Written By James Mwombela, CFP®, CSLP®
Updated on January 1, 2024
Thanks to recent developments within federal student loan policy, middle-class students can access a strategy that helps them avoid student loan debt and pay almost nothing for a college education.
If you’re a traditional student, you and your parents can finance all of your college costs with federal student loans. When it’s time to repay that student loan debt, you can take advantage of a strategy that leverages President Biden’s new income-driven repayment plan (IDR), the double-consolidation loophole for Parent PLUS Loans and IDR forgiveness.
A similar approach can also help non-traditional students limit their educational costs. Read on to find out the necessary steps to make almost free college a reality today.
Biden's new IDR plan
Before explaining the steps you need to take, let’s talk about President Joe Biden's new IDR plan.
Early this year, the Biden Administration announced a new IDR plan for federal student loan debt that’s much more generous than existing loan forgiveness programs. It modifies the existing REPAYE repayment plan, with changes expected to go into effect in summer or fall 2023.
Under the New REPAYE plan, undergrad borrowers are required to pay 5% of their discretionary income toward their student loans instead of the current 10%.
Discretionary income was previously defined as taxable income qualifying above 150% of the poverty line, but now it’s taxable income above 225% of the poverty line. The New REPAYE plan also waives all unpaid interest that isn’t covered by the federal student loan borrower’s income-based payment.
The double-consolidation loophole
The key for dependent students to go to college almost for free is the double-consolidation loophole.
Undergraduate students who are still dependents of their parents are limited to borrowing a total of $31,000 in federal undergraduate loans. That’s lower than the average cost of one year at a private university.
Federal Parent PLUS Loans taken out in parents’ names can be used to cover the entire cost of attendance.
You can imagine the federal government doesn’t want parents taking on these much larger loan balances and paying back only 5% of their income.
That’s why Parent PLUS Loans don’t have access to IDR plans. If they’re consolidated using a Direct Consolidation Loan, parents only have access to the Income-Contingent Repayment (ICR) plan. It requires 20% of parents’ discretionary income to be paid toward the federal student loan debt, and only 100% of the poverty line is excluded from discretionary income.
This is where the loophole comes into play. Parent borrowers are limited to ICR if they consolidate Parent PLUS Loans. But they can instead consolidate their Parent PLUS Loans into two separate consolidation loans, and then consolidate those two consolidation loans together.
This final consolidation loan is considered the same as any other consolidation loan and unlocks eligibility for any IDR plan, including the New REPAYE plan. The larger limit for Parent PLUS borrowing and the double-consolidation loophole is the key to allowing dependent undergrad students to attend school anywhere for almost free.
7 steps for dependent students
Now that you understand the background information, here are the steps to make your zero to low cost higher education magic happen.
1. Fill out the FAFSA every year. To get access to federal student aid, including student loans and the federal Pell Grant, fill out the Free Application for Federal Student Aid (FAFSA) before your first semester and every year thereafter.
2. Maximize available undergraduate federal loans. Your loans can stay in deferment status while you are in school.
3. Cover remaining costs with Parent PLUS Loans. Ideally, take out all of the loans under one parent’s name so that payments are calculated using only that parent’s income. Consider taking out all the loans in the name of the lower-income spouse to secure lower payments. These loans can also stay in deferment while the student is in school.
4. After graduating, enroll in REPAYE. Your monthly payment for the first year is based on your income from your latest tax return at the time you begin repayment. File a tax return during the prior tax season, even if you have little to no income, to possibly have a $0 payment for that first year.
5. Optimize your student loan repayment strategy. Your payments are based on your income, so maximize opportunities to reduce how your income looks on paper. For instance, contribute to a retirement account to exclude those contributions from your taxable income. Also, married couples can file taxes as married, filing separately, to exclude their spouse’s income from the payment calculation.
Any balance remaining after 20 years of payments is forgiven. You can get debt forgiveness in 10 years if you work for a nonprofit and qualify for Public Service Loan Forgiveness (PSLF).
6. Parents use the double-consolidation loophole strategy and enroll in REPAYE. Remember, don’t consolidate all the loans together; doing so only qualifies parents for the most expensive ICR plan. If parents make this mistake, it can’t be undone!
Instead, submit a total of three consolidation applications. Consolidate half the loans on one application, and the other half on another application. After those have been processed, your parents will have two consolidation loans.
Finally, consolidate the two consolidation loans together into a new consolidation loan to access the New REPAYE plan. The actual mechanics of double-consolidation application paperwork is pretty complex and easy to mess up, so make sure it’s done right.
7. Parents optimize their student loan repayment strategy. Parents have a variety of strategies available to pay as little as possible back. They can request up to three years of forbearance, max out their retirement accounts, and, for married couples, file taxes as married, filing separately.
After retiring, they can make taxable withdrawals from their retirement accounts first and delay claiming Social Security until age 70. This maximizes their Social Security income, and if they have little to no other taxable income at that point, their Social Security is tax-free or almost tax-free.
That means your parents would have little to no taxable income, which would make their student loan payment $0 in retirement.
Dependent student case study: Lauren
Now, let’s see how this works with some real numbers, starting with dependent students.
Let’s say Lauren was accepted to Vanderbilt University and starts school this fall semester. The total cost of attendance is about $84,000 per year. We’ll add $5,000 for transportation, resulting in a total of $90,000 per year, or $360,000 over four years. Lauren can borrow $31,000 in federal loans. Her mother borrows the remaining $329,000 needed in Parent PLUS Loans.
Lauren enters repayment
After Lauren graduates and her six-month grace period ends, she has $0 monthly payments during her first year, based on her tax return for the prior year. Every year, Lauren recertifies her income based on the prior year’s tax return. Her payments eventually catch up to her actual income and increase to $105. After a couple of years of receiving raises from her employer, her loan payment rises to $127 per month.
Lauren optimizes repayment and gets IDR forgiveness
Let's assume Lauren gets married in 2026 and has a child in 2028 — her payment would drop to $83 based on her larger family size. We assume she files taxes as married, filing separately, to exclude her spouse’s income. After having a second child in 2030, her payment drops to $48.
That’s right, her payment is that low even though she is making $85,000 a year and her spouse is making $100,000. Not bad at all for a young couple in their late-20s/early-30s!
Only people who owed more than they earned benefited from IDR. Now, the New REPAYE plan turns that on its head by benefitting undergrad borrowers who owe far less than they make.
If Lauren contributes 20% of her income to her 401(k) (saving 20% of her income is a good rule of thumb anyway), she pays a total of $3,000 before her payments drop to $0 after the birth of her second child. Additionally, all interest above that $3,000 is paid; so, basically, all of the interest accrued is waived by the U.S. Department of Education. Her balance would not increase, and the $31,000 balance would be forgiven after 20 years in repayment. The forgiven amount would be considered taxable income, costing her about $8,000 in taxes.
Lauren's parents enter repayment
Now let’s see how Lauren’s parents handle their Parent PLUS Loans. Let’s assume Lauren is the youngest sibling, and Lauren’s mom is 57 years old when Lauren graduates. The Parent PLUS Loans accrue interest while Lauren is in school, so let’s say the $329,000 borrowed has become $400,000. Lauren’s mom can request three years of forbearance, at which point the balance would be $500,000.
Lauren's parents optimize repayment and get IDR forgiveness
Let’s assume Lauren’s mom makes $70,000 a year, and her dad makes $150,000. If they file taxes as married, filing separately, the Parent PLUS payment will be about $300 per month.
Assuming Lauren’s mom retires at age 65 and brings in $50,000 of taxable income in retirement while her dad brings in $70,000, her Parent PLUS payment would drop to $60 a month. This is the benefit of taking out loans in the name of the lower-income spouse.
After 25 years of payments, Lauren’s parents have paid a total of $33,000 in payments. With additional tax maneuvering, they could have $0 loan payments in retirement. They could live off their taxable retirement assets and convert the rest of them to tax-free accounts before starting Social Security at age 70. That would make their Social Security tax-free and their taxable income $0.
After the $500,000 Parent PLUS balance is forgiven, Lauren’s parents could face a six-figure tax bill, but they would be in their 80s at that point. There are several reasons why seniors shouldn’t worry about taxable loan forgiveness.
After everything is said and done, Lauren and her parents paid a total of $44,000 for a $360,000 degree, only 12% of the cost. And with some additional maneuvering, Lauren’s parents could pay even less.
I would consider that a big win, wouldn’t you?
An approach for independent students
If you meet at least one of the requirements for being an independent student for federal student aid purposes, you’re allowed to borrow a total of $57,500 for your higher education. The requirements are very strict, and there’s no loophole to appear like an independent student if you aren’t.
Simply supporting yourself financially and filing taxes on your own isn’t enough to qualify as an independent student. Most independent students are working adults, age 24 or older, who are going back to school. Some independent students are younger and are serving in the military or coming from foster care. As of 2012, just over half of all undergrad students were independent students.
The increased borrowing limits allow independent students to cover their entire college education with federal student loans. With federal loans, they can then repay their loans under the New REPAYE plan while pursuing IDR forgiveness.
6 Steps for independent students
Now let’s see how this works for independent students.
1. Stick to the $57,500 undergrad borrowing limit. According to Education Data, the average cost of in-state tuition and fees at a four-year public university is $9,377 per year, or $37,500 over four years.
Going to community college for two years, and then transferring to an in-state public university would lower your total cost. Students pay an average of $1,230 per year on books and supplies for a total cost of $5,000. Assuming the independent student commutes, there’s no room and board to worry about.
That leaves $15,000, almost $4,000 per year, that can be borrowed to cover transportation and personal expenses. Remember, you are allowed to borrow up to the cost of attendance, which is determined by the school, minus other financial aid received. The cost of attendance includes personal expenses, even the cost of dependent care for children.
2. Look into all available financial assistance. This includes merit-based scholarships, need-based grants and employer tuition assistance to cover any costs not covered by your student loans.
3. Fill out the FAFSA every year. In addition to federal student loans, the FAFSA also allows you to potentially qualify for any merit- or need-based aid that your school might offer.
4. Borrow the maximum available federal loans for undergrad. The loans can stay in deferment while you are in school.
5. After graduating, enroll in REPAYE. Your federal student loans default to a 10-year standard repayment plan. Enroll in REPAYE to lower your monthly payments.
6. Optimize your student loan repayment strategy. Depending on your income and family size, your payment will likely be quite low on the new REPAYE plan. Optimizing your strategy further can lower your payment to as low as $0. The example below demonstrates this further.
Independent student case study: Martina
Martina is a help desk assistant who wants to get a bachelor’s degree in IT to advance her career. After researching online, she finds that Colorado State University offers a flexible online program. Luckily, she is a resident of Colorado!
She determines she can handle 24 credits per year, which is eight courses, while working full-time. She can do three courses per semester, and two over the summer session. The 120-credit hour degree will take five years to complete and cost $42,000 in tuition with no fees.
Let’s assume she spends the national average of $5,000 on books. Since Martina is continuing to work and completing the program online, there’s no room and board or transportation to worry about. She’ll also need to spend $3,000 a year for five hours a week of child care while her husband is working and she’s in class and studying.
The total cost of her degree is $62,000. Luckily, after filling out the FAFSA each year, she can borrow $57,000 in federal student loans, and CSU awards her $1,000 a year of need-based aid over her five years of school.
Martina enters repayment and gets IDR forgiveness
After Martina graduates, she has a six-month grace period before payments are due. Her income is $30,000, and if she files taxes as married, filing separately, her payments will be $0. She gets a promotion with a new salary of $60,000, and her payment increases to $50 a month.
If she contributes $12,000 from her $30,000 raise to her 401(k) each year, her payments will remain at $0. That’s right, she won’t pay a dime toward her loans.
Because her income-based payment is $0, all interest is waived each year by the Department of Education, and her balance remains at $57,000 after she reaches 20-year loan forgiveness. However, she will owe $15,000 in taxes that year.
That means she pays $15,000 out-of-pocket for a $62,000 degree. Better yet, she doesn’t have to pay that until 20 years after graduating, 20 years after earning the higher income afforded to her by the degree. If you take into account inflation, $15,000 spent 20 years from now is the same as spending $6,000 today.
If student loan debt forgiveness becomes tax-free, college would be literally free for Martina.
Could this almost free college strategy go away?
The New REPAYE plan was established by executive order, which means it could be altered or eliminated by a future president. If that happens, IDR payments would double for undergrad debt in the name of the student borrower. But Parent PLUS borrowers would not be affected, assuming they will pay roughly the same amount on New REPAYE as they do on current IDR plans.
New Parent Plus borrowers will still have access to the New IBR repayment plan. That plan was established by federal law, which means it would take 60 votes in the Senate to repeal. It is unlikely that Democrats would vote in favor of a change that makes student loan borrowers worse off, so New IBR is safe.
The double-consolidation loophole could also be closed if the Department of Ed. and the loan servicers change their policies to disallow it. If that happens, Parent PLUS borrowers will still have access to the ICR plan.
Although that payment is 20% of income, parent borrowers can still delay payments as long as possible and do some tax planning so their taxable income in retirement is $0. If you have to pay 20% of $0, you will pay $0.
Every strategy has its risks, but this one is far better than many alternatives.
Exploring student loan forgiveness as an undergraduate
Assuming the new REPAYE plan doesn’t go away, dependent students and their parents can win big with this undergraduate loan financing strategy. Independent students can also benefit from the upcoming policy changes if they limit the cost of their education (e.g. attending a public college in their state and considering community college).
Run the numbers to see if this lucrative college financing strategy makes sense for you and your family. Subscribe to our email list so that you have access to our latest student loan calculator, which is updated with the new REPAYE rules. You can also schedule a pre-debt consultation if you are interested in taking out new student loans.
If you already have undergraduate debt and want to find out if IDR forgiveness can now benefit you, schedule a consult.
