Written By Travis Hornsby, CFA®, CFP®
Updated on February 17, 2021
If you’re facing a potential salary decrease, you can start to worry about your student loans. But federal student loans have a safeguard built-in with forgiveness. The lower your income, the better forgiveness can be for you. And if you’re paying 10% of your income and you get a pay cut, then 10% of your income is less.
It’s not an ideal situation, but the right repayment strategy can give you peace of mind about your student loans no matter your income.
There are also a few lessons you can learn about managing your student loans from Trump’s finances. You can use some of the same financial tactics to save some money on your student loans.
Declining insurance reimbursement rates and their impact on student loans
The CMS has recently proposed reductions to the Medicare reimbursement for various therapy services. Specifically, they have proposed a 9% cut in Medicare rates for physical therapy, speech-language pathology and occupational therapy.
Many health care professionals providing services in these areas are concerned. These reductions will certainly affect their income. Already, some healthcare companies are starting to pay physical therapists less because of the upcoming cuts.
In addition, many private insurance companies are likely to use these new Medicare guidelines to determine their rates, leading other insurance companies to decrease reimbursement rates, too.
What to do if your salary goes down when you have student loan debt
Many therapists are asking: how do you deal with a potential decrease in salary due to the proposed cuts when you have student loan debt?
Well, hopefully, this doesn’t happen. But if your income goes down because of the cut in reimbursement rates from insurance companies, that might be a good thing if you have student loan debt.
That’s because a reduction in your salary makes student loan forgiveness look even better.
When you’re on an income-driven repayment (IDR) plan, and your pay goes down, then 10% of your income is less money. So, you will pay less for your student loans, and the burden is even less than it was.
What about the tax bomb?
The only thing you might still have to think about is tax liability. You might have to save $500 to $1,000 per month to cover any future tax bomb.
But, it’s likely the tax bomb isn’t going to exist anyway. And if it does, you probably won’t have to pay income taxes on your forgiven student loan debt because it may not be collectible.
So, suppose you're worried about decreased earnings because of the reimbursement cuts or insurance paying even less for procedures. In that case, forgiveness is going to be an even better option for you.
What Trump’s finances can teach you about managing your student loans
However you feel about President Trump, there’s been some interesting reporting by the New York Times that has made me think about how people deal with debt. I’m not going to talk about Trump’s finances so much as I’m going to share some things he did in his finances that you could use to save money on your student loans.
What if you can’t pay the tax bomb
One of the biggest questions I get about student loan forgiveness is about the tax bomb: what will happen if you can’t pay it when it comes due? It can make you feel uneasy and even deter you from pursuing forgiveness at all.
But the tax bomb might not be a problem at all.
Trump had $287 million of debt forgiven in relation to his Chicago Tower project. The New York Times did a story about how he didn’t pay much income tax on the forgiveness of that debt.
So how did Trump get tax debt forgiven? And how can you use that to get out of paying the tax liability on the forgiven balance of your student loans?
It was a complicated transaction – anything having to deal with real estate usually is. What happened is that Trump took losses from other places in his other businesses. Those losses were used against the income he had from the forgiven debt from the Tower.
What if you had losses in other areas that you could use against the income from your forgiven student loan balance?
It requires investment. Personally, I like to invest in index funds, mutual funds and my business. If you own a business or are interested in real estate, there are ways – with careful tax planning – to reduce the lump-sum income hit that you take.
It isn’t easy. But I believe it’s possible to mitigate the tax bomb by strategically planning for loss in other areas of your finances.
Strategies to pay less in taxes
If you’re not interested in paying less in taxes, that’s okay, too. But if you want to pay what you’re legally required to pay – and no more – that is very reasonable. And it’s possible with phantom losses, where you don’t really have a loss, but it looks like you have a loss on paper.
Because you and I aren’t gazillionaires, we don’t have the same access to complicated tax-loss planning. But we can use tax-loss harvesting.
Basically, you have one mutual fund that you have a loss, and you sell it and buy one that’s similar but not identical. Then you realize that loss on paper. You can get up to $3,000 per year to write off against income, resulting in tax savings on your ordinary income.
It could easily add up to $1,200 to $1,500 in tax savings every year. And if you don’t use all of that loss, you can carry it forward to future years.
You can do this same sort of strategy with real estate.
Retirement contributions can reduce your taxable income, too. If you’re an employee, your 401k contributions reduce your taxable income. But there’s a cap on that. For business owners, the cap is much higher, which can lower your tax liability even further.
Unfortunately for ordinary people like you and me, we don’t have access to the best tax help or the same loopholes as people who are much wealthier with significantly more investments. But there are still things we can do to minimize our taxes legally.
I’m not a tax professional, so I want to make sure you reach out to someone knowledgeable about taxes before attempting to put any of these strategies into place.
But I am a student loan expert. If you’re worried about a pay cut and its effect on your student loans or don’t have a clear path forward to repay them, schedule a consult to get a personalized repayment plan.
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