Promises of student debt forgiveness put advisers in uncharted territory

With student loan debt having become the political football for the ages, financial advisers find themselves traversing an ever-shifting landscape when it comes to helping clients deal with their loans.

As politicians continue to taunt borrowers with promises of various forms of debt forgiveness that have yet to come true, and while nobody has been required to make a student loan payment since President Biden took office, financial advisers have been resorting to debt management strategies based on best guesses and hope.

“I am advising clients to not make student loan payments while we wait on the Biden administration to give us a final answer one way or the other,” said Richard Cooke, a financial planner at 2Point0 Financial.
Like a lot of advisers whose clients are responsible for a chunk of the $1.7 trillion student loan mountain, Cooke can only offer advice based on the moving target of political promises and paused payment requirements.

“I have a handful of clients who have the cash ready to pay off the student loans, but we don't want to be the last people to pay off student loans before forgiveness comes, if it does,” he said. “So we think it's best to wait and see what the final answer is.”

While some early campaign promises from Democrats touted up to $50,000 worth of loan forgiveness, the latest talk out of the Biden administration has shrunk down closer to $10,000. And that’s still just talk at this point.

The potential for any debt forgiveness would only apply to the $1.5 trillion government student loan market, and not the $200 billion private loan market.

Because student loan debt in any form can’t be forgiven through bankruptcy and because many of the loans include multiple generations of co-signers. advisers say the issue is front and center with no clear road map available.

Lacy Rogers, founder of The Dedicated Dollar, said the payment deferral period should be used to pay down other debt.

“Use the freed-up income to focus on knocking out your credit card and card debt,” she said. “And once they’re paid off, vow never to borrow again.”

Depending on the amount of the student loan, Rogers is advising some clients to “get that monkey off your back, and just pay it off,” instead of waiting around for politicians to deliver on their promises.

“When you’re waiting on student loan forgiveness, it’s just hanging around, and they keep moving that carrot further out,” she said. “The Democrats are the ones that want to do it, but they’ve had control of the House, Senate and the presidency for the last two years. If it was easy to do, it would have gotten done. If it was me, I would just pay my loans off.”

But if the loans are beyond a few thousand dollars, Rogers tells clients who can afford to to build up a stockpile during this period of payment deferral and make a lump sum payment to principal when the payment moratorium ends, which is currently slated for Aug. 31.

“Let's be real, the loan payments will probably resume in some fashion at some point,” she said. “Total debt forgiveness is not likely.”

As advisers try and read the political tea leaves related to student loan forgiveness, most are telling clients to make the most of the payment moratorium period by shoring up household balance sheets. But there's growing focus on the potential of at least $10,000 worth of forgiveness.

“If their overall federal student loan balance is under $10,000, then I am encouraging them to wait to see what happens with forgiveness and set aside what they would otherwise be putting toward their student loans to potentially make a lump sum payment later in the year,” said Ethan Miller, a financial planner at Planning for Progress.

“For clients with larger loan balances who are working to aggressively pay down their debt, I am advising them to start making monthly payments if they have not been already, to take advantage of the 0% interest period and prepare their monthly budgets for when payments will restart,” he added. “For clients with high-interest debt, such as credit card debt or personal loans, I am encouraging them to make as much progress as possible to pay down those debts before loan repayments start again at the end of August.”

Bonnie Maize, owner of Maize Financial, points out that the closer one looks at student loan debt, the more complex it becomes.

While it can make sense to advise higher earners who might not qualify for much debt forgiveness to just keep chipping away at the debt, it can be a different story for borrowers involved in the various student loan forgiveness programs that have been around for years.

In addition to various income-based programs that limit payments to up to 20 years, there is the Public Service Loan Forgiveness program that limits payments to 10 years for people working for qualifying government or nonprofit employers.

Maize, who keeps herself up to speed with student loan debt management and policy changes, said it isn’t clear which individuals participating in some of the loan forgiveness programs would qualify if Biden does come through on his promises.

On top of that, nothing has yet been made clear regarding the potential tax implications of having the lump-sum debt forgiveness added to a borrower’s annual income.

“It's a complex system and generally quite confusing for those with loans to navigate on their own, especially with the changes made during the pandemic,” Maize said. “It's very specific to the individual as to whether I advise them to continue payments during the payment pause or not.”