Today’s World of College Savings and Student Loans

Undoubtedly, we have each endured a moment of fear over the last couple of months. Whether it be watching over your children, allowing your teen to take your car for the first time, worrying about catching a virus with no certain cure, or trying to keep your small business afloat during a pandemic; we want to keep our families safe. Nevertheless, times like these will also cause fear for our financial future. With so much change, and an abundance of news outlets, it becomes increasingly difficult to grasp just what information affects you personally. The SECURE Act, CARES Act and the Coronavirus pandemic have each made their impact on college savings vehicles and student loans.

We are often asked, “What can I do with my leftover 529 funds?” With the establishment of the SECURE Act, there are now more answers to this question beyond submitting a beneficiary change form via the web. Under the SECURE Act, distributions from 529 College Savings Accounts are now exempt from federal income tax if funds are used to repay student loans. As with most regulations, there is a limit of $10,000 of qualified distributions over a lifetime for a single 529 plan beneficiary. The portion of student loan interest that is paid for with tax-free 529 plan earnings is not eligible for the student loan interest deduction.

As for the fluctuation in value experienced in your college savings accounts: resist panic and the urge to make dramatic decisions — markets go up and down. If time is near to begin withdrawals to cover college costs, and your investments are not allocated within an age-based selection, you may consider speaking with your advisor (if applicable), or shifting your asset allocation more conservatively, as you may not be afforded the time to wait out the current bear market should economic recovery remain slow. Foremost, college savings should remain a priority just as it was when the fund was established.

Should the reliance on student loans become a more realistic option given the lack of regular funding to your college savings vehicle due to income loss, or simply the reduction in account values given market volatility, there is some good news. In connection to the economic shutdowns, the Federal Reserve Board made two emergency interest rate cuts on March 3 and March 15 which brings the rates within a range of 0% to 0.25%. This will save borrowers significantly as federal student loan rates will drop (to be determined in May for the 2020-2021 academic year). Experts have anticipated a 1.0% to 1.5% drop on these rates, even before fear of the coronavirus began affecting businesses. The interest rate reduction will not affect existing federal student loans. Also, you cannot borrow next year’s federal student loans early. The interest rates on variable-rate private student loans will react more quickly, typically phasing in the new interest rates over a one- or three-month period. Borrowers of federal loans could refinance their federal student loans into private student loans, however, even with the interest rate reductions, federal student loans are likely to maintain more attractive rates. Borrowers who refinance their federal student loans will lose the flexible repayment benefits they provide. Right now, thanks to the CARES act, many federal loans are on a temporary payment pause through September 30, 2020 — also not accruing interest during those months. With any refinancing, there are pro and cons, so carefully consider which is the best choice based on your personal financial picture.

While considering the best vehicles for funding higher education, ensure it is not lost that the future of student loan forgiveness has been a hot topic leading into the 2020 election. Student loan balances have now exceeded that of credit card debt. Because of this astronomical figure, and college costs increasing faster than any other cost (including Disney World admissions!), candidates on both sides have shared their plans for student loan forgiveness in some variation. As the Democratic field has whittled down, and candidates provide more details on their respective presidential plans, there is much to be said on the student loan debate.

Former Vice President Joe Biden hopes to make community college tuition free for all. He has also planned to increase the amount and reach of the Pell Grant program, to focus heavily on income-based repayment plans for borrowers and to provide $10,000 in student loan forgiveness for each year (up to five years) that an individual works in a designated public service job.

Alternatively, the Trump administration has shared their plans for cutting the Public Service Loan Forgiveness program entirely (which has been reduced gradually since taking office), as well as the elimination of Supplemental Educational Opportunity Grant Programs. Ultimately, Congress works to ensure education spending cuts are slow and steady, and therefore, proposals made by the Trump Administration will be enforced in this manner.

The US Government confirmed in early February they plan to forgive $207.4 billion in student loans over the next decade. The bulk of this is likely to be allocated among borrowers with graduate or professional school accolades. In less than 8 months, Americans will be closer to knowing the fate of their personal outstanding student loan debt. Whatever the case, it is in the borrower’s best interest to continue paying the minimum amount due on their outstanding student loans, on time — steering clear of making excess payments on debt with the possibility of forgiveness.

As the novel coronavirus continues to make daily headlines, time is of the essence for recent college graduates. A word of advice: move forward as quickly as possible in your job search. It is difficult to predict where things may be a month from now, and the best thing you can do is secure an offer.

The road ahead will not be an easy one — market volatility, new regulations, postponed deadlines and new challenges. What should remain intact, however, are your financial priorities. There are lending tools for higher education, but not for retirement. Hold on tight, the road will be bumpy. Keep your head up and stay focused on your goals.