they're going to go off of 2021's income, since that's the most recent tax return filed, so that's for a single person. If you are married, then the income limit is $250,000, and the other part to this….so there's a $10,000 cancellation amount and there's a $20,000 cancellation amount. $20,000 is going to be for those who were a Pell Grant recipient. This is also something you can confirm whether or not you were by logging into your studentaid.gov account. It's one of the first two numbers that you'll see. If you are not a Pell Grant recipient, then you'll get $10,000 of loan cancellation. 

Katie: Okay. Do we have reason to believe that there's going to be a sort of phase-out with the income, or do we think it's going to be binary? Do we know that yet?

Meagan Landress: It sounds as if it's black or white, that it's going to be either you're eligible or you're not. At this point, it doesn't seem like there's any phase-out. 

Katie: Okay, cool. That's interesting. I was just kind of curious about that. So if somebody knows that this applies to them or that they have Pell Grant loans, or they qualify for the $10,000, how do they go about applying for this? 

Meagan Landress: It could be automatic for a lot of folks that the Department of Education already has income information for. And this is possible if someone's on an income-driven plan, but the problem is no one has had to make income-driven payments for almost two and a half years because we've been in this COVID payment freeze for so long. So it sounds like the majority of folks are going to have to apply for this. And there's going to be an application developed and put on studentaid.gov that anyone could submit an application for, it seems like in the next few weeks. 

Katie: Okay. Studentaid.gov. Yeah. We'll put that in the show notes. And we're…you're expecting, Meagan, that you think we’ll maybe see an application in the next few weeks come out?

Meagan Landress: Yep. That's…as far as what Department of Ed has said so far, is that they're developing it now and we should definitely…well, they said that we should definitely see it by December 31st, but I think we're going to see it a lot sooner. They said a couple of weeks, initially.

Katie: Okay, cool. Cool. But that's good to know, that like it could take as long as, you know, the end of the year, so to kind of set expectations for people. So with this new income-driven repayment program, I've seen some talks of this proposal. How does that work? 

Meagan Landress: Yes. So this is right now a proposal. So we don't know a lot, and some of the technicalities have not been ironed out about this yet. So this is not something that you can take action on. You can't apply for this yet. You can't really do anything to put yourself in a better position for this quite yet. But high-level, what it sounds like they're trying to do is create a cheaper repayment option for those who have undergraduate loans, and a shorter forgiveness timeline. So each of the existing income-driven plans have a maximum repayment period where one could only pay for 20 or 25 years, and whatever's left over at the end of that timeline is then forgiven. Now they're trying to make that timeline a little shorter and make the payment that's based off of income a little lower for those with undergraduate loans. And this may also affect graduate students, because a lot of times graduate students borrow undergrad before they get to grad school. We just don't know if this is going to roll out yet. So we're not getting too excited until we see it actually, you know, posted as law. 

Katie: Yeah. Okay. Do you have a sense for any sort of timeline there, or is it something that we're all just kind of in the dark about at this point?

Meagan Landress: That's a great question. Things have been moving pretty fast. Like there's been a lot of changes over the past two years since Covid really hit us hard in 2020. So it's possible that there could be some answers on this, or some more clarity on it by the end of the year, but I would maybe be pessimistic and say maybe 2023. 

Katie: Okay. You mentioned undergrad and graduate for that income-driven repayment program. So just to kind of nail that down as it's written now, the current proposal, do we think graduate students would be included, or is it something that we're more so thinking is going to apply just to undergrad? 

Meagan Landress: Mostly undergrad, but if a graduate student has undergrad loans, that's where they might be affected in some way. If they just have graduate school loans, doesn't seem like they're going to be part of this equation.

Katie: Interesting. So I guess from here, I really would love to hear about this Public Service Loan Forgiveness limited waiver opportunity. Can you talk to us about how someone would know if they're eligible for that? 

Meagan Landress: Yeah. So Public Service Loan Forgiveness is a program that you can apply for if you're working full-time at a nonprofit institution or 501c3 or government entity. So if you are a public service worker, this could be eligible to you if you have federal student loans as well. Now, the PSLF waiver is a second chance for people to go back and get prior payments that were deemed ineligible for the program, because they either had the wrong types of loans at the time, which there…and this is also going to sound confusing…there's multiple types of federal loans that one can have. Only direct loans are eligible for the PSLF program. And so some folks may not in the past have known that they didn't have the right loans for PSLF. So they had been making payments on those prior loans and not getting credit. 

Katie: Oh, no. 

Meagan Landress: Yeah. So this waiver is a big deal for that purpose. It's allowing people to go back and get credit for all of those prior payments that they made on the wrong types of loans, or even on the wrong repayment plans. So the other part to PSLF is you have to be on an income-driven plan. And some folks were not on income-driven plans in the past. So they have months where they paid and they were full-time at an eligible employer, but they weren't getting credit towards PSLF, which you have to make 120 qualifying payments for. And so the PSLF waiver is a second chance to go back and get those credits. So people can find themselves a lot closer to PSLF than they originally thought they were going to be, with this opportunity. And maybe even at loan forgiveness now, which we have seen already quite a bit. 

Katie: Wow. Okay. So just to kind of nail that down, because that is confusing. 

Meagan Landress: Yeah. 

Katie: So you're saying that somebody could have thought that they were making payments toward eligible loans, but they were not at the time? So this waiver would allow them to then go back and receive credit for those payments. Is that what you're saying? 

Meagan Landress: Correct. Yep. 

Katie: Cool. Okay. So why are people not applying for this? Or are you seeing any sort of, is it an awareness thing? Is it a confusing process? Like talk to me about that. 

Meagan Landress: I think all the above. I think awareness is one thing. PSLF has been flawed. So people have kind of given up on the program in the past, so that there's an awareness problem because people aren't paying attention to it anymore. They're fed up with the program. So that's one, but another is, people do have to take action. So it's not something that's automatic, or it…for the most part, it's not going to be automatically applied. And let me maybe say this too. Nothing in the student loan system is automatic, it seems like. You have to take action for almost everything. So for those who don't have the correct loans, they have to take action to consolidate, which means convert them into the correct loans now. And then not only that, but they have to also submit an employment certification form to verify that prior qualifying employment. So it's two steps if someone had the wrong loans; only one step, only submitting the employment certification form, if they just weren't on the right repayment plan in the past. 

But it takes action. And so I think people are going to miss out, because maybe the requirements are a little confusing or they gave up on, you know, paying attention to this a long time ago. Or, you know, another just simple thing that I've…you know, keeps me up at night is it's been so long since people have had to be in repayment, so email addresses may have changed, addresses in general, like physical mailing addresses have changed. So the Department of Education is getting this information out there through the contact information that they have on file for these people, which may or may not be correct. And if, you know, people aren't hearing about it on social media or in the news, like people can miss out that way as well. 

Katie: That's pretty scary. So even now, though, if somebody thinks, “Hey, I, you know, I'm working at an eligible institution, I have been the whole time, or I was when I was making the payments,” they still would have to go and, did you say, convert the loans to the direct loans, that that is still part of this step? 

Meagan Landress: Yep. If they had the wrong loans, yes.

Katie: If they had the wrong loans. Okay, cool. So if anyone's listening to this who thinks this might apply to them, it sounds like you want to Google “Public Service Loan Forgiveness limited waiver opportunity.” 

Meagan Landress: Correct. 

Katie: …to see if this is something that you should be pursuing. Meagan, anything else that you want to leave us with today, or that you think is worth knowing that we have not touched yet? 

Meagan Landress: Yeah. So this is a lot of information. I think the most direct source right now for you is going to studentaid.gov, signing in, updating your contact information and completing the PSLF help tool, which is in the Department of Education studentaid.gov website, because that'll give you step-by-step on…it'll recognize if you have the wrong loans or if you're not on the right repayment plan. So it can help guide you through what your next steps are. And it's still going to be a lot of information, but it'll be a really great, like, first step to making these next moves. 

Katie: Amazing. Meagan, thanks so much for joining us today. 

Meagan Landress: Thanks. Thanks for having me. 

Katie: Thanks for tuning in to this bonus episode of The Money with Katie Show. I will see you next Wednesday. We'll get back to our regularly scheduled programming. Our show is a production of Morning Brew and is produced by Nick Torres and me, Katie Gatti Tassin. Sarah Singer is our VP of multimedia, and additional content editing comes from our lovely senior editor, Henah Velez. Additional fact checking comes from the fabulous Kate Brandt. Sam Cat is our VP of chaos, as always. And Jojo is our chief of woof. Woohoo, we did it!