Tune in as VIN Foundation Executive Director Jordan Benshea chats with student debt educator Dr. Tony Bartels about the latest student loan tax forgiveness. Taking the “hope for the best and plan for the worst” approach, Dr. Bartels will take you through the details of this confusing situation. Did you know if you were making payments toward your student loans during the Cares Act forbearance time you can get a refund? Listen in to learn this and additional helpful information.
GUEST BIO:
Tony Bartels, DVM, MBA
Tony Bartels graduated in 2012 from the Colorado State University combined MBA/DVM program and is an employee of the Veterinary Information Network (VIN). He and his wife, a small-animal internal medicine specialist practicing in Denver, have more than $400,000 in veterinary-school debt that they manage using federal income-driven repayment plans. By necessity (and now obsession), his professional activities include researching and speaking on veterinary-student debt, providing guidance to colleagues on loan-repayment strategies and contributing to VIN Foundation resources as a VIN Foundation board member. Beyond debt, his professional interests include small- and exotic-animal practice. When he’s not staring holes into his colleagues’ student-loan data, Tony enjoys fly fishing, ice hockey, camping and exploring Colorado with his wife, Audra, and their two rescued canines, Addi and Maggie.
LINKS AND INFORMATION:
- American Rescue Plan Act of 2021: https://www.congress.gov/bill/117th-congress/house-bill/1319/text?format=txt
- Federal Student Aid: https://studentaid.gov
- Federal Student Aid COVID FAQ: https://studentaid.gov/announcements-events/coronavirus
- Sizing up the Student Loan Tax Forgiveness blog post: https://vinfoundation.org/sizing-up-student-loan-forgiveness-tax-exemption/
- VIN Foundation Student Debt Center: https://vinfoundation.org/studentdebtcenter
- VIN Foundation My Student Loans tool: http://www.vinfoundation.org/mystudentloans
- VIN Foundation WikiDebt: https://vinfoundation.org/wikidebt
- VIN Foundation Webinars: https://vinfoundation.org/resources/webinars/
- Stay up to date with VIN Foundation webinars: https://vinfoundation.org/updates/
Personalized Assistance available via the special VIN and VIN Foundation Student Debt Message Board areas:
Email VIN Foundation: [email protected]
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TRANSCRIPT
Intro
Tony Bartels, DVM, MBA: The excitement, I think, lies in the fact that they’re considering the implications of having student loans canceled and what that tax might mean for people who experienced student loan forgiveness.
Jordan Benshea: That is Dr. Tony Bartels, and this is the VIN Foundation’s Veterinary Pulse podcast. I’m Jordan Benshea, Executive Director of the VIN Foundation. Join me and our cohost and VIN Foundation Board member, Dr. Matt Holland, as we talk with veterinary colleagues about critical topics and share stories. Stories that connect us as humans, as animals, as a veterinary community. This podcast is made possible by individuals like you who donate to the VIN Foundation. Thank you. Please check the episode notes for bios, links, and information mentioned. Welcome, Tony. Thanks for joining us.
Tony Bartels, DVM, MBA: Thanks for having me again. Good to be here.
Jordan Benshea: Yeah, as most listeners probably know by now, but just in case, Dr. Tony Bartels is a VIN Foundation Board member and a student debt educator, and you can find his bio in the episode notes. So, like always, you’re usually here, and we’re talking about these really important, lots of fun topics. You’re a fun topic guy. Right? That’s probably how you’re known. Let’s just dive right in.
Understanding the American Rescue Plan Act
Jordan Benshea: Our topic for today is the American Rescue Plan Act [ARPA] of 2021 and the included tax exemption for canceled student loans. Specifically, what we’re talking about is section 9675, which is the modification of treatment of student loan forgiveness. Is this something to get excited about?
Tony Bartels, DVM, MBA: Yes, if there’s anything you can get excited about, it’s all of that. It’s always big news when Congress does anything and it gets signed into law, but when it changes how things can potentially work with your student loans, we do have to pay extra special attention. Buried in all of the other complex things that the recent legislation provided, it also exempted student loan cancellation from being considered as taxable income, but only for the tax years 2021 through 2025. That’s important, because when we talk about student loans and particularly income driven plans and forgiveness, forgiveness is synonymous with cancellation of debt in the eyes of the IRS. So basically, I’m familiar with it mostly in the context of income driven repayment plans where you make payments for a certain number of years and if you still have a balance remaining, that balance is forgiven or cancelled and then treated as taxable income. Well, this legislation that was recently passed exempts that forgiveness or that canceled student debt specifically from being included in your taxable income when you pay your taxes. The big issue is that it’s only exempted that canceled debt from your income for the next five years, which generally is not all that helpful for those of us that have graduated anytime recently and have been using an income driven repayment plan and might be planning for that eventual tax down the road.
Jordan Benshea: Say that you’re in an income driven repayment plan currently, for the years from 2021 to 2025. During those years it will not be considered gross income, but the rest of the time it will be.
Tony Bartels, DVM, MBA: Yes, essentially, right. Normally, the way the law was originally written when it comes to student loan repayment and income driven repayment plans, is that you would make payments for a specified period of time and when you reach that maximum repayment period, anything that’s remaining would be canceled, and however the IRS handles canceled debts for that year, that would determine whether or not your forgiven balance would be taxable. Now in almost all other cases, anytime you have debt canceled, it’s treated as taxable income but in this specific legislation they carved out student debt cancellation specifically for the years that might experience student debt cancellation 2021 through 2025 only. All right, so if it happens beyond that 2025 timeframe as of now, then you would not be exempt from paying the tax on your student loan forgiveness.
Implications of Student Loan Forgiveness
Jordan Benshea: So, this is a very small group of people who could potentially benefit from this, then.
Tony Bartels, DVM, MBA: Well, so there’s different ways to look at this. Technically, yes, because there’s only been one income driven plan that has been around long enough. So, income contingent repayment [ICR] is a specific type of income driven repayment plan that allows you to pay based on your income for 25 years, and if you still have a balance remaining, it would be canceled and prior to this legislation would be considered taxable income. Now, that plan went into effect in 1995, so 25 years from 1995 is sometime in the middle of 2020. If you had navigated ICR for 25 years and had a balance remaining that got cancelled in 2020, you would actually have to pay the tax on that, because 2020 is not one of the years where student loan forgiveness is exempted. If that forgiveness happened in 2021, 2022, 23, 24, or 25, then you do not have to pay the tax on your student loan forgiveness.
Jordan Benshea: It almost seems as though the thinking here is if you are about to hit that forgiveness, instead of being hit with that “tax bomb” during these years where perhaps the country is recovering from this pandemic, it’s almost a break for those that would hit that tax bomb during these years where we’re recovering from the pandemic. Is that what it seems like?
Tony Bartels, DVM, MBA: I think that would be a charitable interpretation of it. I do think that it actually has more to do with the desire for this particular administration and particularly democratic senators and many congressional representatives to see some amount of student debt canceled. Not necessarily because of the income driven repayment plans, because currently that’s the only mechanism for student debt to be cancelled. I think they’re anticipating or even pushing the current president to do what I call ad hoc cancellation of student debt. So, all the proposals that have been out there where they’re talking about should we cancel $10,000 of everybody’s student debt, or $50,000 of everybody’s student debt, they’re still investigating whether or not the president even has the authority to do that via executive action. There are people that think that the President does, and there’s people that think the president doesn’t. So, we don’t even know where we land legislatively on that. However, if the president were to be able to cancel any amount of student debt, it would still be subject to taxation, because generally speaking, the IRS treats any kind of canceled debt as taxable income. However, this clause within the recent legislative package that was passed and signed into law specifically exempts student debt that is canceled between 2021 and 2025 from being included as taxable income. If the President decided that he had the executive authority to cancel student debts, whatever amount would be cancelled, if he did that pretty much during his first term here, that would not be subject to taxes by the IRS, which is what I believe was the primary driver behind that particular piece of legislation.
Jordan Benshea: Okay, got it. Maybe we should back up here and clarify.
Exploring Income-Driven Repayment Plans
Jordan Benshea: There are four different types, to my understanding, of federally funded income driven repayment plans. You just mentioned one, ICR which is an older one. Can you run us through them real quick?
Tony Bartels, DVM, MBA: Sure. Income contingent repayment became available in 1995. Unfortunately, it wasn’t a very beneficial plan, so, almost nobody was using it. I believe that the number of people that would be using ICR and would be eligible for forgiveness during this 2021 through 2025 period is really small. Now, we have had some improvements on those income driven plans over the years that would make it more likely that you might reach student loan forgiveness, but the next one after ICR didn’t come online until 2009. So, that was the first version of income-based repayment. So IBR. Since then, we’ve had those plans improve more so. We’ve had Pay As You Earn which became available in 2012, and then revised Pay As You Earn for the people that didn’t meet the eligibility requirements for Pay As You Earn. We have revised Pay As You Earn that became available in December of 2015. We also have a newer version of IBR that’s available, but that is only applicable to people who started taking higher education loans after July 1rst 2014. So, you can either qualify for the old version of IBR or the new version, you can’t use both. It depends on when you started borrowing your student loans as to whether or not you qualify for the old one or the new one. So those newer plans, the ones starting in 2009, 2012, 2015, are plans that are more likely to result in student loan forgiveness, because they have us paying a much lower percentage of our income. So, it’s more likely that you would reach the student loan forgiveness after hitting the maximum repayment period and thus having this taxable event that would occur for you. That likely is not going to happen for any appreciable number of student loan borrowers until about 2032, which is 20 years after Pay As You Earn went into effect and Pay As You Earn tends to be one of the more beneficial of the income driven plans.
Jordan Benshea: I’m not hearing a lot of excitement from you about this. Should anybody be excited? Should any of the colleagues who were in any of these four plans be excited about this and if so, why?
Tony Bartels, DVM, MBA: I’m reserving my excitement for a later date. I think that based on how much detail we’ve had to go into just to explain what this even means, I think most people haven’t even really processed it or know how to process it, quite frankly. The excitement I think lies in the fact that they’re considering the implications of having student loans canceled and what that tax might mean for people who experience student loan forgiveness. That’s a good thing, because I do believe that because these plans are so confusing and a lot of people use them because they provide some very meaningful monthly student loan repayment relief, but I do think that they don’t think long term about what the forgiveness consequences could be if they if they reach forgiveness. So, to exempt the student debt cancellation from being taxable income is a pretty big deal in the context of student loans. What a lot of people think is this opens the door to potentially making student loan forgiveness nontaxable going forward. If you think about the logistics of this in 2025, whatever the congressional makeup is and whatever the presidential makeup looks like, again, we’re going to have to then consider, do we want to continue that forgiveness exemption so you don’t have to pay tax on student loan forgiveness or are we going to let it expire and now we’ve created a situation where some people didn’t have to pay tax, but more people will in the future? Honestly, to me, it looks like a huge social experiment and it’s really going to be dependent upon what the political makeup looks like and the appetite for taxing people on student debt cancellation in the future.
Jordan Benshea: To your point that you mentioned earlier, we spent several minutes just trying to explain what this is, so what if some listeners are feeling confused? What can they do to help make sense of this or where do you think that they can go to try to understand their situation?
Planning for Potential Tax on Forgiveness
Tony Bartels, DVM, MBA: Because my wife and I use an income driven plan and I’m still planning as if there’s going to be a tax due on our student loan forgiveness, my recommendation is hope for the best but plan for the worst. If you’re using an income driven repayment plan and you’re not covering the interest on your monthly payments, or you’ve used the VIN Foundation student loan repayment simulator and every time you run it, you’re seeing that you have a balance forgiving at the end, then I would plan as if you have to pay tax on that student debt forgiveness. You can use the forgiveness planning module in the VIN Foundation student loan repayment simulator to help you estimate what that tax would be, as well as how much you need to save in order to be prepared for that tax.
Jordan Benshea: Obviously, you’d rather have that nut saved so that you are able to pay that tax at the end and if it turns out you don’t need to, well, then that’s just gravy. Right?
Tony Bartels, DVM, MBA: Exactly.
Jordan Benshea: And if you do, but if you don’t save for it, and then you do have it due, you definitely don’t want to be in that situation. Right?
Tony Bartels, DVM, MBA: Absolutely. Exactly. That’s exactly what the hope for the best and plan for the worst is all about. If I get to the end of student loan repayment and I have a balance forgiven and I don’t have to pay the tax, but I’ve got a huge fund that was meant for paying the tax, wow, now I’ve got bonus retirement money, or I can do whatever I want to with that nice little nest egg that I’ve built for that tax. Now, if all of a sudden, I’m knock on the door of forgiveness, and I was banking on the fact that there was not going to be a tax due, it’s going to be really hard to come up with some of these projected taxable amounts with just a few years before you hit forgiveness. So, you really need to use that time that you have before you would reach forgiveness to really get prepared for that tax in the event that you have to pay.
Jordan Benshea: That sounds like good advice, of course, and probably there are some colleagues out there right now feeling frustrated with all these changes and all these unknowns. It can seem hard to keep up with. Do you have any suggestions to help with that frustration? Are you feeling frustrated? What are you doing?
Tony Bartels, DVM, MBA: Yeah. Well, I think there’s a lot of good things too right now. We’ve gone into a lot of detail and a lot of weeds around student loans work, and we’ve also dove into politics, which we generally don’t do, but we have to in this case, because there’s no two ways around it, this is very critical.
Navigating Pandemic Forbearance Benefits
Tony Bartels, DVM, MBA: However, the pandemic forbearance that’s been in place since March of 2020 has been hugely beneficial for all federal student loan borrowers. That has turned off the interest, has shut off the payments for those of us in repayment. For those of us that are using an income driven repayment strategy, the time that we’ve spent in this pandemic forbearance even counts towards the time required to reach forgiveness, which is a triple bonus. In my opinion, that was almost unnecessary, because the income driven plans could have handled low- or no-income situations. That’s what they’re designed for, but we got these additional benefits that really provided some additional money in most of our monthly budgets. If we hadn’t started planning for the tax, it gives you an opportunity to start building that or playing catch up. Same with your retirement funds. We’ve got some more flexibility in our budget because we don’t have to pay off our student loans, we’re not accruing any interest, and we’re not losing any time towards forgiveness. So, we can use this time to boost those areas of our financial wellness that we may not yet have started or have been ignoring, because we were either too focused on our student loans or we just didn’t have the capital to do it.
Jordan Benshea: Right. If there are colleagues who perhaps may not have been taking advantage of this forbearance time, even now with a few months left before we get to September 30th, there is still time to utilize that money and put it away and put it in your retirement. There are still ways to make progress even if you haven’t so far.
Tony Bartels, DVM, MBA: Yes, absolutely. There’s even a lesser-known benefit as part of the CARES Act and some of the pandemic forbearance is if you were making payments towards your student loans and decided that maybe that wasn’t such a good idea, you can actually ask for refunds of those payments during this pandemic forbearance period and your loan servicers have to give you that money back.
Jordan Benshea: How does somebody go about getting that refund?
Tony Bartels, DVM, MBA: They would request that to their loan servicer. Any payment that you’ve made during the pandemic forbearance period, so starting March 13th of 2020, any payment you’ve made since then you can request to be refunded back to you. Now, it usually takes somewhere between 30 to 60 days for them to process that and get you that payment back, but you can request any and all payments that you’ve made during the pandemic forbearance period provided all of your loans are covered under that pandemic forbearance benefit.
Jordan Benshea: Is there a time, like the last date, that you could ask for those refunds? Do you know?
Tony Bartels, DVM, MBA: Oh, I don’t know if there’s an end date. Right now, the pandemic forbearance period is scheduled to expire at the end of this September, so I would presume that any payments that you’ve made all the way through the end of September would be refundable, but we’re waiting to see if that in fact will be the end of the pandemic forbearance period. I’ve seen some reports that they are considering potentially extending it, but my thought is that they probably won’t. I was surprised to see that they were even looking into that. We don’t know. Those are things that we’re just going to have to wait and see if they decide they want to extend it for some reason, then great. If not, then we’ll have to listen and learn what repayment restart is also going to mean.
Resources and Future Updates
Jordan Benshea: The next thing I wanted to ask you was with all this information we’ve discussed, where can people go? Probably things will change, as we know things do, so where would you suggest veterinary colleagues go to look and check for updates? One thing that we’ve talked about is we’re definitely going to do a VIN Foundation repayment restart webinar towards the end of August or so. We’ll see where things are to let people know the latest changes and what we’re hearing. Any other places that you’d suggest?
Tony Bartels, DVM, MBA: I would say studentaid.gov is a great place to start. They have an excellent COVID-19 pandemic forbearance page. Right when you land on the studentaid.gov website, at the top of the page, there is a banner that says COVID-19 emergency relief flexibilities. If you review the details on that page, it pretty much answers every question that I get asked on a daily basis: What if I’m using income driven repayment? What if I’m working towards public service loan forgiveness? Do I need to renew my income? All of those sorts of things are covered explicitly on that studentaid.gov website. It’s also where we see information pop up or where I expect to find information pop up when we start talking about what repayment restart looks like. So that’s where I’ll be going, and we’ll be digesting that information and trying to tell you what it means as a veterinarian and veterinary student to help you navigate getting your loans back into repayment or starting repayment for those that are graduating in 2021 Class. I would go to VINFoundation.org under the Student Debt Resources and we’ll keep you up to date there as well.
Jordan Benshea: Absolutely. We will put all those links that Tony’s mentioning in the episode notes as well, so you don’t need to scramble to get there right now. If you do want to make sure that you know about the webinar, we’ll put those links so that you can stay updated in the episode notes, also. Thank you so much for this time, Tony. Is there any other information you think colleagues with student loans need to know now?
Tony Bartels, DVM, MBA: No, I think it mostly is just focus on understanding your student loans and using the tools that are on VIN Foundation in the Student Debt Center. You can still learn a lot about what status your loans are in. I do routinely find that many people don’t even know which repayment plan they’re using. So that’s really helpful to know which repayment plan you’re using, so that you’re requesting the same one or the one that makes the most sense for you. In subsequent years, when we start to renew our income again and get back in the swing of things and what repayment looks like, we’re going to have to know what repayment restart – at some point we’re going to end up back in repayment, I don’t see any scenario where that’s going to not happen, so that’s going to take some care, diligence, and knowledge to make sure that mistakes aren’t made by your loan servicers or you don’t miss something. For many of us that are using income driven repayment for a long time now, you may have a pretty significant unpaid interest balance and if you miss something along the line here, when we get back into repayment that could get added to your principal, which would add more cost to your overall total repayment cost over time. There’s definitely reason to one] be excited by the flexibility you have, so you can meet other areas of your financial wellness, but two] use this as a way to better understand your student loans so you know how to get them back in repayment once we all end up back in repayment.
Jordan Benshea: Wonderful. Thanks again, Tony. As always, your knowledge is I’m sure helping many, many colleagues, so thanks for your time.
Tony Bartels, DVM, MBA: Thank you again for having me and please feel free to reach out. I know we were kind of in the weeds on this one, so I anticipate that it’s going to be tough to understand all that or apply it. Let us know how we can help and make it a little bit easier for you to understand.
Jordan Benshea: Absolutely. We’ll put that email to reach out in the episode notes. Thanks, everyone. We look forward to hopefully you being here next time.
Tony Bartels, DVM, MBA: Thank you.
Outro
Jordan Benshea: Thank you for joining us for this episode of the Veterinary Pulse. Please check the episode notes for additional information referenced in the podcast. If you enjoyed this podcast, please follow, subscribe, and share a review. We welcome feedback and hope you will tune in again. You can find out more about the VIN Foundation through our website VINFoundation.org, and our social media channels. Thank you for being here. Be well.