Important Updates for Student Loan Borrowers and College Savers
Excitement is in the air this September, with college students returning to campuses across the country and the college sports season getting underway. There is likely less excitement for borrowers whose 3-year federal student loan repayment pause came to an end on August 31. Federal student loans began accruing interest again on September 1 and borrowers will need to start making payments this October.
In addition to student loan repayment changes, college savings plans also saw recent changes as part of the Secure Act 2.0, passed in December. Below is a brief summary of those changes for our readers who are borrowers and college savers, or friends and family who fall in those categories, in order to stay informed and make sound decisions.
Monthly Payments. Payments will be capped at 10% of discretionary income for graduate loans, and 5% of discretionary income for undergraduate loans. The SAVE plan calculates discretionary income based on the difference between a borrower’s AGI and 225% of the poverty guidelines –essentially protecting much more of a borrower’s income for necessary expenses than previous repayment plans.
Cap on Interest. The SAVE plan will cut additional interest charges after borrowers meet their monthly payment, meaning interest will not be charged interest. Compound interest is a great thing, except when it is working against the borrower. This will be beneficial to physicians and other professionals with large debt but start at a lower salary with high future earnings potential. The balance will not grow on them, and they can pay it off when they attain higher income.
Forgiveness after 10 years. Beginning in 2024, those with principal loan balances of $12,000 or less will now be eligible for loan forgiveness in 10 years of payments, with the time frame increasing per $1,000 borrowed and the maximum time frame at 20 to 25 years for higher balances.
Married borrowers. Those filing Married Filing Separately can now exclude their spouse’s income from their monthly loan repayment calculation.
529 College Savings Plan Changes
529 plans are flexible, tax-advantaged accounts designed specifically for education savings. Earnings grow tax-deferred and withdrawals for qualified education expenses are federal income tax-free (and free of state tax in many cases).
As the below graph shows, regular contributions to a 529 plan can help offset the cost of higher education.
The many benefits of 529 college savings plans are highlighted below:
Factored into financial aid formulas at 5.6%, meaning only 5.6% of 529 assets are included in expected family contribution (EFC)
Beneficiaries can be changed
$10,000 per year may be used for qualified K-12 expenses
Account owner retains control of the assets
Large contribution limits: for 2023 can contribute up to $85,000 per beneficiary in a single year ($170,000 per married couple)
One additional 529 college savings plan benefit from The Secure Act 2.0 is:
Starting in 2024, 529 account owners will be able to transfer up to an aggregate lifetime limit of $35,000 from a 529 plan into a Roth IRA for the benefit of the 529 plan beneficiary.
The transfer is subject to the $6,500 per year limit and must be in the same name as the 529 plan beneficiary. The 529 plan must have been in existence for at least 15 years prior to the rollover and any 529 contributions made within the previous 5 years are ineligible. As our clients know, a Roth IRA is a great way to get a young adult started for their retirement savings.
We know navigating all aspects of college borrowing and college saving can be challenging. Your Charter Oak Advisors are available to answer any questions you, a family member or a friend may have on student loans, college savings and financial wellness while preparing for or attending college and beyond. We are grateful for the opportunity to be your trusted advisor and send our most sincere good wishes as summer winds into fall.