Welcome to my very first "How-to Series" where I show you how to calculate your monthly payment under the SAVE plan!

I don't trust loan servicers to calculate the monthly payment accurately, so I encourage loan borrowers to understand how to calculate it themselves so they can double-check the math! Keep reading for a step-by-step breakdown of how to do this. Please note that this math takes effect on July 1, 2024.

Let's break it down step-by-step together. You can do this old-school style with a pen and paper or in an Excel file I created - whatever works best for you!

Step 1: Write down your Adjusted Gross Income (AGI) from line 11 on your 2023 tax return. If your current income is less than this, use that instead.

Step 2: Use this chart to determine the 225% Federal Poverty Guideline for your state and family size. Write it down. This is your income protection threshold (IPT), meaning the income protected from student loan payments, so it's not used in the monthly payment calculation.

Step 3: Subtract your income protection threshold (IPT) from your adjusted gross income (AGI). This is your discretionary income. Write this down. This is what they'll use to calculate your monthly student loan payments.

Step 4: Next, we must determine whether they'll multiply your discretionary income by 5%, 10%, or a weighted average when calculating your monthly payment. This depends on whether your loans are from undergrad only, grad only, or a mix of both. 

• Undergrad only: 5% (.05 in Excel)
• Grad only: 10% (.10 in Excel)
• A mix of undergrad and grad: Weighted average. Use my handy Excel file to help calculate this.

Step 5: Multiply your discretionary income (calculated in Step 3) by 5%, 10%, or the weighted average (calculated in Step 4). This is your annual payment.

Step 6: Divide the annual payment by 12 to get the monthly payment. This is your NEW monthly payment under the SAVE plan as soon as you re-certify your income and family size any time after July 1, 2024. Your recertification date is listed on your studentaid.gov account and will be as early as fall 2024.

I hope you found this helpful! If you have any questions, comment below or email me at emma@perkplanning.com.

Biden Unveils New Student Loan Forgiveness Plans

I was lucky enough to be a face in the crowd at Madison College on Monday, April 8th, where Biden unveiled his newest plans to extend student loan relief to millions of federal student loan borrowers. He detailed the five key features of his plan, which I've highlighted below. If these proposed solutions move forward as planned, he expects them to be implemented in fall 2024 at the earliest.

1. Cancel runaway interest

For those of us burdened with student loan debt, the interest often seems to run away, making it challenging to pay the loans off. However, under this plan, up to $20,000 of unpaid, accrued interest could be canceled for borrowers whose loan balances have grown since entering repayment. Notably, single borrowers earning $120,000 or less and married borrowers earning $240,000 or less are eligible, ensuring a wide range of borrowers can benefit without needing to apply.

2. Cancel debt for borrowers eligible for loan forgiveness under SAVE, PSLF, closed school discharge, or other forgiveness programs who are not currently enrolled

Tens of thousands of borrowers are eligible for forgiveness programs. Unfortunately, they may not 1) know that they're eligible or 2) be able to overcome the significant and burdensome hurdles of paperwork, horrible advice from their student loan servicer, or other obstacles. The Department of Education would identify borrowers who fall into these categories and cancel their debt without requiring an application.

3. Cancel debt for borrowers who entered repayment over 20 years ago

Due to the lack of systemic tracking of borrowers pursuing forgiveness under the 20- and 25-year income-driven repayment plans, many borrowers still face surmountable debt when it should have been forgiven years ago. Borrowers with undergraduate student loan debt would qualify for debt cancelation if they first entered repayment 20 years ago; borrowers with any graduate school debt would be eligible if they entered repayment 25 years ago. Direct loans and direct consolidation loans would be eligible. Borrowers do not need to be on an income-driven repayment plan to qualify.

4. Cancel debt for borrowers who enrolled in low-financial-value programs

This would cancel student loans taken out in programs that eventually lost their eligibility to participate in the Federal student aid program or were denied recertification due to shady business practices. It would also cancel student loans taken out during programs that eventually closed and failed.

5. Cancel student debt for borrowers experiencing hardship

Biden explained that borrowers currently in default (or at high risk of eventually being in default) would qualify for this. Additionally, borrowers experiencing other financial difficulties, such as medical debt and high childcare costs, could apply for this relief.

Stay tuned for more information!

I would be shocked if various lawsuits weren't already in the works to try to bring these plans to a halt. I'll be sure to blog as I learn more!

Student loan borrowers deserve support, clarity, and information they can trust. 

This is why we began offering this in the first place. We've heard it time and time again from our clients: it was difficult for them to reach their loan servicer (HELLO hours-long wait times!) and, when they did, they couldn't trust what they were told. At best, it wasn't helpful. At worst, it was inaccurate and downright harmful. No loan borrower should have to navigate this alone.

Let us be your guide: our process

We provide guidance through our streamlined process, keeping it straightforward and efficient:

1. You book a 60-minute Zoom meeting with Emma via Calendly
2. We follow up via email with some onboarding tasks, including filling out our student loan planning questionnaire
3.  We begin working on the analysis, keeping in touch with you throughout as questions arise
4. During the Zoom meeting, we'll take our time to go through it together to make sure it's what you hoped for and expected. We'll record this meeting for you, too, so you have continued access to what we discuss.
5. After the Zoom meeting, we send an email with a copy of the analysis, a meeting recording, and a link to our satisfaction survey to ensure we hit the mark.

The Student Loan Planning Questionnaire

Our analysis will reflect YOU! We'll take the time to gather important information from you through our questionnaire by asking questions about:

• Your income, family size, and tax filing status
• Your student loan debt 
• Any extenuating circumstances that may impact the analysis, such as anticipated changes in family size, employers, state of residence, etc., in the upcoming year
• Which forgiveness opportunities you're interested in (if any)
• Your goals and what you'd like to see reflected in the analysis
• Whether there is anything else you'd like us to know that wasn't already captured

The Analysis

Once you submit the questionnaire, we'll get to work on your personalized student loan analysis. The analysis is usually a multi-page Excel document where we run our analyses and projections. Your goals and priorities will inform what these look like and will drive our inputs, calculations, and recommendations. Examples of these include (but aren't limited to):

• The impact of filing taxes MFS vs. MFJ in a community property state on monthly payments
• Monthly payments under SAVE vs. PAYE (or any other plans)
• Total paid under SAVE vs. PAYE (or any other plans)
• Total amount forgiven under PSLF
• Examining the impact of employer sign-on bonuses and assistance on your income and overall student loan planning goals
• ...and more!

The last tab on the document contains our recommendations and action items, which are unique to you. Because we have the CFP designation, we frequently use a financial planning lens when crafting these, enabling us to be creative and help you accomplish your goals. You'll leave our meeting knowing exactly what to do, where and when you'll do it, and why it helps you.

Our clients frequently tell us how blown away they are by the analysis and that they appreciate the level of detail, care, and expertise that went into it. 

We're here when you need us!

Our analysis should be enough to get you where you want to go. But if things change or questions arise, we're here for you until your loans are paid off or forgiven. We're only an email or a follow-up meeting away, and you can reach out any time. The best part? We'll be quick and efficient and tell you exactly what you need to know. No more waiting hours on hold to speak to a loan servicer only to not trust what you're told. 

Don't miss the April 30, 2024, deadline!

Wait...what are you talking about?

The April 30, 2024, deadline is for the Income-Driven Repayment (IDR) Account Adjustment. It is a huge opportunity for federal student loan borrowers to get credit toward Public Service Loan Forgiveness (PSLF) on past payments that wouldn't ordinarily count. It's the Department of Education's attempt to make up for past wrongs, including a lack of payment tracking, inaccurate information, and abysmal (and sometimes downright harmful) support from student loan servicers.

Who does this impact?

It impacts two groups of loan borrowers who are pursuing (or want to pursue) the Public Service Loan Forgiveness (PSLF) program:

1. FFEL loan borrowers
2. Direct loan borrowers who have separate loans with different PSLF-qualifying payment counts

If you aren't sure what type of federal student loans you have, watch my 2-minute tutorial. 

Regardless of which group you're part of, you must take action before April 30, 2024! I describe this in greater detail below.

FFEL Loan Borrowers

FFEL loans are not eligible for PSLF; only Direct loans are eligible. To convert FFEL loans into Direct loans, you must consolidate them via studentaid.gov. By consolidating your FFEL loans, you will convert them into Direct loans, making them eligible for forgiveness through PSLF.

Usually, when a borrower consolidates their loans, the PSLF clock starts again at 0 since it creates a new loan. But thanks to the IDR Account Adjustment in effect until April 30, 2024, FFEL loan borrowers can consolidate them AND get credit for past payments made on their FFEL loans, WITHOUT restarting the PSLF clock! This is HUGE! 

If FFEL loan borrowers wait to consolidate their loans until after April 30th, they will not receive any credit toward PSLF for past payments. The thought of this happening to borrowers keeps me up at night!

Direct Loan Borrowers With Different PSLF Payment Counts

Borrowers will sometimes have a handful of Direct student loans with different PSLF payment counts. I usually see this when someone has loans from multiple degrees (an undergraduate and graduate degree, for example) and spent time working at a PSLF-qualifying employer before, between, and/or after them.

The IDR Account Adjustment is a golden opportunity for this borrower to consolidate their federal student loans before April 30, 2024. The resulting new Federal Direct Consolidation loan will be given the highest PSLF payment count of all the underlying loans they consolidated. I've seen this wipe YEARS off my clients' PSLF repayment timelines! 

If these borrowers wait to consolidate their loans until after April 30th, the resulting Federal Direct Consolidation loan will be given the weighted average PSLF payment count of all the underlying loans they consolidated.

After consolidating, verify all periods of PSLF-eligible employment

Once borrowers consolidate, they should use the PSLF Help Tool to verify PSLF-eligible employment dating back to October 2, 2007, if they haven't already. The form will then be sent electronically to employers (past and current, as applicable) for them to sign off on. The form is then routed to Mohela for processing (which will likely take months).

The IDR Account Adjustment

What is it?

This is a huge opportunity for borrowers to get credit toward PSLF and/or IDR forgiveness by getting credit for past payments that wouldn't ordinarily count. You may need to take action depending on the types of outstanding loans you have and what option you're pursuing (PSLF or IDR forgiveness). Keep reading for a tutorial on how to determine what, if anything, you may need to do before the April 30, 2024, deadline!

Step 1: Review Your Outstanding Loan Types

If you're unsure what type of outstanding loans you have, you'll need to log into studentaid.gov and look them up. I recorded a short YouTube tutorial on how to do this. If you have FFEL loans, this quick tutorial shows you how to determine whether they're commercially held or held by the Department of Education. 

Step 2: Determine which forgiveness opportunity you're pursuing.

Once you know what type(s) of outstanding loans you have, your action steps depend on the kind of forgiveness you're pursuing (or would like to pursue). I have a quick synopsis of both options below.

Public Service Loan Forgiveness (PSLF)

The PSLF Program forgives the remaining balance on your Direct loans after you've made the equivalent of 120 qualifying monthly payments under an accepted payment plan and while working full-time for an eligible employer. The accepted payment plans are the four income-driven repayment (IDR) plans: SAVE, PAYE, IBR, and ICR. Loans forgiven through PSLF are federally tax-free. 

Only Direct loans are eligible for PSLF.  If you have federally-held or commercially-held FFEL/FFELP loans, you must consolidate by April 30, 2024! More on this below.

Income-Driven Repayment (IDR) Forgiveness

The remaining loan balance is forgiven after making payments for 20 or 25 years on an IDR plan. This is usually considered taxable income at the state and federal levels. However, it is currently paused from being federally-taxed through 2025. Most states have also paused it, but not all! If you're in Wisconsin (like me), unfortunately, they've continued to tax it at the state level. 

Only Direct and federally-held FFEL/FFELP loans are eligible for IDR forgiveness. If you have commercially-held FFEL/FFELP loans, you must consolidate by April 30, 2024! More on this below.

Step 3: Use the chart below to determine your action steps.

Once you've clarified what type(s) of outstanding loans you have and which forgiveness opportunity you're pursuing, use the chart below to determine your action steps. If the chart indicates that consolidation is necessary, you MUST submit a consolidation application on studentaid.gov by April 30, 2024, to avoid losing all progress. 

By consolidating by April 30, 2024, you will get credit toward PSLF or IDR forgiveness for past payments that wouldn't ordinarily count. If you consolidate after the deadline, you will start all over again.

Call me a nerd (I am), but I love helping federal student loan borrowers determine the impact of marriage and tax filing status in a community property state on their monthly payments. It presents a unique and creative student loan planning opportunity for my fellow cheeseheads to help keep their monthly payments low. Fun fact: Wisconsin is one of only nine community property states!

When a federal student loan borrower is enrolled in one of the income-driven repayment (IDR) plans, they must supply updated income information annually to their servicer. Their servicer takes this information and recalculates their monthly payments accordingly. Borrowers will usually provide their most recent tax return (as long as they're not making less than what is reflected on the return).

For married borrowers on an IDR plan, their spouse's income and federal loan balance will be taken into account if they file their taxes as married filing jointly (MFJ). This may mean a higher monthly payment, which isn't good news if they're pursuing Public Service Loan Forgiveness (PSLF). The strategy behind PSLF is to keep the payments as low as possible to maximize the forgiveness received after 120 qualifying payments. So, can they ignore their spouse's income information? 

If they file their taxes as married filing separately, they can (kind of) ignore their spouse's income information. Ah ha! Now we're getting somewhere. But wait, how does that work in a community property state? I thought you'd never ask! 

If a borrower files taxes as married-filing-separately in a community property state, their household income is split in half using Form 8958. Both spouses must submit this form with their tax returns. The borrower then supplies this recent tax return to their student loan servicer, resulting in a lower monthly payment. Let's take a look at an example of how this plays out for the married couple below: 

• Rachel and Ross are married and live in WI (a community property state)
• Rachel makes $100,000 annually, has $120,000 in federal student loan debt, and is pursuing PSLF since she works at UW-Madison
• Ross makes $80,000 annually and has no federal student loan debt 
• If they file taxes jointly, Rachel's monthly payment would be $1,116.75 on the SAVE plan (based on $180,000 of household income)
• If they file taxes separately, her monthly payment would be $467.63 on the SAVE plan (based on $90,000 of household income) - an annual difference of $7,789.50! WOWZA!

When Rachel does their 2023 taxes, she should compare the costs of filing taxes separately to the annual savings on her student loan payments. 

Pro tip: I always recommend that my clients consult with a CPA when deciding whether to file taxes as MFS or MFJ. Though I can share the impact of tax filing status on student loan payments, I can't give tax advice since I'm not a licensed CPA.
 

Retirees often stress over taking money out of their savings to cover living expenses. But imagine the stress of having to spend your savings to cover one of the harshest penalties of all: the 50% fine that is levied for failing to take a required minimum distribution.

You've heard this before: when you turn 70 1/2 years old you must begin taking required minimum distributions (RMDs) as dictated by IRS rules.  But keep in mind that there are two keys to avoiding trouble:

1. WHEN - pay attention to when you must begin taking RMDs
2. WHERE - understand the account aggregation rules that specify WHERE the RMDs must be withdrawn from.

When

It's easy enough to understand the rules when you have, say, one tradtional IRA. Per the IRS:

"If you are the owner of a traditional IRA, you generally must start receiving distributions from your IRA by April 1 of the year following the year in which you reach age 70 1/2. If you don't (or didn't) receive that minimum amount in your 70 1/2 year, then you must receive distributions for your 70 1/2 year by April 1 of the next year."

Back to our somewhat simple example of a retiree with one Traditional IRA...let's assume that she turns 70 on April 1, 2019 and reaches age 70 1/2 on October 1, 2019. For 2019, she must receive the required minimum distribution from her Traditional IRA by April 1, 2020.  In addition, she must receive the required minimum distribution for 2020 by December 21, 2020. The downside of this approach is that she will be doubling up on taxable income in 2020 which might push some of that income into a higher marginal tax bracket. 

Where

What if you have more than one type of retirement account? This is where you need to pay careful attention to the account aggregation rules, including the requriements regarding which accounts you must actually take the withdrawal from. By the way, all RMDs are calculated by dividing the balance of the account (or aggregated accounts, if appropriate) by the balance as of the close of business on December 31st of the preceeding year, then dividing by the applicable life expectancy per the IRS. Now back to the aggregation rules by account type:

• Traditional (pre-tax) IRA's - Treat these accounts as one. You can tally up the balances as of the close of business on December 31st of the preceeding year, then divide that total by the applicable distribution period. And it's OK to then pull the RMD from just one of these IRA's.
• Roth IRA's - As long as it's your IRA and you didn't inherit it from a non-spouse, there is no requirement to take a distribution.
• Traditional 401(k)'s and 457 plans - You cannot aggregate these accounts. You must calculate and take the RMD separately from each account.
• Roth 401(k)'s and 457 plans - This is a surprise to many: Roth 401K's and 457 plans ARE subject to required minimum distribution rules. You must calculate and take the RMD separately from each account.
• 403(b) plans - If you have more than one 403(b) you are allowed to aggregate them and the RMD can be satisfied with only one distribution from just one of these plans. 

What do you do if you discover that you have missed an RMD or that you failed to take the distribution from the correct account? Your first move is to take the distribution as soon as you discover the error. Then file Form 5329 asking for forgiveness from paying the 50% penalty, and include a brief letter explaining what happened. Be sure to keep copies of the letter and form, and use a mailing method that allows for tracking so that you can document that it was sent.

If you don't hear back from the IRS that's actually GOOD news. If you are denied the IRS will determine the penalty and will send you a letter explaining the denial of your request. 

If you want help ensuring that you don't make an RMD mistake, you have a few options: enroll in your custodian's automatic RMD service (do this with each account from which you must take an RMD) or ask your financial planner or CPA to calculate this for you and send you a letter outlining the amount that needs to be withdrawn from each account - then take the withdrawals as outlined.        

Financial writer Bob Veres has been blogging lately about the chaos that exists in the pricing of financial planning services among fee-only advisors.   He questioned why we haven’t come up with a more standardized approach. 

In case you haven’t been exposed to the basic array of pricing options, I’ll summarize:  the majority of fee-only advisors operate under an Assets Under Management (AUM) model where the client pays anywhere from 0.25% to 2% of their investable assets every (freaking) year in advisory fees. In exchange, the advisor will most definitely focus on investments and may offer to include a comprehensive plan for free or for an additional fee. There are, of course, other advice models – including flat-fee or hourly, but these last two represent a tiny percentage of the fee-only advisor market. Flat-fee and hourly advisors will also offer guidance on investments but are likely to place the same emphasis on comprehensive financial planning. You know, mundane things like goal setting, budgeting, long term care planning, whether or not you should refinance and which pension option is best for you.

FYI – all fee-only advisors have a fiduciary duty to their clients, and nearly all fee-only advisors embrace a passive approach to investing, the hallmark of which is to keep your costs down by investing in low-cost, no-load index funds or ETF’s (purchased directly). We differ in the degree to which we adhere to this philosophy - it’s hard to justify your AUM fee if you’re not developing sophisticated-looking portfolios and offering complex rebalancing strategies.

The hourly and flat-fee among us are leaving serious money on the table. If I switched to an AUM model and charged an average of 1% of the assets under my advisement, my gross income (in the extremely unlikely event that I could convince my current clients to come along with me) would increase by a factor of seven. If I were in the business of selling handbags and the same income opportunity existed, I’d be a fool if I didn't change my strategy.

But I’m not selling handbags. People pay me for fiduciary advice, which dictates that I have an undivided loyalty to my client and reveal any potential conflicts of interest. This includes the conflict between the fee that I charge and the value they will get. 

Cue the choir and usher me to the gates of Sanctimonious Valley.  But this wouldn’t sound so cringingly pious if I were your mother’s oncologist. 

We aren’t saving lives, but we have the same obligation to our clients as physicians, lawyers and accountants. If a doctor breaches this duty by recommending a drug or device in which he has a financial interest without disclosing the conflict, there will be hell to pay.

Which leads me back to Bob Veres’ question on why the disparity in fees persists among the AUM crowd. My take: squirming uncertainty about the value they are adding, internal conflict between the application of their fiduciary duty and their income goals, and the markets they are each targeting.

Advisors who target and serve extremely wealthy households get little quarrel from me. I get it I get it – you are crushing it with your team of Certified Financial Analysts and loss harvesting strategies and collars and dynamic asset allocation and rebalancing on the fifth Thursday after the mid-point of the presidential election cycle (sorry Jim Otar, I know this isn’t your actual strategy). This crowd rests easy in their knowledge that their fee is justified by the degree of financial complexity involved and the delight with which their clients pay their fee. Fair enough.

I also have no issues with AUM advisors who give their clients a choice between AUM and hourly OR at least advise them of other options available to them in the market if the complexity of the situation suggests the that the client would receive a better value for their dollar elsewhere.

Pricing gets messier when you move down the complexity and transparency scale and the internal fiduciary v. income conflict grows as newer advisors measure the gap between what they were making in their former lives and their new Fee-Only-Fiduciary career. And they tinker with their AUM percentages when guilt creeps in over how little time is spent “managing” their client’s money after the initial blizzard of implementation.

The disparity in the availability of both business models is further fueled by the overabundance of testosterone in this fee-only smoothie. It gives the industry an aura of a big you-know-what contest. Coffee is for closers and you can’t get your name on the rolls of Worth magazine without AUM.

So, what’s the right answer for a fee-only advisor who was born to manage money? Frame your services and pricing transparently, limit your clientele to those who are likely to receive adequate value and be clear about the options available to them (either with you or elsewhere).  

Hourly advisors run into conflicts all the time.  I've met with prospective clients who were already doing the things that I would recommend and tell them that I don’t think I can add any value.  Others have the money to pay me but also have a financial disaster on their hands that would be better served by a non-profit debt and credit-counseling agency so I send them to Greenpath. And a few have the trifecta of $500K or more to invest, only need investing advice and stumbled into my office. “Hello Vanguard Concierge Services?  This is Lisa Andrews.  Lisa.  A-n-d-r-e-w-s.  Anyway, I have another client for you.” The rest all get a quote from me for services that I think will add value.

I have experienced few things in my life that are as unexpectedly satisfying as telling a prospect that I think they may get a better value somewhere else.  And no, I don’t feel like a chump - because I am a fiduciary.

A Nerd Wallet reader asked:  Is it better to pay off student loans quickly or to save up for a down payment for a house?

Background:  I have a 10-month emergency fund saved up and will be graduating from graduate school in May. I will be working full-time and wonder if I should put my monthly savings toward paying off more of my $60,000 in student loans than my monthly payments or toward saving up to buying a first home/condo. I live in D.C. I annually max out my retirement funds contribution limits. I'm not sure if it's better to pay down the student loan debt early or to save up for a down payment on a property since my rent money is just going to a big black hole never to be seen again and I can write off the student loan interest. I will earn about $65,000+ annually once I graduate. If it's better to pay off the student loans first, is there a threshold point where I can then transfer my energy to saving up for a house? Like at $20,000 paid off? I'm 30 and would like to have a place that I own.

The only way I'm in favor of you buying a house is if it's a multifamily unit and you generate some rental income.  Otherwise, a single family home is just an expense and an anvil for a 30-year-old. Khan Academy has a good video on the topic of renting vs. buying here.

If you are going to go ahead and buy the single family home anyway, here's what I suggest to minimize the risk to your financial security:

1. Emergency Fund - you said you have 10 months set aside.  I suggest six, and you can do an Amish version if you believe you could cut your monthly spending on food, entertainment, etc.  And go ahead and back out what your would receive from unemployment compensation.
2. Use the excess money in your emergency savings to pay down your student loan debt.
3. Calculate the maximum payment you can make toward paying off your student loan that would allow you to continue to contribute 15% of your gross income to retirement savings.  I am unmoved by the student loan interest tax deduction. Get the monkey off your back.
4. After the student loan is gone (that's my threshold), accumulate enough money to put 20% down on your new house (I abhor PMI payments), plus closing costs, plus obvious repairs that will need to be made within the first year.  Limit your loan to an amount that puts your monthly payment (including escrow) at no more than 28% of your gross monthly income.

There is nothing sexy about my answer unless you think being sensible is sexy.  Buying a home is often  a much bigger financial black hole than making rent payments.