Best and worst case scenarios for planning your financial future

Alex Brandon/AP

The uncertainty surrounding the cancellation of student loans, including lawsuits in six states and a ‘stay’ granted by the 8th U.S. Circuit Court of Appeals over the Biden administration’s loan cancellation plan, leaves many people wondering about their financial future.

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Andrew Griffith – CPA (NY) and Associate Professor of Accounting at Iona University’s LaPenta School of Business – described some of the best and worst student loan forgiveness scenarios and how borrowers can prepare for any eventuality.

Protect your credit in the worst case scenario

“The worst-case scenario,” he said, “is that student borrowers who ask for forgiveness will not have their loans forgiven and may have to pay interest and penalties on any missed payments.” He recommends continuing to make payments, if possible, to avoid this eventuality.

“A potentially negative credit report entry can result in increased interest rates for future borrowing. Some insurance companies consider their subscriber’s credit history when evaluating their rates, and some “Employers don’t offer jobs to applicants with poor credit records. These risks can be avoided by pursuing required payments,” Griffith said.

If you continue to make payments, according to, and reach your 120 eligible payments for a direct public loan, you can apply for a forgiveness under the Public Service Loan Forgiveness or Expanded Public Service Loan Forgiveness temporary. This option exists regardless of the status of the legislation under review. Additionally, if you made payments during the payment break – which runs from March 13, 2020 to December 31, 2022 – you may be able to get a refund on those payments. These payments will still count towards your 120 payments required for rebate.

Plan for a more secure financial future

Griffith also spoke about the best case scenario for borrowers. “Their debt is forgiven and none of it is federally taxable income,” he said.

If this happens, borrowers have the opportunity to prepare for a more secure financial future.

“You might want to use your extra money for a luxury trip or a shopping spree. There’s nothing wrong with indulging yourself, but you shouldn’t spend all your freed up money on non-essential things” , advised Aidan Kang, CFA and CEO of house of debt.

“A budget is a very useful tool,” he said. “It allows you to have a clear vision of your needs, guiding you in your decisions. Review your financial goals and plans. Where did you split your income? What other debts do you have and what financial milestones did you intend to reach? Reassessment can help you maximize the extra money from student loan forgiveness. »

Almost every expert has recommended setting up an emergency savings fund if you don’t already have one.

Also, start focusing the money on other debts. “Most of the people who would benefit significantly from student loan forgiveness will have many similar destinations for their money,” said Melanie Hanson, editor-in-chief of EDI refinancing. “Whether they’re paying off car loans, medical debt or more student loans, or they’re starting to build their savings for home ownership, investing that money in long-term financial security is a good idea. idea.”

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Many experts have also suggested creating or starting retirement savings accounts. “Investing for the long term through index mutual funds and similar securities is a great idea here. Maximizing your 401(k) or IRA contributions is a good idea if you’re going this route,” Hanson said.

Putting more pre-tax dollars into a retirement account can also help if student borrowers face a third, more likely scenario.

Meeting in the Middle – A Likely Scenario for Many Borrowers

Full student loan forgiveness may not be the most likely scenario, according to many experts. “Somewhere between these two scenarios is the most likely scenario of some, but not all, of their student loan debt being forgiven. This canceled debt is taxable income at federal, state and local income tax levels on their tax returns for the calendar year in which it is cancelled,” Griffith said.

If this happens, borrowers should prepare for a larger than expected tax bill the year their student loan debt is forgiven. It may be a good idea to consult a tax accountant or tax lawyer to discuss ways to reduce tax liability.

What future borrowers can learn from student loan forgiveness

Hanson pointed out that even if the student loan forgiveness guidelines pass, they are still, essentially, putting a temporary band-aid on a larger problem.

“Until the actual costs paid by students to attend college come down, we will continue to produce deeply indebted graduates who will need financial assistance to succeed in our current economy,” she said. .

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Until then, Griffith advised, incoming students should research their options and evaluate their career choices before taking out loans to pay for their education. “If someone is borrowing money to pay for their education, that borrower should make sure that the program they want has sufficient probability of leading to immediate job opportunities after graduation with a sufficient increase in earnings to be able to pay off student loans in less than five years. If this is not the case, a different program should be considered,” he said.

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This article originally appeared on Student Loan Repayment: Best and Worst Case Scenarios for Planning Your Financial Future

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