(Today I've asked Rebecca Wrock to discuss student loans -Kyle Zwiren.)
By Rebecca Wrock
When the Emmy-winning hit fantasy series "Game of Thrones" concluded this summer, articles emerged explaining why the show was such a cultural phenomenon among Millennials. Principal among the explanations was a comparison relating the "millennial experience" to the experience of the Stark children, the tragic heroes of the series.
The Stark children grew up in a long, safe, and prosperous summer, understanding that hard work and tradition were the keys to success. Similarly, Millennials were taught that success lay in studying hard and going to college; by going to college, everything else in life would fall into place, including marriage, children, a house, and a better life than their parents had the "American dream."
When Millennials were in college, though, tuition rates were unprecedentedly high, and taking student loans was, for many, the only means by which one could pay for and attend college. Gone were the days of being able to work one's way through college and graduate in four or five years. To top it off, a majority of Millennials entered the job market during the 2008 recession or its recovery, unable to find gainful employment after paying substantially more for education even after adjusting for inflation than any previous generation.
Like the Stark children, Millennials were hurled into a hectic world not of their creation. They had the rug pulled out from under their feet. From paychecks to home ownership to retirement, nothing is certain. Millennials must plan for the future with moving targets and try to adapt as best as they can.
One such area of uncertainty and moving targets is student loan repayment, particularly as it relates to federal income driven repayment (IDR) plans and forgiveness. Those currently on an IDR plan will have their remaining student loan balance forgiven after 20 or 25 years of qualifying payments (depending on the program and whether the loans were for undergraduate or graduate school), but that forgiveness results in "cancellation of debt income." That means that the amount of your loans that is forgiven gets added to your taxable income in the year of forgiveness. For Millennials with six-figure student loan debt, that may result in a hefty tax bill.
Another trap for the unwary is capitalized interest, which arises at the end of a grace period, deferment, or forbearance, a change in IDR status, consolidation, or a failure to timely recertify for IDR.
You may be considering consolidation, a change in IDR plans, or working to pay off your loans more aggressively than you would be required to. You might be wondering whether you're better off with the protections of federal student loans at higher interest rates, or giving up those protections to refinance into private loans with lower interest rates. You may wonder, assuming current laws are then in effect, how you can plan to save for a hefty tax bill if and when your student loan balances are ultimately forgiven.
All of these questions are difficult to answer in generalities, with constantly moving targets both on individual and generational bases. With a combination of planning and the flexibility to adapt, you can be positioned as best as possible under the circumstances. While spoilers are rarely possible in the realm of real life (and I'll be conscientious not to give any here with respect to the Stark children), this preparation can give you the best chance of realizing a financial "dream of spring" after the harsh "winds of winter" that are now upon Millennials.
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Rebecca Wrock is a member of Varnum Law's Estate Planning Practice Team. She advises clients on all aspects of estate planning and trusts, including probate avoidance, asset protection, special purpose trusts and elder law matters including Medicaid, veterans and special needs planning.
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Attorney Kyle Zwiren works with Financial Architects Inc., an independently-owned company located in Farmington Hills. Zwiren and his team serve attorneys and other professionals to help them design financial plans in line with their goals and based on optimal efficiency. He practiced law prior to becoming a Financial Architect and left the practice to follow his passion. To talk to Zwiren about other topics featured in The Economic Blueprint, email him at kzwiren@financialarch.com or call him at 248-482-3622.
Published: Fri, Jan 17, 2020
