Federally owned student loans have been on CARES ACT forbearance since March 27, 2020. Interest rates and payments were temporarily set to zero as part of a response to the COVID pandemic. Biden administrative officials have now extended the emergency forbearance through August 31, 2022.
Depending on how your circumstances have changed since March 2020 and the impact of The American Rescue Plan's new tax rules on your family, you will need to reassess your optimal tax filing status and retirement savings strategies before your payments resume in September.
So, how do you know if you should make a change? Start by asking yourself these questions.
Did your priorities or goals change?
Covid lockdowns came with remote work flexibility and increased family time. Shifting priorities has prompted relocations, job changes, and new outlooks on work/life balance. How did your pre-Covid feelings about debt and retirement goals change? What changes to your lifestyle are necessary to accommodate your new priorities?
Did your income change?
All borrowers on Income Driven Repayment (IDR) plans will receive a deadline to recertify income. At that point, the payment amount will be calculated for the next 12 months. Your assigned recertification deadline, income change, and goals will dictate when and with which tax return you should recertify.
If your income fell, you can recertify now to use a recent tax return (or paystub) to show the lower-income, and qualify for a lower payment as soon as possible. But, if your income has risen significantly since March 2020, you may want to wait until the last possible moment to recertify and keep the lower payments for as long as possible. You can recertify as soon as you want, but no later than the deadline provided.
Did you leave (or join) a PSLF/TLF eligible employer?
Great news, if you are pursuing Public Service Loan Forgiveness (PSLF), these months of forbearance have counted toward your critical 120 payment count. Additionally, a temporary PSLF waiver may provide you with credit for past periods of repayment that would not have previously counted for PSLF. Get updated loan counts now! This temporary waiver is set to expire October 31, 2022.
Additionally, The Education Department's largest servicers — Navient and FedLoan — recently quit. Millions of borrowers and their payment histories are being transferred to new servicers. In a process where customer service was already abysmal, hold onto your hats.
Did you get married?
Have you considered the impact on your IDR payment of filing jointly with your new spouse? IDR plans usually calculate the required payment on total household income (10%). Therefore, the addition of spousal income could significantly increase a borrower's required payment.
Consider if married filing separate is optimal. Yes, you could pay more in aggregate taxes, but this increase may be worth it compared to the reduction in your IDR payment amount.
Did you have a child?
Married Filing Separately has historically been used by married couples with income disparities to reduce student loan payment amounts, but this filing strategy may no longer be optimal for families with young children.
The Child Tax Credit and Dependent Care Credit can offer significant tax savings for families; but married couples will see these credits reduced or eliminated if they file taxes separately. The reduction in student loan payments may no longer be significant enough to justify paying the higher tax liability from filing separately.
No financial decision exists in a vacuum.
Your tax filing status will affect your choice of repayment plan. In addition, your income recertification date will impact which tax return you should submit, which then determines your payment amount for the next 12 months. All of which may alter how much income you have left each month to fund your immediate and long-term goals.