Editor's note: This is the last of a four-part series about wealth planning for different generations. Part one was Talkin' 'Bout My Generational Wealth: Baby Boomers, part two was Come as You Are: Wealth Management for Gen X, and part three was Bouncing Back: New Tunes for Millennials Trying to Make It.

In the last months, I shared wealth planning tips for different generations. This final installment focuses on Gen Z — a generation especially dear to me as it happens to also include my children.

As I think about the financial journey that they are about to begin, I hear Olivia Rodrigo's "Drivers License" in my head, with themes of youthful exploration and the uncertainties that come with it.

Generation Z, born from 1997 to 2012, is entering adulthood in a time of economic and global tremors, technological advancements and a very different career landscape than the one that generations prior faced.

The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

Just as obtaining a driver's license symbolizes new freedoms and responsibilities, so does the journey toward financial independence.

'Work From Home': Embracing the gig economy

The rise of the gig economy is redefining traditional employment — leading many Gen Zers to work as freelancers, independent contractors or part-timers.

Some of this trend is by choice, and some is a result of the evolving employment market. Like everything, this move to the gig economy is going to provide workers with interesting opportunities, but some daunting challenges as well.

Without a steady salary that a typical full-time employer would provide, it is even more important for this generation to have a sound budget and financial plan in place. Two key considerations are:

Budgeting for variability. Establishing a monthly budget that accounts for fluctuating income is crucial. Allocating funds for essentials, savings and discretionary spending can help provide financial stability should income flow vary due to the nature of your work.

Building an emergency fund that could last for at least six months is a helpful benchmark.

Tax preparedness. Unlike traditional employees, "gig" workers must manage their own tax withholdings. Setting aside a portion of each paycheck for taxes is a prudent way to manage and prevent year-end tax surprises.

Note that in certain cases, they may need to make quarterly estimated tax payments throughout the year to avoid underpayment penalties. Therefore, it is not only about having the liquidity to pay the taxes, but also satisfying the timing of such payments.

When your income is variable, rather than a steady income stream, it can make it harder to manage your day-to-day life. A focus on sticking to a budget and making a financial plan is even more important.

The traditional ease of having a payroll system with automatic deductions is not available for those in this category.

Be proactive! A degree of discipline is required to ensure you're following your budget and financial plan.

'Good 4 U': Maximizing tax-advantaged accounts

Starting early with tax-advantaged accounts can yield long-term benefits.

Understandably, retirement may seem like a far-away idea for this generation just entering the workforce. However, the long-term benefits realized from tax-deferred or tax-free compounded growth are significant.

The earlier you start, the more you can maximize the benefits of these tax-advantaged accounts. Two possible considerations include:

Roth IRA. Ideal for young earners, Roth IRAs allow after-tax contributions to build future tax-free growth. These accounts have an income threshold by which one is prohibited from contributing.

In 2025, that income limit is $150,000 for a single person and $236,000 if you are married filing jointly. If your income is higher, there is a phase-out. So, with an income level of $165,000 or above (or $246,000 for married couples), you are prohibited from making a Roth IRA contribution.

Many early-career Gen Z individuals fall below these thresholds and should take advantage of this opportunity while it's eligible to them.

Health savings account (HSA). Another tax-advantaged account that may not be obvious is the health savings account, or HSA, which offers triple tax benefits — tax-deductible contributions, tax-deferred growth and tax-free withdrawals for qualified medical expenses.

While many young people may not see a need for significant health care expenses on a yearly basis and may therefore assume that this is not applicable to them, a longer view is beneficial.

Having a conversation with your children about the costs associated with a serious health event (cancer, injury, etc.) can be illuminating for them.

HSAs can be flexible because the money held in the account can be invested and withdrawn later in life. With that perspective, an HSA is more like a "retirement" account for future health care expenses.

Note that HSAs are available only to those with high-deductible health plans, meaning a deductible of at least $1,650 for individual coverage or $3,300 for family coverage in 2025.

'When I Was Older': Illuminating retirement planning

The evolution of the employment market and compensation trends suggest that few Gen Zers will have a pension upon retirement.

Independent contractors and gig workers do not have the benefit of an employer-sponsored 401(k) plan or company contribution match. Therefore, this group may have to consider self-created retirement accounts.

In addition to the Roth IRA and HSA mentioned above, a SEP IRA and Solo 401(k) are also good options. The type of account will depend on your income level, contribution amount and your financial circumstances.

Regardless of the vehicle, it is important to be vigilant and make regular and consistent contributions. Without the (often) forced discipline of an employer-sponsored plan, where contributions are automatically drawn from a regular paycheck, the onus is on the individual to ensure proper funding.

'Save Your Tears': Understanding debt management

The rising cost of education has left many Gen Zers with significant student debt. Navigating student loans and other debts requires strategic planning about many factors, chiefly:

Loan awareness. It's essential to understand the terms, interest rates and repayment options of your student loans. Certain loan forgiveness and subsidy programs may be available, depending on your situation.

Although interest rates have risen in the last years, keeping an eye on the prevailing market interest rate is a good idea. If rates do drop, it could present an opportunity to consolidate student debt at a lower rate.

Interest deduction. Not all debt is equal. There is some "good" debt because it qualifies for a tax deduction.

For example, one may deduct up to $2,500 of student loan interest, with income phase-outs starting at $80,000 for a single individual ($165,000 if filing jointly) in 2025. The availability of a tax deduction reduces the effective cost of the debt.

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In contrast, interest on "bad" debt, such as credit card debt, is not tax-deductible. If cash flow is an issue, then repaying non-tax-deductible debt should be a priority.

'Truth Hurts': Prioritizing financial literacy

In this age of information overload, discerning accurate financial advice is vital.

Many young people in my kids' generation get their news and information from social media. Consider the rise of the so-called "finfluencer" — a social media influencer who offers financial-type advice.

Many apps and robo-financial platforms also provide basic financial information. If all else fails, there is also ChatGPT, which is readily available to answer almost any question. There is no shortage of "advice" one can get on this topic.

Financial literacy is more than knowing definitions — it is about creating an understanding about how financial rules and strategies apply to your situation.

It is, therefore, vitally important to verify information through reputable sources and consult with (human) professionals to understand the nuances when necessary.

I often remind young adults of a phrase I learned early on in my career … you don't know what you don't know. That is why it is critical to question what you read and see, verify information with trusted sources and seek out advice with a critical eye.

The bottom line for those in Gen Z? With challenges come opportunities.

Like all previous generations we discussed in this series, Gen Z will navigate the complexities of modern finance and find their own levels of growth and stability.

Just as that driver's license opens the road to new adventures, smart financial decisions will pave the way to a secure and prosperous future.

Wilmington Trust is not authorized to and does not provide legal or tax advice. Our advice and recommendations provided to you are illustrative only and subject to the opinions and advice of your own attorney, tax adviser or other professional adviser.

Related Content

• Nine Key Tips Self-Employed and Gig Workers Should Know About Retirement
• Median Income by Generation: How Do You Compare?
• 10 Best Places For Gen Z To Buy A Home
• The Wealth-Building Powers of Health Savings Accounts (HSAs)
• A Little-Known Tax-Free Way To Help Pay Your Student Loan

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Eighty percent of Americans are concerned about affordability of everyday living costs regardless of income level, according to consumer research from Equitable.

And that was before the stock market took a plunge and tariffs shot up, both of which could kickstart another period of high inflation.

With key purchases and even necessities increasingly out of reach, going into debt might seem likely.

It's incredibly common already: According to TransUnion's Q4 2024 Quarterly Credit Industry Insights Report, American households had an average of $263,923 in mortgage debt, $24,373 in auto loan debt, $6,580 in credit card debt and $11,607 in personal loan debt, not to mention student loans or medical debt.

The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

The problem? This debt can spiral out of control as interest payments pile up, making loans more challenging to pay back and credit harder to access. After all, Fortune reports, nearly 1 in 5 Americans have maxed out their credit cards.

According to the New York Fed, almost two-thirds of credit cardholders carry debt month over month, paying an average of 23% in interest — meaning these purchases are ultimately far more expensive than the sticker price.

While it might seem like a tough time to manage debt, the reality is that this is a crucial moment to get it under control. In the long run, handling debt effectively offers financial freedom, flexibility and the ability to weather hard times and enjoy your hard-earned money.

Here's how to get started.

Step No. 1: Avoid unnecessary debt

Steering clear of unnecessary loans might seem obvious, and it may not feel like helpful advice when you're trying to manage your existing debt. But especially when times are tough, it's worth remembering that just because you can access a certain amount of credit doesn't mean you should.

Consider what you actually need vs where you can cut costs.

For example, if you're looking to buy a house in the next few months, you may hear lenders refer to the "30% rule," which recommends that your monthly housing payment should not exceed 30% of your gross monthly income.

If you make $10,000 a month before taxes, you might think this means your budget is $3,000 a month and look at property that fits that price range.

A safer approach, however, would be to set a smaller budget that meets your needs, even if it means not getting everything you may want.

Instead of searching with the maximum allowable budget, look at properties with monthly payments that equal just 20% of your net take-home pay (or about $1,500 in this example, assuming a $7,500 monthly income after taxes).

The extra cash you save by avoiding unnecessary debt will not only give you financial breathing room, but also can enable you to pay back other debts.

Step No. 2: Calculate with clarity

To get a handle on how to repay your debt, you need to know exactly what you owe and when.

Assemble specific information about your balances, the interest rates on your loans and the terms of said loans. Calculate how long it will take to pay off your loans at the minimum monthly amount and how much interest will be paid to the lender under this framework.

If you're able, try to restructure your debt. Work with your lenders to see if you can get a lower interest rate. You should also consider whether consolidating or refinancing your debt saves you interest payments over time.

Once you have this information in hand, prioritize:

• Mathematically, debt with the highest interest rate should be paid down first to minimize the overall amount you will pay in interest.
• Emotionally, you can also consider attacking the debt with the lowest balance first, so you have a quick win to sustain you.

Whichever route you choose, you should calculate how much you are able to put toward repayment every month and commit to that plan.

Step No. 3: Make payments and boost income

Once you've done the calculations and finalized your payment plans, the next part is easy (at least on paper): Pay back your debt.

If you can, look for opportunities to boost your income, too, be it through extra hours at work, side hustles or a part-time job. If you receive bonuses or gifts, resist the temptation to buy something you don't need.

Instead, put that amount toward repayment. And if you're really ready to go the extra mile to become debt-free, you can even consider downsizing your home (including by selling and moving to a cheaper rental) or downgrading your car.

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Putting even a little extra money toward your repayment efforts each month can make a big difference.

For example, if you have a $10,000 credit card balance with an 18% annual rate, it will take more than 15 years to pay down that amount (and you would pay nearly $19,800 in interest alone) if you paid $160 a month.

But if you paid an additional $50 a month? You would pay off that debt in half the time — a little over seven years — and would save about $12,000 in interest. It adds up.

Remember, whatever amount you pay, make sure it's at least enough to cover the interest.

All too often, people simply pay their card's minimum payment amount without realizing it might not be sufficient to cover the accrued interest. At that rate, they'll never pay off the balance.

Short-term pain, long-term gain

Paying down debt will require short-term sacrifices, and it can take an emotional toll. But when times get tough, just remember: You're securing a debt-free future and your financial freedom.

I promise it'll be worth it.

This article, which has been written by an outside source and is provided as a courtesy by Stephen B. Dunbar III, JD, CLU (AR Insurance Lic. #15714673), Executive Vice President of the Georgia Alabama Gulf Coast Branch of Equitable Advisors LLC, does not offer or constitute, and should not be relied upon, as financial, investment, debt management or legal advice. Equitable Advisors LLC and its affiliates do not make any representations as to the accuracy, completeness or appropriateness of any part of any content hyperlinked to from this article. Your unique needs, goals and circumstances require the individualized attention of your own tax, legal, debt management and financial professionals whose advice and services will prevail over any information provided in this article. Equitable Advisors LLC and its affiliates do not provide tax or legal advice or services. Stephen B. Dunbar III offers securities through Equitable Advisors LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI & TN), offers investment advisory products and services through Equitable Advisors LLC, an SEC-registered investment adviser, and offers annuity and insurance products through Equitable Network LLC (Equitable Network Insurance Agency of California LLC). Financial professionals may transact business and/or respond to inquiries only in state(s) in which they are properly qualified. AGE-7957140.1(05/25)(exp.05/29)

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

It’s easy to think of student loans as a young person’s problem. But the reality is that a good number of older Americans, including near-retirees, are juggling student loans, either because they’re still paying off their own education or they took out loans to help finance a child or grandchild’s education.

The Urban Institute reports that as of August 2022, about 6% of Americans ages 50 and over had student debt. That amounts to roughly 7.2 million in this age group.

Meanwhile, as of 2022, the Federal Reserve reported an average student loan balance among Americans aged 55 to 64 at nearly $62,000. For those between the ages of 65 and 74, the average balance was about $58,000.

Not only can student loans be burdensome, but they can also hinder achieving financial goals, such as retirement savings. And while it’s clear that plenty of people carry student debt with them into retirement, that’s not ideal.

Many retirees are limited to a fixed income from Social Security and modest withdrawals from IRA or 401(k) accounts. Having to worry about student loan payments at that stage of life can make money management more stressful. That’s why it’s important to be strategic with your student loans if you’re over 50 and still carrying a balance.

One piece of good news is that the Trump administration has paused plans to garnish the Social Security checks of borrowers who are in default on their student loans, according to AP News. That potentially alleviates one source of stress for older adults on a fixed income. But it doesn't address the overall problem of needing to juggle those loans and other bills. That’s why it’s important to be strategic with your student loans if you’re over 50 and still carrying a balance.

Don't stop saving for retirement

If you’re still on the hook for student loans and you’re creeping closer to the end of your career, you may be inclined to funnel all of your spare money into those loans to knock them out ahead of retirement. It’s an understandable line of thinking, but it may not be the best way to go if it means neglecting your nest egg.

Domenick D’Andrea, Co-Founder/Financial Advisor at DanDarah Wealth Management, says, “People over 50 don’t have as many opportunities in the workforce with guaranteed pensions, so they must do planning on their own through a variety of retirement savings accounts like 401(k)s or IRAs. With a large percentage of this age group having to repay student loans, where the payments are a considerable portion of their monthly expenses, it is becoming harder and harder to save for goals like retirement.”

That said, pausing retirement plan contributions could mean giving up a lucrative tax break, since traditional 401(k)s and traditional IRAs are funded with pre-tax dollars. There’s also the possibility of leaving free money on the table if your employer offers a 401(k) match. And of course, there’s the danger that halting retirement plan contributions will leave you short on savings once your career ends.

Rather than put retirement plan contributions on the back burner to focus on student loan repayment, D’Andrea says older borrowers should figure out what their monthly budgets look like and see if there are ways to cut back on expenses.

That said, some employers may offer a student loan match in lieu of a traditional 401(k) match. If your workplace offers this benefit, it’s one you may want to look into.

One advantage older borrowers may have is a fair amount of equity in their homes. And borrowers 50 and over may be reaching the point where their children are growing up and moving out.

Downsizing out of a more expensive home could free up equity that can be used to repay student loan balances sooner. And if there’s limited equity, reducing your housing costs could make it easier to get ahead of your student debt while also finding the money to fund your 401(k) or IRA.

See if it pays to refinance your student debt

If you can’t cut back on expenses, or if doing so only minimally helps you repay your student loans more quickly while saving for retirement, then D’Andrea suggests looking into refinancing. This especially makes sense when you borrowed privately.

If you’re still carrying federal student loans, it may not make sense to refinance them. Not only do federal loans tend to offer competitive interest rates, but they also come with different protections that private loans are not guaranteed to offer.

Joseph Patrick Roop, President at Belmont Capital Advisors, suggests using these protections to your advantage.

“In some cases, refinancing can help ease the monthly burden. For others, especially those with federal loans, income-driven repayment plans or even loan forgiveness programs might make sense, even for folks in their 50s or 60s,” he says.

The key is to have a plan

It’s natural to get down on yourself for carrying student loan debt later in life. But Roop insists that you shouldn’t

“Do not be ashamed that you have student loan debt into your 50s, 60s, or even retirement years, as it is more common than most people realize,” he says. “Many folks took on loans to help their kids through school or went back to finish their own degree. There’s no shame in it, but there does need to be a plan.”

If it doesn’t seem like you’ll be able to pay off your student loans ahead of retirement, you still have options. Those could include working a bit longer, working part-time as a retiree, or making lifestyle changes in retirement (which could include relocating to stretch your income).

“Ultimately, it’s not just about getting rid of the loan,” says Roop. “It’s about putting together a plan that includes your debt, Social Security, retirement income, and taxes. You can still retire comfortably with student loan debt, but it takes a clear plan and the right guidance.”

Read More

• The Average 401(k) Balance by Age
• How the One Big Beautiful Bill Act Could Reshape 529 Plans
• Is a 401(k) Worth It? Here Are the Pros and Cons
• A 10-Year Checklist for Retirement Planning

President Trump's tax package, the One Big Beautiful Bill Act (OBBBA), passed the House in May and the Senate this past week. On July 4th, Trump signed the bill into law, with some provisions taking effect immediately. However, the exact timeline for 529 expansions may depend on guidance from the Treasury and IRS.

Among its key proposals is an expansion of 529 education savings plans created to help families save for future education expenses. Not just a college savings vehicle, 529 plans can also be useful estate planning and retirement savings tools.

With a 529 plan, contributions grow tax-free, and withdrawals for qualified education costs are also tax-free. Considering the cost of college, a little help now could go a long way in planning for your child’s education.

A 4-year college degree at a public in-state school costs approximately $120,000 (including tuition, books, supplies, dorm room, and other expenses). On average, a college student graduates with about $39,000 in student loan debt. And that’s just the average. Multiply that amount by the number of students attending college (about 43 million), and you get about $1.6 trillion in federal student loan debt as of early 2025, per the U.S. Department of Education. Yikes.

Good news — your 529 savings plans just got a sweet upgrade.

Bad news — the new law limits financing options, making it harder for student borrowers to manage their debt.

Read: Trump Targets Student Loan Forgiveness: Here’s How Taxes and Repayment Could Soon Change

Enhanced 529 plans

Enhancements to 529 plans under the One Big Beautiful Bill Act call for a significant expansion of 529 plan benefits and include a brand-new Kids' Savings Program called the MAGA account, withdrawal limit increases and the expansion of qualified expenses.

Read: Should You Start a Trump Account For Your Child?

Increased K-12 Withdrawal Limit

The OBBBA expands the definition of qualifying education expenses for 529 withdrawals. Currently, families can withdraw up to $10,000 per year for elementary or secondary education. The law expands the maximum limit to $20,000.

Expanded K-12 Qualified Expenses

The law expands the definition of "qualified expenses" for K-12 education to include non-tuition costs such as:

• Curriculum materials
• Fees for nationally standardized tests
• Books and other instructional materials
• Dual-enrollment fees for college courses taken in high school
• Online educational materials
• Tutoring or educational classes outside the home
• Specialized strategies designed to support students with disabilities

On top of that, you can tap your 529 for these costs without federal tax worries. At the same time, any expansion of K-12 benefits may require new legislation on a state-by-state basis, as not all states currently consider K-12 expenses as qualified expenses for tax purposes.

Additional qualified higher education expenses

The new law allows tax-free withdrawals for a wider workforce, on-the-job training, and continuing education programs. This includes tuition, miscellaneous fees, books, exam costs and supplies for programs listed under the Workforce Innovation and Opportunity Act.

• Programs that appear on a state or federal Workforce Innovation and Opportunity Act list
• Programs listed in the VA’s WEAMS database
• Programs that prepare students for industry-recognized licensing exams
• Continuing education fees that may be required to keep a credential active

Fixed ABLE-account flexibility

The three Achieving a Better Life Experience (ABLE) provisions, currently set to expire at the end of 2025, will become permanent. The law makes it possible to roll over funds tax-free from 529 plans to ABLE accounts, along with the "ABLE-to-Work" contribution limit and the Saver’s Credit for ABLE contributions.

A brand-new “MAGA” kids’ account in 2026

While not a 529 plan, the Money Accounts for Growth and Advancement (MAGA) program can also be used for saving for your child's education. Under the terms of the OBBBA, funding of up to $5,000 per year is allowed. Contributions can come from a parent or guardian for a child under 8, and any gains would be taxed at the long-term capital gains rate when used for higher education, a first-home purchase, or starting a small business.

The law also calls for a one-time contribution of $1,000 from the federal government to the accounts of children who are U.S. citizens at birth born between January 1, 2025, and January 1, 2029. At least one parent must provide a valid Social Security number.

Parents and relatives can contribute up to $5,000 annually (adjusted for inflation) to the account, with funds growing tax-deferred until the child reaches age 18.

Funds can be used for higher education, small business startup costs, or first-time homebuyer expenses, with withdrawals taxed at the long-term capital gains rate for qualified expenses. Non-qualified withdrawals are taxed as ordinary income with penalties.

Any unused funds could be withdrawn for any reason after age 30. The first withdrawal would be at age 18 (up to 50% of the balance). Earlier withdrawals for non-qualified expenses would be taxed at ordinary income rates.

What 529 rules stay the same

Although the new law expands how you can use 529 money, many of the current rules remain the same.

• No change to federal 529 contribution rules
• Lifetime caps on contributions remain state-specific
• Earnings in 529 plans continue to grow tax-free when used for qualified education expenses.
• State-specific tax deductions or credits for 529 contributions remain unaffected by the bill. (States may need to enact legislation to align with the expanded federal definition of qualified K-12 expenses for state tax purposes).
• The existing provision allows tax-free rollovers from 529 plans to Roth IRAs, up to a lifetime limit of $35,000 (subject to annual Roth contribution limits).
• Withdrawals for non-qualified expenses continue to incur ordinary income tax, plus a 10% penalty on earnings.

Proposed timeline

President Trump's "One Big Beautiful Bill Act" was signed into law on July 4, 2025, during a ceremony at the White House. However, the various provisions within the bill take effect at different times.

MAGA accounts are now open, and the federally funded $1,000 newborn deposits will begin on January 1, 2026.

Why you should have a 529

It doesn’t matter if your child is a teen or a toddler; it’s never too soon to start saving for college with a 529 plan — just make sure you’ve paid down or paid off your debt, set up an emergency fund, and are saving for your retirement first.

If you’re already using a 529, the One Big Beautiful Bill Act only sweetened the deal. A college education follows your kids for life, just make sure the cost of funding doesn't take a toll on your finances for the rest of your life.

Related Content

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• Big GOP Tax Bill Could Change Your Estate Planning for 2025
• 529 Plans: Give the Gift of Education (and Compounding)
• Have Leftover 529 Funds? Expert Strategies for Unused Balances

There’s a lot of talk about debt and whether it is good or bad. As a general rule, when discussing money matters or, really, anything in life, whenever superlatives are used, something is probably missing from the conversation. The reality is debt is just a tool that allows you to use other people’s money for your benefit (or detriment).

This article is intended to clarify when it may make sense to take on debt and when it may make sense to avoid debt. In addition, I hope to offer some clarity on two types of debt that seem to be in the news a lot: mortgages and student loans. My intention is to teach the underlying principles of debt so you can make healthier personal financial decisions.

What is good debt?

Good debt, in my opinion, is any debt that is used to acquire an asset that is expected to appreciate in value. In other words, you appreciate debt that is associated with something that appreciates in value (e.g., your home).

Second, to qualify as good debt, it must have a reasonable interest rate. As a rule of thumb, I like to think that a reasonable rate would be anything around 1.5 times the current 10-year Treasury yield or less.

Lastly, good debt does not compromise your overall quality of life. That means you can afford to make payments comfortably. It is important to live within our emotional and economic limits. That means your debt does not stress you out.

What is bad debt?

Bad debt, in my opinion, is any debt used to acquire a depreciating asset. Bad debt can also be any debt that has a high interest rate (think credit card debt). Once you take on bad debt, it becomes challenging to pay off.

Bad debt can overwhelm your budget or spending plan while preventing you from being able to save for the future. Too much of a good thing, even if it may look like “good debt,” can be bad. If you have bad debt, pay it off as fast as you can. Consider cutting back on dining out, going on vacation or taking on any other non-essential expenses so you can free yourself from the influence bad debt has over you.

Find a system that can help you pay it off as fast as possible. If you want an app that can help you get rid of bad debt while gaining a better understanding of how to manage your cash flow, I’d recommend Cash Flow & Capital. It was designed to help people develop a healthier relationship with money.

Sometimes, it can be difficult to determine if taking on debt is a good thing or a bad thing. Here are a few examples that may be able to help you understand where the line is.

Mortgage debt

Real estate can be a wonderful investment. Whether you are looking to buy a home for yourself or to rent to tenants, there’s a good chance you don’t have sufficient cash for the purchase. That’s where mortgages come in.

You need a place to live. That means you are either paying rent or paying a mortgage. Let’s say you have enough of a down payment, but the mortgage payment would still be more than your rent payment. Is it still worth it?

The basic question is, “Can you afford the payments?” If the payment fits in nicely with your overall spending plan, then all is well. If your payment causes you to tighten the belt, then it might not be a good idea.

Over time, you’ll be able to pay down the debt while the home appreciates in value. If you can pay down the mortgage more aggressively during the first few years, it can help you pay off your mortgage significantly faster than had you made the minimum payments.

All things considered, a mortgage often falls under the “good debt” category, especially when you consider rent as the alternative. Also, the home equity you build can be used to buy your next home. Lastly, if you pay off your home before you retire, then you don’t need to be worried about that expense in retirement.

Student loan debt

Another type of debt that I believe could be considered either good debt or bad debt is student debt. Let me explain.

According to the National Center for Education Statistics, a 25- to 34-year-old who works full time and has a high school diploma is expected to make up to $41,800 per year. If that same person were to go to college with the intention of getting, say, an engineering degree, their income potential would increase to $76,000 out of college. As these individuals gain experience, they may be able to increase their income to $130,000 or more.

In this situation, the individual is the asset, or investment, that can appreciate in value. Because their new skill helps them become more valuable in the workplace, they increase their overall earning potential. As mentioned earlier, you appreciate debt that is associated with something that appreciates in value, even if that is you.

Let’s run another example. Let’s say someone wants to go to school to become a teacher. Student debt may make sense if you can get a job where the state pays off your loan for you. Make sure you understand the options available to you and the probability of getting hired. When you take on debt, you take on risk. It is possible not to get hired in the field you desire.

Lastly, let’s discuss a situation where student debt would be considered bad debt. If you wanted to go to school and get a degree in something that may not give you in-demand skills for the workplace, your expected income may only be slightly higher than if you had gone straight into the workforce with a high school diploma.

This may sound harsh, but the reality is some degrees may not give you sufficient or relevant skills to increase your earning potential once you graduate to rationalize the risk or financial burden of student loan debt. In this situation, it would be better to go through school slowly while working at the same time. That way, you can pay as you go without taking on the burden of student debt.

Student debt should also be considered bad debt when the debt is so high that it can’t be paid off in a reasonable amount of time. Even if you are going to school for a skill that is in demand, you can still take on too much student debt.

In my opinion, students should consider student debt as the last resource to help them get through college or trade school. Consider paying for your education by applying for scholarships while working part time or full time. You can also help lower your education costs by first getting an associate degree at a community college before getting a bachelor’s degree or higher at another college.

Conclusion

There are many other forms of debt, good and bad. However, in the end, it is important to understand that debt is nothing more than a tool. When you take on debt, you take on risk. That risk must be rationalized by associating itself with an asset that has a high probability of appreciating in value. All debt should be limited so that it does not overwhelm your personal cash flow and overall quality of life.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Your student loan was recently forgiven — hurray! But wait. Do you owe taxes?

As we hurry through yet another tax year, some borrowers may wonder whether their federal student loan forgiveness is tax-free. After all, under the Biden administration, over five million debtors with about $188.8 billion in debt were forgiven.

Biden accomplished this through the American Rescue Plan (ARPA), a law passed during the pandemic, which promised that federal student loans would be "free from taxes" for a while, right? Well, somewhat.

If your federal student loan was forgiven, depending on where you live, you may still be subject to state taxes, and the law that provides for tax-exempt federal student loan forgiveness expires after this year.

Plus, the Trump administration has targeted the PSLF program and, through the GOP's so-called "One Big Beautiful Bill," has enacted several changes that will impact student loans and borrowers.

Read on for more of what you need to know.

Is student loan forgiveness taxed in 2025?

Federally forgiven student debt is not taxable on your federal return through the end of this year. That's because ARPA made federal student loan forgiveness tax-free through 2025.

After that, a forgiven loan will again count toward taxable income on federal returns.

Affected loans may include:

• Pay As You Earn (PAYE) which limits federal student loan payments to generally 10% of a borrower’s discretionary income.
• Saving on a Valuable Education (SAVE) plan, which calculates your loan’s monthly payment amount based on income and family size (currently stalled in court — more on that below).
• Public Service Loan Forgiveness (PSLF), a program that forgives the balance on Direct Loans.

Student loan news under Trump

Parts of the SAVE plan are currently contested in a federal lawsuit. Repealing the plan could mean borrowers will face higher monthly student loan payments if forced to switch to another, more expensive alternative.

Additionally, after 2025, students will again pay taxes on their forgiven federal student loan debt unless Congress acts.

So, where does Trump stand on student loans?

• This month, the Trump administration has proposed a new rule for PSLF that would disqualify organizations involved in activities that have a "substantial illegal purpose." This may include what the administration identifies as illegal immigration, terrorism, or certain medical procedures on minors.
• New borrowers enrolling in July 2026 or later will have just two main federal repayment options: a Revised Standard Plan (fixed payments) and a Repayment Assistance Plan (RAP), which is tied to income and requires up to 30 years of payments before forgiveness.
• Existing income-driven plans are slated for a phase-out, and borrowers will need to transition to a new system by July 2028.
• Starting August 1, 2025, interest will also resume for those enrolled in the SAVE plan.

And that's not all. Earlier this year, Trump called for the end of the Department of Education, which manages federal student loans, among many other things.

Trump argues that the move would cut costs and return control to the states, potentially reshaping education in the U.S. Those on the other side say that eliminating the Department of Education could harm vulnerable students, disrupt funding, and weaken school civil rights enforcement.

While eliminating the department would require congressional approval, Trump could significantly alter its functions through executive actions.

For more information on which programs might be going away and how your taxes will be affected for 2026, check out Kiplinger's report Trump Targets Student Loan Forgiveness: Here’s How Taxes and Repayment Could Soon Change.

Are student loan payments tax deductible?

Yes, the interest portion of your student loan payment may be deductible if you qualify for the student loan interest deduction. Here are a few other ways you may save on student debt:

• Ask your employer about any qualified educational assistance programs or a 401(k) student loan match.
• If you have a 529 account, claim up to $10,000 (lifetime limit) to help pay off college debt.
• Talk to your employer about tax-free student loan repayment assistance.

Student loan debt and state taxes

As mentioned, most canceled student debt is currently exempt from federal tax, but only some states follow that federal law.

As a result, you could be stuck with an unexpected state tax bill for forgiven student loan debt, which could be as high as $1,100 in some states.

Check out your state’s Department of Revenue website to determine if you’ll be taxed on student loan forgiveness, or to see if you're missing out on any state tax breaks.

More on Student Loans

• States That Could Tax Forgiven Student Loans
• How to Get a 401(k) Match for Your Student Loan Payment
• A Tax-Free Way To Help Pay Your Student Loan
• 12 Education Tax Credits and Deductions

As the 2024 presidential election nears, the fate of student loan forgiveness is at the forefront of many borrowers' minds, particularly as Vice President Harris and former President Trump have such wildly differing viewpoints. In the first half of this year, federal student loan debt increased by $17.9 billion, bringing total student loan debt in the United States to over $1.75 trillion.

Approximately 43 million Americans have student loan debt as of 2023, with borrowers owing $37,853 on average in federal student loans, according to the Education Data Initiative. And college is only getting more expensive. Between 2000 and 2021, average tuition and fees jumped by 65%, to $14,307 per year from $8,661, according to BestColleges.com. Not to mention the impact of rising interest rates on student loans — 6.53% for the 2024–2025 academic year, the highest rate since 2007–2008.

Student loan forgiveness has become an increasingly hot topic over the last several years as legal battles over debt relief initiatives leave millions of borrowers in limbo. 

In 2023, Biden’s plan for widespread student loan forgiveness, which would forgive up to $10,000 of student loan debt for eligible borrowers, was struck down by the Supreme Court. In August 2024, the court temporarily blocked the administration’s Saving on a Valuable Education (SAVE) repayment plan.

In September, U.S. District Judge James Randal Hall issued an order blocking the Biden administration’s latest student loan forgiveness plan, which would have provided debt relief to over 30 million Americans. And just one day after Hall decided to let the restraining order expire, Biden's forgiveness plan was temporarily blocked again by a Missouri judge. 

One study from Bankrate found that nearly 1 in 5 Americans say student loan debt will have a major influence on their vote in the 2024 presidential election. Considering each candidate has very different ideas on how student loans should be handled, many borrowers are anxious to learn how the election will impact them.

Here’s a closer look at each candidate’s plans regarding student loan debt.

Harris on student loans

The Biden-Harris Administration has implemented several aid programs that have contributed to total debt relief, despite strong opposition. And if Kamala Harris becomes president, she will build on these policies, working to provide widespread student debt relief for millions of borrowers by expanding programs like income-driven repayment plans and Public Service Loan Forgiveness.

“We see a future where every student has the support and the resources they need to thrive,” Harris stated in a speech made in July. “And a future where no teacher has to struggle with the burden of student loan debt.” She noted that the Biden-Harris administration has forgiven student loan debt for nearly five million Americans. Nearly $160 billion in federal student loan debt has been forgiven since Biden took office, according to the U.S. Department of Education.

The administration's efforts have been focused on targeting areas for forgiveness for borrowers who are most in need, Stacey MacPhetres, senior director of education finance for EdAssist by Bright Horizons told Kiplinger. Borrowers most in need have included those facing financial hardship, holding balances greater than the initial amount borrowed due to accrued interest, those who are eligible for forgiveness but have not yet applied, those who have been in repayment for 20 years and borrowers who attended institutions that show low financial value. 

Here’s a closer look at various loan forgiveness programs Harris will likely continue expanding if she takes office.

• Borrower Defense loan discharge: If your college misrepresented details that led you to enroll there, you may have grounds to apply for borrower defense loan discharge. The administration says this has led to the discharge of over $28 billion in debt for 1.6 million borrowers.  
• Income-Driven Repayment plans: These plans base your monthly student loan payment amount on your income and family size. There are four plans:
  • Pay As You Earn (PAYE) 
  • Income-Based Repayment (IBR) 
  • Income-Contingent Repayment (ICR) 
  • Saving on a Valuable Education (SAVE) 
• Public Service Loan Forgiveness (PSLF): This program forgives federal student loans of borrowers employed by the government or certain non-profit organizations after ten years of on-time payments or 120 qualifying monthly payments. These efforts have reportedly led to the forgiveness of over $62 billion in student loan debt.
• Total and Permanent Disability (TPD) discharge: More than half a million borrowers with disabilities have received over $14 billion in relief through the Total and Permanent Disability Discharge program, according to the White House. 

"The Harris campaign would be trying to extend the same types of programs and maybe repackage those in a way that they can get those through either Congress or get them through the court system without being struck down," said Shane Cummings, wealth advisor & director of technology/cybersecurity at Halbert Hargrove.

Trump on student loans

Trump stands firmly in opposition to student loan forgiveness. If he becomes president, his efforts will likely be focused towards getting student loan forgiveness programs enacted by the Biden administration repealed or restricted.

During Trump's presidency, he proposed significant cuts to student aid programs and called for eliminating Public Service Loan Forgiveness (PSLF), Federal Supplemental Educational Opportunity Grant (FSEOG) programs and subsidized federal student loans.

And while Trump has made no statements regarding his specific plans to revoke student loan forgiveness initiatives if elected president, he is very vocal about how he views these initiatives. He has referred to Biden’s plans to cancel student loan debt as "not legal" and “vile.”

"He got rebuked, and then he did it again,” Trump stated at one of his rallies back in June, referring to the Biden administration's 2023 attempt at widespread student loan forgiveness that the Supreme Court shut down. “It’s going to get rebuked again even more so.”

In the September 10th presidential debate with Kamala Harris, Trump stated, as per Politico: "They didn't even come close to getting student loans. They taunted young people and a lot of other people that had loans, they can never get this approved.”

Kimberly Weihbrecht, CSLP®, Senior Associate at Fearless Finance tells Kiplinger that although the Trump administration would likely try to repeal programs like SAVE, PSLF and income-driven repayment, "big rollbacks like this would be difficult to do via regulations for the same reason SAVE is struggling now. Regulation-based programs are more likely to get contested in court and potentially struck down."

Ultimately, whether or not loan relief programs are actually repealed during a Trump presidency could heavily depend on whether or not there is a Republican majority in Congress. A set of conservative policy proposals developed by The Heritage Foundation, called Project 2025, calls for significant changes to how student loans are managed, including the phasing out of existing income-driven repayment (IDR) plans. And while Trump has tried to distance himself from the project, according to Reuters, many of his closest policy advisers and those likely to take high-ranking positions in his administration are heavily involved in the project.

Bottom line

Ultimately, it's still too early to determine exactly how the election will impact student loans. And because of the uncertainty of whether or not loans will be forgiven, it's difficult for many borrowers to make long-term plans concerning their debt, according to Cummings. This is why he advises borrowers to focus on repayment and plan conservatively.

For borrowers who are struggling to meet loan obligations, MacPhetres urges them to communicate with their loan services to review any repayment options or hardship opportunities available.

Related Content

• A Look at Kamala Harris's Tax Plans Ahead of the Election
• Kamala Harris Calls for 28% Capital Gains Tax, Diverging from Biden's Higher Rate
• Should Paying Off Student Loans Be a Priority? What to Consider

Graduating from college is a remarkable achievement, but it often coincides with the pressures of finding a new place to live, securing a first job and managing your first paycheck. Entering the workforce now means you must focus on maximizing your entry-level salary, potentially paying off student loans and planning for a secure financial future.

While these obligations may seem daunting, implementing basic financial habits into your daily routine can help ease the transition into life after college. By tracking expenses, staying on top of any student loan debt and planning out the initial stages of your career path, you can lay the groundwork for a financially secure post-graduation period.

You recently graduated: Now what?

Performing initial research on salary estimates for your major or career choice is crucial. Understanding the differences in pay between different industries, sectors and companies — as well as the cost of living for different cities — can help you structure your career path and identify positions you want to apply for.

Once you land a job, it’s a good idea to create a monthly budget based on your income. Tracking your expenses will not only provide you with a clear idea of where your money is going, but also help you create new habits — enabling you to focus on your priorities and say no to unnecessary spending.

However, creating a budget doesn’t mean cutting out all the fun stuff! Budgets are meant to help you identify items that aren’t essential to your daily needs, like how much you spend on eating out, luxury accessories and subscription services. Removing or cutting back on some of these items will allow for greater flexibility to focus on essential spending.

One required bill for many graduates is their monthly student loan payments. If you have student loan debt, prioritizing these payments is essential to protecting your credit score.

As such, these payments should be factored into your budget. A general rule of thumb is to devote no more than 10% of your monthly gross income to paying your student loan under a standard 10-year repayment plan. If you find yourself paying more than 10%, it might be time to review your budget to see where you can put that extra money to better use.

Planning your career path

While a larger salary can make it easier to balance your budget, recent graduates often place a heavy emphasis on their starting pay, mistakenly equating it to career success.

While a job provides you with money to pay the bills, pursuing a career means gaining experience, building your innate skills and talents, which will allow you to progress toward higher-paying positions with more responsibility and impact.

Seek a career path that aligns with your passions, lifestyle and long-term goals. Take remote work as an example. If you prefer to interact with colleagues face-to-face, then taking a position in which you’re not going into an office — even if it offers a higher salary — will not bring you personal fulfillment.

Additionally, keep in mind that you may move between companies and industries at various times in your career. This is why it’s important to take a long-term approach to planning, taking positions early on that enable you to learn and grow your skills and make yourself more marketable. While this could mean taking a pay cut early on, improving your skill set will pay dividends in the future.

Working with a financial professional

Sometimes, no matter how much effort we put into managing our finances, it’s not enough to cover all the bases in our financial journey. This can be particularly true when you are balancing a new salary, student loans and the responsibilities of rent, utilities and insurance that come with living on your own.

This is where a financial advisor can help you “level up” basic habits to strengthen your financial security and stability. For example, if you are having trouble making loan repayments, an advisor can help you understand your loan obligations in greater detail and help you choose a repayment plan that makes sense for your situation.

A financial advisor’s greatest impact, however, lies in long-term planning. By working together to understand where you are today — and where you would like to be — an advisor can craft a comprehensive financial plan that considers your unique needs and circumstances, as well as your vision for the future.

With an entry-level starting salary, it usually takes time to achieve financial independence. But that doesn’t mean you can’t begin to save for longer-term goals, such as retirement, homeownership, a new car or continuing education. Collaborating with a financial advisor can help you budget for these items and take advantage of your employer’s retirement plan, which often includes matching contributions to your pretax salary deferrals.

Whether you work with an advisor or on your own, it’s important to set professional and financial goals and plan the steps you should take to realize them. The post-graduation period is filled with new responsibilities and important decisions, and financial missteps early in your career can lead to neglected debt payments, a damaged credit score and overall financial stress. However, if you stay committed to your financial plan, maintain responsible spending habits and seek a position that aligns with your passions and skills, you can lay the foundation for a rewarding career and a secure financial future.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Editor’s note: This is the first article in a six-part series focused on paying for education using smart financial and estate planning. Other articles focus on 529 plans, Coverdell Education Savings Accounts, Uniform Transfer to Minor Accounts (UTMAs), education trusts and family loans. See below for links to the other articles.

It’s never too early to start thinking about how to pay for the education of your child, grandchild or someone else you want to support. The cost of schooling continues to increase in the United States, and not just in higher education. Even independent day and boarding schools are raising tuition at higher rates to retain teachers and keep pace with inflation. The good news is that paying for education can be done through smart financial and estate planning.

As an outsourced chief investment officer firm, Hirtle Callaghan is often asked by families how to weigh the various options for paying for education. This series will examine different possibilities in depth, from direct payments, to government-sponsored plans and other estate planning techniques.

Efficient tuition funding: Direct payments explained

For estate planning purposes, it may be most efficient and effective to pay directly for someone else’s tuition. Unlike other options we will explore, paying tuition on behalf of another individual does not require years of advance planning. Yet, it can have an immediate tax benefit because the tuition payment does not count toward your annual gift tax exclusion or your lifetime exemption amount. For example, you can make a direct payment of $40,000 to a school to cover the cost of a grandchild’s tuition and then make a gift of $18,000 (in 2024) to the same grandchild in the same year free from gift taxes.

As noted above, it is critical that the tuition must be paid directly to the educational institution. If a grandparent were to give their son or daughter money to pay the tuition (and not do it directly), then the transfer would count as a gift under federal tax law. This option is not only available for college or graduate school but is also available for preschool, private grade school and private high school tuition. It is worth noting the direct payments apply only to tuition, not the cost of books, supplies or room and board. Those other expenses would count as gifts under federal gift tax law.

How this could affect financial aid

A direct contribution can negatively impact financial aid eligibility because it is treated as untaxed income on the Free Application for Federal Student Aid (FAFSA), which reduces eligibility by 50% of the amount paid. So, a tuition payment of $10,000 may reduce eligibility by $5,000. However, if financial aid is not a consideration, paying tuition directly may be the easiest and most tax-efficient way to fund a child, grandchild or loved one’s education.

Benefits:

• Tuition payments are removed from the grantor’s estate, which leaves fewer assets in the grantor's estate that could later be subject to estate tax.
• Direct tuition payments to an institution do not count toward the lifetime or annual gift tax exclusion
• Direct payments can be used for preschool, private grade school, private high school, college and graduate school

Considerations:

• Financial aid may be reduced
• The costs of books, supplies or room and board are not covered

Opting to pay tuition directly to an educational institution can be a savvy move for those looking to support someone’s education without coming up against gift tax limitations. However, it’s essential to consider the potential impact on financial aid eligibility and remember that this method covers only tuition, not ancillary expenses like books and room and board.

Also, paying directly for someone else’s education requires being willing and able to part with disposable income.

Each family's situation is unique, so it’s crucial to weigh this option against other strategies, such as government-sponsored plans or educational trusts, to find the best fit for your financial and estate planning goals. By carefully evaluating your choices, you can effectively support education while optimizing tax benefits and aligning with your broader financial planning strategy.

The next article in this series will be about unlocking the power of 529 plans.

Other Articles in This Series

• Part two: 529 Plans: A Powerful Way to Tackle Rising Education Costs
• Part three: Coverdell Education Savings Accounts: A Deep Dive
• Part four: UTMA: A Flexible Alternative for Education Expenses and More
• Part five: How an Irrevocable Trust Could Pay for Education
• Part six: How Intrafamily Loans Can Bridge the Education Funding Gap

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

It’s no secret that getting a college degree comes with a hefty price tag.

According to a report from Education Data Initiative, the average annual cost of tuition in the United States in 2024 is $38,270. This price includes books, supplies and living expenses. That number goes down a bit for students attending college in-state, with the average annual cost being $27,146, or $108,584 for four years.

Entering the workforce with a six-figure debt can be debilitating, especially when entry-level job salaries aren’t keeping up. According to a report from ZipRecruiter, the national starting salary for a recent college graduate is $62,609, which is just over half the cost of getting a degree at an in-state school.

When it comes to employment, a report from Strada Institute for the Future of Work and the Burning Glass Institute found that 52% of recent four-year college graduates are underemployed a year after graduation. That number drops slightly for those who graduated a decade ago, with 45% still holding a job that doesn’t require a four-year degree. When you couple that with current inflation rates, it can be extremely difficult to pay that debt off, bogging down some Americans for decades. Of course, there are scholarships and grants available to help offset these costs, but there’s another option families can take advantage of known as a 529 plan.

What is a 529 plan?

Section 529 plans, named after Section 529 of the Internal Revenue Code, are tax-advantaged accounts that can be used to pay for educational expenses from kindergarten through graduate school. There are two types of 529 plans: education savings plans and prepaid tuition plans.

Education savings plans grow tax-deferred, and account holders can make tax-free withdrawals when the money is used for qualified education expenses. Prepaid tuition plans allow account holders to secure current tuition rates for future attendance. These funds can be used only for tuition and related fees. All other expenses, such as meal plans or room and board, will be charged at the institution’s current rate.

Despite these plans being offered by all 50 states, only 30% of Americans utilized them in 2023, according to data from Education Data Initiative. The same report showed that 54% of parents were unaware that 529 plans existed. These plans are available to anyone and are typically opened by parents or grandparents for their children or grandchildren, who are listed as beneficiaries on the account. Each state has its own rules, fees and tax benefits associated with these accounts. Another nice perk is that qualified withdrawals aren’t subject to federal or state taxes. However, for K-12 students, tax-free withdrawals are limited to $10,000.

In addition to their various structures, there are some stark differences between the two types of 529 plans. With education savings plans, funds contributed to the plan are invested in a preset selection of investments. Account holders can choose what kinds of investments to make, and the account grows based on how those investments perform over time. Many plans offer target-date funds, which typically become more conservative as the beneficiary nears college age.

What 529 plans cover has been expanded

The money can be used to cover tuition, fees, room and board and other related costs for both college and K-12 students. However, the federal government has made some expansions to the plans in recent years. Under the SECURE Act of 2019, the federal government allowed beneficiaries to use account funds to cover registered apprenticeship program expenses. These tax-free withdrawals can also be used to cover student loan repayments of up to $10,000 for beneficiaries and their siblings. In 2022, the government expanded the plan further to help boost retirement savings. Under the SECURE 2.0 Act, $35,000 of unused funds in education savings plans can be rolled into a Roth IRA account.

Prepaid tuition plans are a little different. These plans are offered only in a few states, along with select colleges and universities. As mentioned, these plans allow account holders to lock in current rates, even if the beneficiary isn’t college-age. These plans are not eligible for any K-12 education expenses — and they don’t cover the cost of room and board for college students. Similar to 529 education savings plans, withdrawals from prepaid tuition plans are not taxed, and the funds grow over time. It’s important to note these plans are not guaranteed by the federal government and may not be guaranteed by some states, depending on where you live, so make sure you understand those risks before opening an account.

529 plans are a great way for families to save money on education costs — especially when it comes to paying for college. Opening one of these accounts could lessen or even eliminate the amount of debt your child accrues until they graduate, saving them years of student loan payments. Furthermore, the funds in these accounts grow over time, allowing you to maximize your contributions.

You may also be eligible for various tax benefits depending on where you live. Despite continuous talk of student loan forgiveness and free tuition, a 529 plan can be a great way to help ensure your child has access to higher education, which will open a world of opportunities for them as they enter adulthood.

Justin Stivers is an investment advisory representative and provides advisory services through CoreCap Advisors, LLC. Stivers Wealth Management is a separate entity and not affiliated with CoreCap Advisors. The information provided here is not tax, investment or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Student loans have become one of the heaviest financial burdens for Americans. As of this year, student loan borrowers owe a whopping $1.7 trillion in federal and private student loan debt, according to the Federal Reserve. It may seem that student loan debt is most often a problem for younger and middle-aged Americans, but data from the Consumer Financial Protection Bureau says otherwise. It found nearly 40% of borrowers 65 and older have defaulted on their loans.

What’s even more concerning is that for many, age 65 is when people start thinking about claiming Social Security benefits, if they haven’t done so already. This financial burden can add even more pressure on Americans nearing, or in, retirement.

Having enough money to live on for the rest of your life is one of the biggest concerns in retirement. It’s why we spend most, if not all, of our working years saving up for it. When you add rising costs, increased medical treatment and the burden of student loans onto an older adult’s plate, it can become extremely challenging to make ends meet. This has caused many to default on their student loans, which can lead to even more problems, especially if they’re federal loans.

Under the Treasury Offset Program, the federal government can garnish up to 15% of monthly federal benefits for those with outstanding student loans. This includes disability payments, tax refunds and even Social Security benefits. This has caused concern for lawmakers who sent a letter to the White House in March. They’re urging the Biden administration to exempt Social Security benefits from being garnished under the program.

Co-signed student loans can also be an issue

Older adults who are co-signers on student loans for children or grandchildren also need to be careful, especially when it comes to private student loans. The federal government isn’t allowed to garnish a co-signer’s Social Security checks if the borrower doesn’t pay the loan. However, the lender can take you to court in an attempt to collect the amount due on the loan.

This isn’t really an issue for federal student loans, because they typically don’t require a co-signer. A biological or adoptive parent can take a Direct Plus, or parent Plus, loan to help their child pay for college, but if you default on those payments, your Social Security or disability payments could still be garnished. If you’re planning to co-sign or take a loan to help your child pay for college, make sure you understand the terms of the loan and the consequences if payments aren’t made.

If you’re heading into retirement before your student loans are paid off, there are a few options for handling the financial burden. If you have federal loans, it may be worth checking into income-driven repayment plans. These plans determine your monthly payment based on your income. More information on these plans can be found on the Federal Student Aid website.

Another option is to see if you qualify for student loan forgiveness. Depending on your career, your student loans could be forgiven entirely. The Public Service Loan Forgiveness program forgives loans after 120 payments have been made and 10 years of service have been completed. Government workers and teachers are just some of the professions that qualify for this type of forgiveness.

Refinancing could be an option

If you don’t qualify for forgiveness, you might want to consider refinancing your loans. Refinancing may allow you to reduce your interest rate and repayment term, but there are some risks. If you refinance federal student loans into private loans, you’ll lose any borrower protections you had under the federal government.

If none of these options works for you, you can also let your student loans “ride,” meaning you’ll make the lowest monthly payments allowed.

Federal student loans are discharged upon death, so your children will not be responsible for paying them. This is true for most private loans, too, as long as they’re not co-signed.

Daily living expenses need to be taken care of in real time, and sometimes, the best option is to check into an income-driven repayment plan to lower payments or pay the bare minimum required each month.

The burden of student loans can be paralyzing for older adults heading into retirement. If you’re retiring with outstanding loans, be sure you can still afford to make payments. If you can’t, you may need to delay retirement, pick up a side gig for extra income or check into income-driven payment plans and forgiveness. The last thing you need to be concerned with in your golden years is paying off debt from decades ago.

Pat Simasko is an investment advisory representative of and provides advisory services through CoreCap Advisors, LLC. Simasko Law is a separate entity and not affiliated with CoreCap Advisors. The information provided here is not tax, investment or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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• How Lower Interest Rates Could Affect Older Adults

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

As the holiday season progresses and the end of the year quickly descends upon us, many minds turn to the subject of giving. Grandparents in particular seek to bring joy to their grandchildren’s faces and enrich their lives at this time of year. Few things in life are as rewarding as seeing a child’s eyes light up when they get the gift they wanted, especially when you’re the one who was able to give it to them! What is arguably even more rewarding is helping to set our loved ones up for long-term success and ease some of the larger burdens they (or their parents) are likely to face as they grow up.

Giving cash directly to the children or their parents is how most grandparents approach this, but as soon as the gift is given, control is surrendered, and this can be problematic for some. Saving for college is one of the biggest concerns many parents and students have these days.

Overall inflation has been abnormally high for the past couple of years, but even the 9% high watermark of June 2022 is dwarfed by the 12% annual inflation experienced between 2010 and 2022 in U.S. college tuition rates. This inflation helps in part to explain the current crisis of student loan debt in the U.S., and it’s reasonable that grandparents would wish to keep their family out of this predicament.

Managing the size of your estate is getting more important

Generosity, estate planning and the turning of the calendar all intersect here. As the current estate tax exemption sunsets at the end of 2025, managing the size of one’s estate is starting to become more of a priority and is an additional motivation to give within your lifetime. The 529 structure solves for tax efficiency, control over use of the gift and takes advantage of continued long-term compounding.

Current gift tax rules allow for each individual to gift up to $17,000 per year per person. So, a married couple may gift $34,000 to each child and grandchild without any of it counting against their lifetime exemption of $12.92 million or needing to file a gift tax return. The 529 uniquely allows a frontloading of five years of such gifts ($85,000 per recipient, or $170,000 from a married couple).

Historically, 529 plans have been very underutilized across our society. One reason for this may be that the upfront tax benefit is not particularly exciting for most Americans. If your state has a plan, you may get some limited deduction on your state income taxes. Many states don’t have a plan, so there is no deduction on contributions, but to focus on this is to largely miss the point. The true tax benefit is not observable at the beginning but is quite significant over the course of the beneficiary’s life.

Most 529 plans are invested in college savings plans. Simply contribute, invest and target a certain account balance. Nine states offer a prepaid tuition plan for public colleges and universities. While locking in a tuition rate in advance sounds attractive, these plans are not for everyone, as they narrow the range of prospective schools from early on.

Qualified 529 expenses are more broadly defined than many may assume. In addition to tuition, funds can be used for housing, meal plans, books, supplies, laptops and even internet service provided the institution deems these items necessary for the course of study.

Solutions for overfunding concerns

One concern about 529 plans we hear raised is the danger of overfunding the account, or the funds being unused if the beneficiary decides on a different path. Given the penalties involved in using plan funds for non-qualified expenses, it is a valid question. Thankfully, the plans allow the account holder to change beneficiaries without any tax consequences so long as the new beneficiary is a member of the current beneficiary’s family. If the new beneficiary is younger than the prior one, it’s likely worth a change in asset allocation to reflect the new time horizon.

Another concern is whether such gifting has an impact on the student’s application for federal aid, which can also have a major impact on the cost of college. While 529 plans owned by parents are considered and do have some impact, plans owned by grandparents are not considered at all on the FAFSA (Free Application for Federal Student Aid) form. From a grant or aid perspective, the grandparent is simply in a much better position to gift and retain control through the 529 structure than the parent.

Congress expanded and enhanced the 529 structure

Enhancements to the original 529 structure have made this gift even more valuable. Recent legislation has seen Congress quietly expand and enhance the 529 structure as a possible long-term solution to the affordability issue in education. Back in late 2017, the Tax Cuts and Jobs Act expanded the eligibility of 529 funds to include private and parochial K-12 schooling.

This legislation was then built upon in 2019 by the first SECURE Act, which allowed 529 funds to be used to pay down up to $10,000 in student debt. The most recent enhancement came in 2022 with the SECURE 2.0 Act, which allows for unused 529 funds, starting in 2024, to be rolled over into Roth IRA assets at the annual contribution limit up to a lifetime maximum of $35,000 for a beneficiary. The account needs to have been open for at least 15 years. The importance of being able to continue to compound these assets in a tax-free environment and remove the 529-related investment and distribution restrictions should not be underestimated.

Whether the priority is reducing the size of your estate, providing for the next generation, being tax efficient or all of the above, the 529 plan should be considered a significant tool in your financial planning toolkit.

The information provided herein is for illustrative and education purposes only and is not intended to be and does not constitute specific investment advice. We urge you to consult with a qualified advisor before making any investment decisions.

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Related Content

• Five Things to Teach Your Kids about Money and Happiness
• Three Reasons You Need to Use a 529 Plan (and Two Reasons You Don't)
• Three Key Ways You Can Help a Child or Grandchild Pay for College
• Using a 529 Plan? Here’s What to Keep in Mind
• Benefits of Doing Roth IRA Conversions Early in Retirement

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

The Biden Administration issued final regulations aimed at bolstering oversight and accountability for higher education institutions and improving protections for student borrowers.

The new rules, which go into effect on July 1, 2024,  strengthen the Department of Education's (DOE) ability to protect students and taxpayers from sudden college closures, the Biden administration said in a statement. They include several requirements for colleges including the creation of warning signs that make it easier for DOE to secure letters of credit or other forms of upfront financial protections.

The rules also mandate that colleges provide clearer and more comparable information on financial aid; prohibit the withholding of transcripts for federally funded courses; require adequate career services; and limit the employment of individuals with a history of risky management of the federal student aid programs.

The move comes as several schools were ordered to cancel various amounts of student loan debt after being charged over misleading practices by the Biden administration. These include Sollers College, which last week agreed to cancel $3.4 million in student loans to resolve a Federal Trade Commission charge of deceptive and misleading loan practices.

Raising the bar

“Too many students have been abandoned by shady colleges that close their doors and leave borrowers with unaffordable debt and little hope of completing their educational journeys and embarking on rewarding careers,” U.S. Secretary of Education Miguel Cardona said. “We are raising the bar for accountability and making sure that when students invest in higher education, they get a solid return on that investment and a greater shot at the American dream.”

The DOE said it has approved $127 billion in relief for nearly 3.6 million students, including record amounts of relief for borrowers whose colleges took advantage of them or closed suddenly. 

After a three-year pause, student loan repayments resumed this month. But there are some tax breaks that can help.

If you believe you are a victim of fraud by your school, visit borrower defense loan discharge for assistance.

Related Content

• $39 Billion in Federal Student Loans Will Now Be Forgiven
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• Your Monthly Student Loan Payments Could Be Slashed in Half

As October draws closer, millions of Americans are preparing for a stark reality they haven’t faced in over three years: the restart of federal student loan payments.

The pandemic-induced payment pause that began in March 2020 was a critical relief during a time of widespread economic instability. However, its cessation could have significant implications for borrowers and the economy.

A looming problem

During the hiatus, many consumers used the break from student loans to help them manage other debts. Borrowers reduced their credit card balances by an average of $611 during the pause, according to a report by TrueAccord, though it also found an alarming surge in credit card reliance, with 87.5 million new cards issued in 2022 alone. Rising interest rates could make unpaid credit card balances more expensive post-resumption.

Another unexpected consequence highlighted by the report’s data analysis is the growth of auto loan debt among those who deferred student loans. These borrowers saw an increase of $264 in their auto loan balance in 2020 and a further increase of $428 in 2021. By 2022, student loan holders had an average of $811 more in auto loan debt than non-student loan holders, a sobering revelation.

Experts have expressed concern regarding this trend, warning that the resumption of student loan payments will usher in a monthly debt burden that borrowers will likely struggle to manage. This could lead to a significant increase in delinquencies across credit types, which would invariably impact consumer financial health on a large scale.

In addition to the burgeoning debt, the restart of loan payments is anticipated to impact consumer behavior, leading to a reduction in consumption, especially of discretionary goods and services. This scenario could prove disastrous, particularly when businesses are grappling with an inflation rate that peaked at 9.1% in June 2022 (it was 3.2% this past July). This disruption could push the economy into a recession.

An opportunity to change behavior

However, amid these concerns, the payment pause has had the beneficial side effect of increasing awareness about long-term options for financing higher education.

Embarking on the journey of higher education is an exciting and transformative experience for parents and prospective students alike. However, it also presents a significant financial challenge that requires careful planning and consideration.

Here are some options:

Tuition payment plans. Many colleges and universities offer tuition payment plans that allow families to spread the cost of tuition and fees over several months instead of making a single lump-sum payment. These plans typically divide the total cost into equal monthly installments, often without charging interest.

It is essential to contact the college’s financial aid or bursar’s office to learn about available payment plan options and enrollment deadlines.

Federal Work-Study (FWS). This need-based program provides part-time employment opportunities for eligible students. These programs allow students to earn money to help cover educational expenses.

Work-study positions are often available on campus and can be related to the student’s field of study or provide valuable work experience, helping the student to develop crucial job skills and build a professional network.

Alternative financing options. In recent years, new and innovative financing options have emerged, offering alternative ways to pay for college. One key example: The Biden administration recently announced it has finalized its newest income-driven repayment plan, called Saving on a Valuable Education (SAVE).

This plan, like other income share agreements provided by private companies, offers affordability and flexibility since payments are always proportionate to the borrower’s income, reducing the financial burden during periods of low or no earnings.

As we brace for the return of student loan payments, it is evident that this issue is not simply about repayment. It’s about how we can transform this challenge into an opportunity to explore and promote more sustainable solutions for managing student debt.

related content

• A Little-Known Tax-Free Way To Help Pay Your Student Loan
• How to Prepare to Start Paying Student Loans Again
• States With the Highest, Lowest Student Loan Debt Burdens
• Student Loan Borrowers See Struggle As Payment Pause Ends
• How to Align Strategies for Student Loans and Retirement

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

More than 43 million people have federal student loan debt. And in recent years, many borrowers resumed making student loan payments — with interest — after an unprecedented multiyear pause.

Under the Biden administration, the U.S. Department of Education offered programs, including income-driven repayment options like the SAVE repayment plan, to help lower payment amounts. (Though some of those options will change under the new Trump administration.)

Additionally, the IRS reminds borrowers (and employers) about a lesser-known, tax-free way to get help with student loan repayment.

"The IRS wants to remind both employers and employees about this special feature that can help with student loans," former IRS Commissioner Danny Werfel said in a statement urging employees and employers not to overlook a potentially beneficial option.

Tax-free student loan repayment assistance

Employer educational assistance programs, which aren’t new, can assist employees in paying off their student loans.

• The option to use educational assistance is available for payments made after March 27, 2020.
• If nothing had changed legislatively, the ability to use the programs to help with student loan repayment would continue for the next two years or so, until Dec. 31, 2025.
• However, under the so-called "One Big Beautiful Bill," enacted on July 4, 2025, Congress has made this option permanent, and it will be indexed to inflation beginning in 2026.

The good tax news is that in most cases, the assistance provided to employees by employers that meets specific requirements isn’t subject to tax.

Here’s what else you need to know about how educational assistance programs work.

Employer educational assistance vs. tuition reimbursement

Employer educational assistance programs allow employers to provide tax-free financial assistance to employees for certain education expenses.

Historically, these programs have been used to help employees pay for books, equipment, supplies, fees, tuition, and other education expenses.

However, due mainly to the pandemic, employer educational assistance can now be used to pay principal and interest on an employee's qualified education loans. According to the IRS, payments made directly to the lender and those made to the employee qualify.

• This employer-sponsored student loan repayment assistance is tax-free because the IRS doesn’t consider the assistance provided by the employer to be taxable income for the employee.
• However, the maximum annual exclusion for educational assistance an employer provides, per employee, is $5,250.

In a statement previously provided on the IRS website, Virginia Sen. Mark Warner encouraged employers to take full advantage of these programs as student loan payments resume for millions across the country.

"This benefit not only provides a pathway towards student debt relief for borrowers but also gives employers the ability to recruit and retain high-quality talent,” Warner stated.

How does tuition reimbursement work? It’s important to note that employer educational assistance and tuition reimbursement are different.

Educational assistance programs can cover a broader range of expenses, including tuition, fees, books, supplies, and student loan repayments. Tuition reimbursement programs, on the other hand, typically cover only tuition and related expenses for courses taken while employed.

Check with your employer if you’re unsure about education-related benefits they do or don’t offer.

There are also limitations and requirements for tax-free employer assistance in repaying student loans that you need to consider.

• For example, the IRS says amounts above the $5,250 per employee limit could be subject to tax as wages. (In that case, your employer should include in your wages (Form W-2, box 1) the amount that you must include in income.)
• Additionally, the educational assistance must be given under a formal, written educational assistance program sponsored by the employer.
• The assistance provided by the employer cannot favor highly compensated employees.

Bottom line

However, if you are looking for a tax-free way to help repay your student loan, it’s worth checking to see if your employer offers a formal educational assistance program.

And if you are an employer that doesn’t have such a plan, the IRS describes it as a “worthwhile fringe benefit” that can help your business attract and retain workers.

For more information, see IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits.

Related

• Biden Cancels $1.2B in Student Loan Debt
• The Student Loan Interest Tax Deduction
• Trump Targets Student Loan Forgiveness: What Borrowers Need to Know
• Student Loan Forgiveness 2025: Will You Owe Taxes?

Some state residents may be eligible to claim a Maryland student loan tax credit in 2023. However, although credit recipients won’t receive the debt relief until they file their 2023 tax returns, the application deadline was September 15, 2023. Residents who missed the deadline might qualify for other types of tax credits (more on that below).

“This program offers Maryland residents a critical advantage when looking for options to pay off student loan debt,” said Gov. Wes Moore in a release announcing the $9 million in student loan tax credits awarded last year.

For the 2023 tax year, $18 million in tax credits are available. That’s twice the amount in 2023! Here’s what you need to know about claiming a student tax credit this year.

Maryland student loan tax credit

The Maryland Student Loan Debt Relief Tax Credit Program offers tax credits to eligible Maryland residents. According to the Maryland Higher Education Commission, recipients of the credit will be prioritized for taxpayers who: 

• Haven’t previously received the credit
• Were eligible for in-state tuition
• Graduated from a higher education institution located in Maryland
• Have high debt-to-income ratios

The dollar amount granted as a tax credit may also be based on the above scenarios. However, it is important to note that you might still qualify for the Maryland student loan tax credit if none of the above criteria apply to your situation.

Who is eligible for the student loan tax credit?

Many Maryland residents qualify for the student loan tax credit. That’s because there are only three main requirements.

• You must be a Maryland taxpayer.
• You must have incurred at least $20,000 in student loan debt (graduate or undergraduate).
• You must owe at least $5,000 in student loan debt when you apply for the credit.

How do I receive the credit? You will claim the tax credit if approved when you file your 2023 Maryland state tax return. If the credit exceeds your tax liability, you will receive the difference as a tax refund. Recipients of the Maryland student loan tax credit must use the entire credit amount to pay student loan debt. If the credit isn’t used for this reason, the taxpayer must pay the amount back to the state. 

Tax credits for student loan payments

Even if you don’t qualify for the Maryland student loan tax credit or if you didn’t have time to submit your application this year, you might be eligible for a federal education tax credit in 2023.

• The American Opportunity Tax Credit (AOTC) is worth up to $2,500 per student and is partially refundable (meaning you could receive a portion of the credit back as a tax refund).
• The Lifetime Learning Tax Credit (LLC) is worth up to $2,000 but is not refundable (meaning it can reduce your tax liability, but you won’t receive it back as a tax refund).
• You may be able to claim a tax deduction for up to $2,500 of student loan interest paid in 2023 (this amount depends on your modified AGI).

Unlike the student loan tax credit for Maryland, you don’t have to use the federal tax credit amounts to pay down your student loans. However, taxpayers must meet specific criteria to claim these federal credits. So, students and graduates should read through the requirements carefully before claiming a credit or deduction on their federal tax returns.

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• Federal Student Loan Forgiveness: What You Need To Know
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Editor’s note: This is part two of a two-part series on managing parent PLUS loans. Part one is How to Align Strategies for Student Loans and Retirement.

Part one of this series covered the importance of considering your whole financial situation when you’re planning to help your college student with student loans. I also discussed the key parts of a holistic student loan plan and the various strategies for repayment and forgiveness. This article brings those pieces together, addressing how to coordinate repayment of your parent PLUS student loans as your retirement approaches and mistakes to avoid.

Rebalancing your plan as you approach retirement

Similar to your investment portfolio, you can rebalance the strategies within your student loan plan as you get closer to retirement. Here, I outline the key strategies to consider in each phase, whether you’re pursuing an income-driven repayment (IDR) plan or standard repayment strategy.

10 to 15 years away from retirement

In this stage, you’re somewhere between planning to take out loans for your kids’ education and your first child graduating from college.

Loan strategies:

• Complete FAFSA and prioritize federal over private student loans.
• Carefully consider who should carry loans, you or your spouse.
• For parent PLUS loans, plan for double loan consolidation.

Employment strategies:

• Explore employer benefits and what you’ll need to qualify.
• Considering a new job or career? Explore the public sector and repayment programs.

Retirement strategies:

• On IDR? Maximize retirement benefits and contributions to lower your AGI.
• Standard repayment? Pay at least the accrued interest and then prioritize retirement.

Tax strategies:

• Manage your AGI and tax consequences in your investment portfolio to minimize tax payments and maximize retirement savings.
• On IDR? Reduce AGI the calendar year before entering repayment.

Five to 10 years away from retirement

In this stage, you may have started paying down your parent PLUS loans, or you’re in the final stretch of taking out loans for your kids. 

Loan strategies:

• New parent PLUS loans? Plan for double loan consolidation after your last loan and consider forgiveness if you expect a large balance.
• Standard repayment? Plan to pay off before retirement. Refinance to lower rates.

Employment strategies:

• Manage pay bumps by increasing pre-tax contributions and maxing out benefits.
• Considering a new job or career? Explore the public sector and repayment programs.
• Planning a move? If you’re married, consider a community property state.

Retirement strategies:

• On IDR? Prioritize retirement and pre-tax savings to keep your AGI low.
• Standard repayment? Prioritize payments and put everything left over toward retirement.

Tax strategies:

• Continue managing your AGI and tax consequences to keep tax payments low.
• On IDR? Continue filing separately and prioritize pre-tax savings over after-tax and Roth.

Fewer than five years away from retirement

When you’re this close to retirement (or currently retiring), you’re either on track for repayment, or you’re considering retiring with student loans.

Loan strategies:

• Large balance? You can still benefit from double loan consolidation and forgiveness.
• On IDR? Consider forbearance to delay payments to retirement when income is low.
• Standard repayment? Pay off ASAP to leverage “catch-up” retirement saving benefits.

Employment strategies:

• On IDR? Manage pay bumps by increasing pre-tax retirement contributions.
• Public employee? Explore Public Service Loan Forgiveness (PSLF) before it’s too late.

Retirement strategies:

• Prioritize retirement savings to leverage “catch-up” savings benefits.
• Coordinate a plan for retirement income and withdrawals.
• Planning to downsize? If you’re married, consider a community property state.

Tax strategies:

• Retiring with IDR? Manage taxes and withdrawals for lowest payments possible.
• Standard repayment? Manage tax consequences to max out saving options.

Parent PLUS loan mistakes to avoid

If you have parent PLUS loans, be sure to avoid these common mistakes:

• Don’t skip exploring IDR and forgiveness because you assume they’re not for you.
• If you’re pursuing forgiveness, avoid putting parent PLUS loans in the higher earner’s name. This can limit your savings.
• Do NOT refinance or consolidate all your loans into one loan. This limits you to the worst income-driven repayment plan: income-contingent repayment, or ICR. ICR forces results in a higher payment than the other IDR plans in two ways. First, it uses a smaller deduction against your overall income. Second, it uses 20% of your income (after the deduction) to calculate your payment, while other plans can be 10%, or even 5% with the new SAVE plan for undergraduate loans.

The road to a happy retirement

The road to a happy retirement starts well before your retirement date. If you have student loans (especially parent PLUS), planning ahead lets you make smaller adjustments along the way.

If you have a large balance, income-driven repayment and forgiveness could be your best options. But even if you choose repayment, following a holistic plan that balances your loan, employment, retirement and tax strategies will provide the biggest savings.

For questions and to discuss your options personally, feel free to schedule an appointment with me.

Related Content

• Student Loan Forgiveness: Navigating the Maze
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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

House Republicans voted to repeal President Biden’s student loan forgiveness plan and the administration's efforts to extend the student loan payments pause, but that extension won't happen anyway. President Biden agreed to resume student loan payments as part of the debt ceiling deal, which suspends the national debt limit until 2025. 

"No one got everything they wanted, but the American people got what they needed. We averted an economic crisis, an economic collapse," President Biden said in a speech regarding the debt limit agreement.

The U.S. Supreme Court struck down Biden's student loan forgiveness plan anyway. So, Biden's plan for widespread student loan relief won't happen.

What does this mean for you? Have a plan to resume your student loan payments.

What is the Status of Student Loan Forgiveness?

Repealing Biden's student loan forgiveness passed the House and Senate. The vote was largely symbolic because of the power split in Congress.

Republicans, who hold the House majority, largely oppose Biden’s plan, and some moderate Democrats also disapprove of the student loan debt relief plan. For example, U.S. Sen. Joe Manchin (D-WV), a moderate Democrat, voted to repeal Biden's student loan forgiveness plan.

When will the Supreme Court rule on student loan forgiveness? The Supreme Court ruled on June 30. Biden's student loan forgiveness plan will not move forward now that the Supreme Court has ruled against it.

As of now, it doesn’t appear that President Biden has a backup plan for broad-scale student loan forgiveness. However, the Biden administration has taken other measures to help borrowers with student loan forgiveness, through programs like borrower defense loan discharge.

Will Student Loan Payments Resume?

You don’t need to make payments on your federal student loans yet because the pause on federal student loan payments is still in place. But student loan payments are set to resume in October. Originally, federal student loan payments were expected to resume in August.

Is Student Loan Forgiveness Still Happening? 

Biden's original plan for student loan forgiveness won't happen, but borrowers may still have a portion of their federal student loans forgiven. For example, an income-driven repayment plan allows you to make student loan payments based on your income and family size. Additionally, the Biden administration has recently changed various rules governing income-driven repayment so that more borrowers might benefit from the program.

• Under the income-driven plans, you would make student loan payments for 20-25 years, depending on the type of plan you enroll in.
• Your student loan balance at the end of the 20-25 year term would be forgiven, regardless of the amount you still owe.

How to Pay for Student Loans

Borrowers have other student loan repayment plans to choose from if they don’t qualify for an income-driven repayment plan. How long it takes to pay off student loans depends on the type of plan in which you enroll. Some plans are designed so you’ll pay less interest, which saves you money in the long run. Other repayment plans are designed to make the repayments less of a burden while you are making monthly payments.

• Standard Repayment plan: You will make fixed payments for up to 10 years and will accrue less interest.
• Graduated Repayment plan: Your student loan payments will start low and will gradually increase as you begin to make more money.
• Extended Repayment Plan: You will make student loan payments for up to 25 years. Unlike the income-driven plans, your balance will need to be fully repaid at the end of the 25-year term. (subject to eligibility requirements)

Having a plan in place to repay your student loans before payments resume is a good thing to focus on if you have a federal student loan. Although Biden’s plan for student loan forgiveness has been struck down, having a strategy to make your monthly payment again and/or finding a federal student loan repayment program that works for you might help make monthly payments more manageable.

 An estimated 44 million Americans carry student loan debt — that’s about 17% of the adult population. If our student loan borrowers were a country of their own, they would be the size of Spain. 

The balances run the gamut. The average balance for a recent graduate is about $40,000, with an average of $37,000 of that owed to the federal government. Of course, those are just averages, and many borrowers owe hundreds of thousands of dollars. 

If you’re one of the millions of Americans with student debt, you face a decision: Should you make paying off that debt a priority? 

Maybe.

Your budget isn’t infinite. If it were, you wouldn’t have had to borrow for your education in the first place. Yet, the demands on your funds do at times seem infinite. 

“There is a certain peace of mind in being debt-free,” Sonia Joao, chief operating officer of Houston-based RIA Robertson Wealth Management, told Kiplinger. “But if you’re comfortable carrying debt, paying off your student loans might not be the best use of your funds. You might find that you have other more pressing financial priorities.” 

First things first: Do you have to pay student loans?

Again, it depends. If you owe the U.S. federal government, then yes, barring loan forgiveness — which is a political hot potato right now — you have to pay. Federal student debt is generally not dischargeable, even in most bankruptcy proceedings. 

You really have to be in dire financial straits for a bankruptcy court to consider discharging it, so you should just assume that you have to pay it back. If you don’t, the government can go so far as to garnish your wages or take it out of any tax refunds they’d otherwise owe you.

With private lenders, the process really varies from state to state. In order to garnish wages, the bank would have to successfully sue you, and depending on the amounts, that may or may not be reasonable. But even in the absence of a lawsuit, a default on your private student loans will potentially wreck your credit score and make it hard to borrow. So, simply walking away from the loans is going to generally be a bad idea.

How should you prioritize loans vs other investments?

Again, your budget isn’t unlimited. So, where does student loan repayment fit in the pecking order?

Retirement. “Student loans subtract from your net worth,” Joao continued. “But putting too much emphasis on debt repayment can actually set you back if it means you’re not investing in your future.”

As an example, consider your company’s 401(k) plan. The average employer with a 401(k) plan matches around 4% to 6% of your salary. That’s potentially an immediate 100% return on every dollar that gets matched. There are also tax benefits, as every dollar that goes into your 401(k) goes in tax-free. 

Assuming you’re making at least the minimum payments on your student loans, it makes sense to prioritize the 401(k) over debt repayment, at least until you’ve gotten the full employer match.

Real estate. What about a down payment on a house? 

While high prices and high mortgage rates over the past year have made home ownership more difficult, it’s generally a good financial move to own a home. Home prices generally keep pace with inflation, and your mortgage interest is tax deductible. 

You can clearly buy too much house and put strain on your finances. But assuming you’re getting a home that is in line with your budget, it’s generally going to make more sense to dedicate that marginal dollar to buying a home than paying down student debt. 

Other investments. The same may be true of other investments. The rate you pay on federal student debt is fixed. So, if you borrowed within the past decade, the rate on your loans is probably somewhere between 3% and 5%. 

If you have a reasonable expectation of earning more than that in an investment — and the long-term average annual return of the S&P 500 is 8% to 10%, depending on what specific years you use — then it makes more sense to invest that marginal dollar of savings rather than use it to pay down your debt faster. 

This isn’t to say you should leverage yourself to the hilt. You don’t want to put yourself in financial distress if you lose your job or hit any financial speed bumps. But you should balance the benefits of investing that marginal dollar over using it to reduce your debt load. 

The elephant in the room

Of course, the single biggest reason to consider slow-rolling your debt repayment is political. President Joe Biden has made student debt forgiveness a priority, as have many high-ranking Democrats. And while meaningful debt relief is not likely in a dividend Congress, we have elections coming up that could alter the balance of power in Washington. It’s impossible to assign odds to it, but there is certainly a chance of at least some form of debt relief in the coming years. 

So, it might make sense to take a wait-and-see approach. With market rates as high as they are today, you could even put the cash you intend to set aside for debt repayment into 1-year CDs or safe Treasury bills for the time being. 

If debt repayment never materializes, no problem. You can use that cash to pay down your debt in the future. But if some form of debt relief is passed, that cash you would have used for debt repayment is yours to keep. 

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It’s not surprising that the need for student loans is in high demand, as the average published tuition and fee for 2022-23 is 2.25 times higher than it was 30 years ago at public four-year institutions, rising from $4,870 to $10,940 since 1992-93, according to CollegeBoard. 

While most complete undergraduate degrees in four years, they'll likely be paying student loans off for more than double that amount of time. It takes most graduates on average 20 years to pay off their student loan debt, although the standard timeline to pay off debt is 10 years, according to a survey conducted by Research.com, which surveyed over 61,000 individuals. 

However, paying off student loans within a decade isn't a standard story because there are so many factors involved, experts say.

"We have a saying in the office: 'If you hear a one-size-fits-all solution to your student loan repayment, it's wrong,'" student loan consultant Jan Miller told Kiplinger. "Student loans are unique in that the repayment terms can be changed upon federal student loan regulatory eligibility, without a credit check."

There are many ways to pay back student loans, Miller continued, which Kiplinger takes a look at below.

Student Loan Repayment Factors

Overall, student loan debt in the United States equals $1.757 trillion; 43.8 million borrowers have federal student loan debt, and the average federal student loan debt balance is $37,338, reports the Education Data Initiative.  

Another report, from the National Center for Education Statistics found that 30.2% of undergraduate students received federal student loans for the year 2020-21, with the average amount equaling $6,598. 

How long your student loans take to pay off depends on a number of factors, including how much you borrowed in the first place, your monthly payment amount and the loan’s interest rate. 

If you’re looking to tackle your student debt within a certain time frame, the Office of Federal Student Aid has several plans that can help you eliminate your student debt within a set number of years. 

Student Loan Repayment Plans

“After graduation, if the borrower does not choose a repayment plan, the borrower will automatically be enrolled in the standard 10-year repayment plan," Joseph Schmidt, CFP at Sunrise Personal Finance, told Kiplinger. "The monthly payment of the standard 10-year plan is based on the borrower’s loan balance and the interest rate.”

However, this plan can be changed if needed. Read on for more information about repayment plans. 

Standard Repayment Plan: 10 years

The standard repayment plan lets you pay off your student loans in the shortest amount of time and pay the least amount of interest over the life of the loan, although monthly payments will be higher than payments made with other plans. With this plan, monthly payments are fixed at an amount that ensures your loans are paid off in 10 years (within 10 to 30 years for Consolidation Loans). All borrowers are eligible for this plan. 

Graduated Repayment Plan: 10 years

The graduated repayment plan also ensures that your loans are paid off within 10 years (within 10 to 30 years for Consolidation Loans). With this plan, monthly payments start low and increase every two years. Payments will never be less than the amount of interest that accrues between payments, and they won’t be more than three times greater than any other payment. All borrowers are eligible for this plan. 

Extended Repayment Plan: 25 years

You must have more than $30,000 in outstanding Direct Loans to be eligible for this plan. Your payments can either be fixed or graduated, but will ensure your loans are paid off within 25 years. While it will take longer to pay off your loans under this plan, your monthly payments will be lower. 

Income-Based Repayment Plan: 20 to 25 years

If you’re struggling to afford your student loans, you may be eligible for an income-based repayment plan. Under this plan, your monthly payments are either 10 or 15 percent of discretionary income. If you haven’t repaid your loan in full after 20 or 25 years, the outstanding balance will be forgiven. To be eligible, you must have a high debt relative to your income.

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President Biden’s student loan forgiveness application officially launched in October and millions of borrowers applied for student loan debt relief. But, as you may have heard, Biden’s plan to forgive up to $20,000 of student loan debt for eligible borrowers faces signficiant legal challenges. The plan was blocked by the 8th Circuit Court of Appeals before a federal judge in Texas ruled that Biden’s student loan forgiveness program is unconstitutional. As a result, the Biden administration is not currently accepting new applications for student loan debt relief. 

However, if you have already applied for student loan forgiveness, the Biden administration has said that it will hold onto your application, while the case proceeds through the courts. And, if you have been approved for student loan relief, the Department of Education should have sent you an email regarding your approved stratus and the hold on forgiving student loan debt.

In the meantime, the U.S. Supreme Court will take up the student loan debt forgiveness dispute in February. Since a Supreme Court ruling in the case won't be expected until June, the Biden administration has extended the student loan payment pause until at least June 30, 2023. 

Buit, if you're wondering what is going on with student loan forgiveness and what to expect, here is some information on the legal challenges involved.

Texas Court Ruling Blocks Student Loan Forgiveness--For Now

A federal judge in Texas ruled that Biden’s student loan forgiveness program is unconstitutional essentially because the judge believes that the program is an illegal overreach of Presidential power.

Legally speaking, the Texas ruling vacated Biden’s student loan forgiveness plan, but that didn't practically change the situation with student loan forgiveness. That’s because student loan forgiveness was already on hold due to another court order that blocked the federal government from forgiving student loans. The Texas ruling though, was the latest in a string of challenges to Biden’s student loan forgiveness program in 2022.

So, what does the Texas judge’s ruling about student loan forgiveness mean for you? The Biden administration had previously said that you could apply for student loan forgiveness if you haven’t already done so. But because of the Texas ruling, the application for student loan forgiveness is blocked until further notice. That means that the federal government won't be accepting new applications for now, and won't be forgiving any student loan debt--for now.

It's important to note that litigation takes time. There’s a way to go with legal appeals before we know the final legal word concerning the constitutionality of Biden’s student loan forgiveness plan. The Supreme Court will hear oral arguments in the case in February, but is not expected to issue a final ruling until June.

So, the acceptance and processing of student loan applications will be on hold until legal disputes over the program are settled. And that understandably raises questions and concerns about what borrowers can expect.

Which Other States Sued to Block Student Loan Forgiveness?

In a case separate from the Texas lawsuit, the 8th Circuit Court of Appeals blocked Biden’s student loan forgiveness plan, which also meant that the Biden administration couldn't cancel student loan debt until the court can consider legal arguments from both sides. 

Six Republican-led states challenged the student loan debt forgiveness program in court, arguing that the Biden’s program would harm student loan companies. The states that sued to block student loan forgiveness include: Arkansas, Iowa, Kansas, Missouri, Nebraska, and South Carolina.

The federal court order pausing student loan debt cancellation delayed the processing of student loan debt relief (i.e., the Biden administration has had to wait to actually cancel student loan debt). 

What To Do About Blocked Student Loan Debt Relief

What can you do about your student loan debt relief application? For now, whether you've already applied or not, stay tuned to updates about student loan debt relief. If you applied for relief and are approved, you should have received an email from the U.S. Department of Education explaining that you are approved, but that student loan forgiveness is on hold due to legal disputes. Student loan payments are paused until at least June 30, 2023, and so won't resume in January.

The Biden administration also encourages borrowers to sign up for updates and get information at studentaid.gov.

Legal challenges have been against President Biden’s student loan forgiveness plan since it was introduced last year. The plan was to offer up to $10,000 of student loan debt relief for eligible borrowers, and up to $20,000 in student loan forgiveness for Pell Grant recipients. Two of those legal challenges have made their way to the U.S. Supreme Court, who will ultimately decide whether the Biden Administration has the legal authority to forgive any student loans. In the meantime, it’s unclear whether you can still opt out of student loan forgiveness–something the Department of Education said that you could do last year. 

Why You Could Opt Out of Student Loan Forgiveness

The idea that you could opt out of student loan forgiveness came from the very first student loan debt relief lawsuit. That case was brought by the Pacific Legal Foundation, a libertarian group in California. The organization argued that student loan borrowers in states that could or will tax forgiven student loan debt would be worse off than other borrowers, because of Biden’s student loan forgiveness. However, the Department of Justice said that federal student loan forgiveness doesn’t create an “automatic” tax penalty because borrowers aren’t required to have their student loans forgiven.

Why does this matter? Well, the Pacific Legal Foundation’s challenge raised important questions concerning states that will or might tax forgiven student loan debt (you might live in one of them), and whether you have to accept student loan debt forgiveness.

The lead plaintiff in the student loan debt relief case was a Pacific Legal Foundation attorney, Frank Garrison. Garrison argued that an Indiana state tax on forgiven student loan debt would amount to immediate tax liability and an unfair penalty. As an Indiana taxpayer, he asked the court to invalidate President Biden’s student loan debt cancellation program and pointed to at least six other states where, Garrison said, borrowers could be similarly harmed.

The federal government responded to the lawsuit by saying that borrowers, who are eligible for so-called “automatic” debt relief, could opt out of Biden’s student loan forgiveness plan, and avoid paying state taxes on the canceled debt. In other words, “you can keep you student loan debt—if you want to.”

As a result of the opt-out, a federal judge denied Pacific Legal Foundation’s motion to block President Biden’s student loan forgiveness and dismissed the organization's claim.

But this case means that going forward, it could be difficult for a borrower to claim that state tax has been unfairly or automatically imposed merely because of Biden’s student loan relief. The student loan forgiveness opt out basically allows the federal government to say that the borrower chooses whether to have forgiven student loan debt in the first place. That would make any tax “penalty” a state issue.

Another challenge with this case is that the lead plaintiff, Garrison, hadn’t yet paid any state tax on forgiven student loan debt. So, it was unclear whether there’s sufficient legal harm to justify stopping President Biden’s student loan forgiveness program. However, that could potentially change if student loans are forgiven and some states impose tax liability on the cancelled debt.

Will Your State Tax Forgiven Student Loan Debt?

You may be wondering why someone would want to decline $10,000 to $20,000 of student loan debt forgiveness. There could be many reasons, but this particular legal case pointed to the idea that borrowers in states that will or could tax student loan forgiveness might not want to pay additional state taxes.

Right now, whether some states will tax forgiven student loans (if the Supreme Court doesn’t strike down the plan) is an evolving situation. A few states have confirmed that they will tax canceled student loan debt.  In Indiana (where the lead plaintiff in the Pacific Legal Foundation case reportedly resides), the potential tax on $10,000 of forgiven student loan debt could be as high as $1,000.

If you live in Mississippi, as another example, the maximum amount of state tax liability could be $500. However, those calculations assume that you are eligible for the full $10,000 of loan forgiveness for individuals with income under $125,000 a year. And if you are a Pell Grant recipient in a state that could or will tax forgiven student loan debt, and are eligible for up to $20,000 in student loan relief under President Biden’s plan, your state tax liability could be higher.

There are other states that could or will tax forgiven student loan debt. However, as of now, if student loan forgiveness goes forward, most states plan to conform to the Federal government’s stance that most forgiven student loan debt is not taxable through 2025.

How to Apply for Student Loan Forgiveness

Applications for Student Loan Forgiveness are on hold. Previously, on its website, the Department of Education had said that  if borrowers wanted to opt out of student loan debt relief for any reason, that they would be given an opportunity to do so. However, given the lawsuits over student loan relief  at the Supreme Court, it’s unclear at this point, exactly how opting out of student loan debt relief will work or whether it will be relevant at all.

Stay tuned to Kiplinger for updates on student loan forgiveness and sign up for updates from the U.S. Department of Education if you have any questions.

With all the talk about President Biden’s student loan forgiveness, you may be hearing about other ways to potentially maximize your student loan debt relief. One idea involves requesting a refund of student loan payments made during the pandemic pause. The Department of Education has said that some borrowers may receive "automatic" student loan refunds, while others will not. And it is also important to know that not everyone is eligible for a student loan refund.

So, here’s a little information about how student loan refunds work—which hopefully can help you determine whether requesting a refund is right for you.

Who is Eligible for a Student Loan Refund?

As you may know, federal student loan payments have been on pause. As a result, millions of borrowers haven’t had to pay their regular student loan payments, or interest on those payments, for more than two years.

However, despite the pause, some people chose to continue making payments on their student loans.

To offer relief for those borrowers, the federal government has said that if you have a qualifying direct federal student loan and made payments during the pandemic payment pause, you can request a refund for any student loan payment that was made — beginning March 13, 2020.

So, how long has the federal government been refunding student loan payments? The Federal government began offering student loan refunds about a year before President Biden’s announcement on broad student loan forgiveness.

And as you might have already guessed, payments made on private student loans aren’t eligible for refunds under this program.

How Student Loan Refunds Work

To request a refund for federal student loan payments made during the pandemic pause, you will probably have to contact your loan servicer. (Your servicer is the company that the Department of Education assigned to handle the billing and other services on your federal student loan.) They likely have information about student loan refunds on their website and should be able to help you determine whether your loan payments are eligible for refund.

When you contact your loan servicer, you may be asked to provide information about the payments that you made during the pandemic pause and the amount that you want refunded.

Once you request a student loan refund, there may be a wait before you receive your money. That's because loan servicers need to process refund requests through the Department of Education. That could reportedly take anywhere from six to twelve weeks for some servicers and borrowers, and 90 days for others.

Generally, though, if you are eligible for a refund, your payments can be refunded to you in the same way that you made them. For example, if you made your payments electronically, your refunds can usually be sent to the same bank account that you used to make the original payments. Additionally, the Department of Education has clarified that auto-debited payments are eligible to be refunded.

Automatic Student Loan Refunds

While some borrowers will need to contact their loan servicer for a refund, the Department of Education has announced that other borrowers will be able to have their refund "automatically" applied to their account balance.

If you made voluntary payments on your student loan during the pandemic payment pause and those payments brought your balance below $10,000 (or below $20,000 for Pell Grant recipients) the Department of Education has previously said that you will receive a refund. That refunded amount will apply to your remaining balance. But there is an important note: to get the refund, you had to successfully apply for and receive debt relief under the Biden administration’s student loan debt relief plan. But that plan has been struck down by the U.S. Supreme Court.

There are some instances where the Department of Education has said some borrowers won’t be able to get an automatic student loan refund. For example, if you made payments during the payment pause that didn’t bring your balance under $10,000, or under $20,000 for Pell Grant recipients, you wouldn't receive a so-called “automatic” student loan refund.

Also, some of you may have paid off your loan in full during the pandemic pause. If you did, and you’re eligible for student loan debt forgiveness, you would likely have to first request a refund of the payments you made during the pandemic. 

The rules and guidelines for student loan refunds can be complicated and are evolving. So, for more information on student loan refunds and whether they are automatically applied to your student loan balance visit the Federal Student Aid website.

Will You Pay Taxes on Your Student Loan Refund?

Normally, the IRS considers forgiven debts to be taxable income. So, that has been the cause of some confusion about student loans and taxes. But the White House has indicated that under the American Rescue Plan Act, which was enacted during the COVID-19 pandemic, student loan relief is not considered taxable income for federal income tax purposes through 2025. That means that for now, you shouldn’t be taxed on refunds of federal student loan payments made during the pandemic.

Should You Request a Student Loan Refund?

Since this refund program has been around for about a while, some borrowers have already completed the refund process, or are waiting for their funds to be refunded.

 But you might not have heard about this opportunity until now and may be wondering whether you should request a refund. (Some people hope that the combination of a student loan refund and student loan forgiveness will help put more money in their pocket.)

Unfortunately, until the Department of Education releases more detailed guidance, it is hard to know exactly how your student loan refund will be calculated on your individual loan balance.

So, stay tuned and informed. More information should be coming soon from the Department of Education.

President Biden made a long-awaited announcement extending the more than two-year-old pause on student loan payments through the end of this year. The Federal government will also provide student loan debt cancellation of up to $10,000 per borrower, within specific income limits, and up to $20,000 for Pell Grant recipients. To be eligible for forgiveness, student loans must be held by the Department of Education.

The information came August 24, a week before the current pause on student loan payments was scheduled to expire. And while some borrowers will welcome the news of the student loan payment pause extension and student loan forgiveness, the latter raises an important question. Will student loan cancellation hurt your taxes?

The short answer to whether you will pay federal income taxes on student loan forgiveness is no. And that' more good news for the millions of borrowers who will be eligible for student loan relief under President Biden’s plan. But it's still helpful to know why the student loan relief won’t be taxable to you.

2022 Student Loan Cancellation

Under President Biden's student loan debt cancellation plan, the Department of Education will provide student loan relief up to $10,000 to borrowers whose loans are held by the Department of Education, and whose income is less than $125,000 per year. For married couples who file jointly, the student loan cancellation income limit is $250,000. (Each spouse will be eligible for up to $10,000 in student loan cancellation). For Pell Grant recipients, student loan relief of up to $20,000 is available.

The White House says that those income limits are designed to prevent high-income individuals or households (i.e., the top 5% of incomes) from benefiting from the broad student loan relief program.

Normally though, no matter your income level, the IRS treats cancelled and forgiven debt as taxable income. As a result, in the past, you would have to pay taxes on the amount of your debt that was forgiven. But thankfully, for the millions of borrowers who may have a portion (or all) of their student loan cancelled under President Biden’s plan, there are some important exceptions to the normal IRS rule that have applied recently to student loans.

For example, student loan borrowers whose loans are forgiven as part of the Public Service Loan Forgiveness program, are currently exempt from tax on the forgiven amounts. (Eligibility for that program has recently been expanded.)

Also, the American Rescue Plan Act (ARPA), which was enacted during the COVID-19 pandemic, paused taxes on student loan forgiveness from 2021 through 2025. That includes people whose student loans are classified under the Income-Driven Repayment program. ARPA's broad relief covers other repayment programs, effectively making student loan forgiveness nontaxable for most borrowers.

On Wednesday, the White House confirmed that because of the student loan relief provisions in ARPA, the 2022 loan cancellation amounts will be nontaxable for federal income tax purposes. That means that the amount of student loan forgiveness won’t be added to your taxable income—at least through 2025.

The Department of Education will provide more information on the 2022 student loan debt cancellation program in the coming weeks. In the meantime, additional details can be found on the Department of Education’s website.

What about state income tax? It should be noted that most states will follow the Federal government on whether the student loan debt forgiveness is taxable. But stay tuned: there may be some states that consider the loan cancellation amount to be taxable, which could impact your state tax bill.

Student Loan Pause Extension

Although you won’t be taxed on the amount of student loan cancellation you receive under President Biden’s plan, student loan payments are scheduled to resume in January 2023. As you may know, student loan payments were first paused in March 2020 to provide relief at the beginning of the COVID-19 pandemic. That payment pause has been extended numerous times since then—the most recent pause was scheduled to expire on August 31.

So, for the last couple of years, you haven’t been paying interest on your student loans. But in 2023, you’ll likely return to making your normal student loan payments with interest. From a tax perspective, that might not be all bad because of the student loan interest deduction.

When you pay interest on your student loan, the IRS allows you to deduct either the amount of interest you paid during a given tax year, or $2,500, whichever is less. And, you don’t have to itemize your deductions to claim student loan interest because the IRS considers that interest to be an adjustment to your income.

But whether you can claim a deduction for student loan interest depends on several other factors including on your filing status and income.

So, when your student loan payments resume in January, remember that you may be able to get a tax break by deducting any student loan interest that you might pay in 2023. You can learn more about how to claim the student loan interest deduction by visiting the IRS’s website. You can also see Student Loans and Taxes: Basics to Know.

One in five Americans have student loans. And there's a lot going on at the moment with student loan payment pauses and student loan forgiveness. Payments are on pause until at least the end of June and the Supeme Court will weigh in on wehther student loan forgivness is legal or not. Until there's a decision on that major plan, tax filing season is here and there are important things to know about student loans and taxes. 

Student Loans Are Not Considered Income

A typical question surrounding student loan debt is whether a student loan is income for tax purposes. The fortunate answer is no, the IRS doesn’t consider student loans to be income.

Income that is taxable is usually made up of salary and wages. The IRS also considers unearned income (e.g., winnings or profits from sales of assets or stocks) to be taxable. So, because student loans are debts that are intended to be repaid with interest, they are not taxable income and do not need to be reported as such on your tax return.

Is Student Loan Interest Deductible?

Additional good news about student loans and taxes is that you may be able to deduct the interest that you pay on your student loan on your tax return. That deduction can potentially save you a little money at tax time.

Right now, payments and interest on student loans are on pause until the end of June. However, normally, when you pay interest, the IRS allows you to deduct either the amount of interest you paid during a given tax year, or $2,500, whichever is less. And, you don’t have to itemize your deductions to claim student loan interest because the IRS considers student loan interest to be an adjustment to your income.

To claim the student loan interest deduction, you must have paid interest on what the IRS calls a “qualified student loan.” That is essentially a loan that was taken out to pay for higher education expenses for you, your spouse, or a dependent.

But whether you can claim a deduction for student loan interest also depends on several other factors including on your filing status and income. That’s partly because the student loan interest deduction phases out depending on the amount of your modified adjusted gross income.

For example, if you are married and want to claim the student loan interest deduction, you cannot file separately, and you and your spouse cannot be claimed as dependents on someone else’s tax returns. Also, your modified adjusted gross income must stay within a specified amount.

In 2022, if your modified adjusted gross income is less than $70,000 (if you’re single) or $145,000 (if you’re married filing jointly), you could deduct the amount you paid or $2,500, whichever is less. However, single filers whose modified adjusted gross income fell between $70,000 and $85,000 or married filers whose income fell between $145,000 and $175,000, would have their student loan interest deduction reduced. This is because their modified adjusted incomes are higher.

More information about the student loan interest deduction can be found on the IRS website.

Student Loan Forgiveness is Nontaxable (For Now)

While it’s important to know whether student loans are income and whether you can deduct student loan interest on your taxes, some wondered whether President Biden's student loan cancellation would be taxable if it's approved by the Supreme Court. That's because whether you were taxed on the forgiven amount of your federal student loan was complicated, partly because of the various types of student loan programs and repayment plans.

Typically however, the IRS treats cancelled and forgiven debt as taxable income. But there are some important exceptions to this that have applied recently to student loans, mainly because of legislation passed during the COVID-19 pandemic. For example, student loan borrowers whose loans were forgiven as part of the Public Service Loan Forgiveness program, are currently exempt from tax on the forgiven amounts. (Eligibility for that program was also expanded).

Also, the American Rescue Plan Act (ARPA) paused taxes on student loan forgiveness from 2021 through 2025. That includes people whose student loans are classified under the Income-Driven Repayment program. ARPA's broad relief also coverns other repayment programs, effectively making student loan forgiveness nontaxable for most borrowers.

Under President Biden's student loan cancellation plan, the Department of Education would provide student loan relief up to $10,000 to borrowers whose loans are held by the Department of Education, and whose income is less than $125,000 per year. (The income limit for married couples who file jointly would be $250,000.) Loan relief of up to $20,000 would also available for Pell Grant recipients. Student loan payments will resume some time in 2023.

For student loan forgiveness, the White House announced that because of the loan relief provisions in ARPA, any student loan cancellation amounts will not be treated as taxable income. That means you should not be taxed on the amount of your student loan that is forgiven under this cancellation program if it goes forward.

Employer Repayment Assistance Could Be Taxable to You

In light of the pandemic, Congress passed the CARES Act, which contained provisions allowing employers to contribute money toward the federal or private student loans of their employees.

Under CARES, employers could directly contribute $5,250 each year tax-free to employees’ student loans. This employer student loan repayment assistance has been extended through 2025.

If your employer offers this benefit, it’s currently a way to reduce your student loan debt that is tax-free to you. However, because it’s a form of debt forgiveness, it is unclear-whether after 2025, when the tax relief is set to expire, employer repayment assistance for your student loan will, or won’t, be taxable to you.

Tax Problems if You Default on Your Student Loan

Data show that one-third of borrowers have already defaulted on their student loans—some more than once. But because of recent pandemic relief (mentioned previously) many borrowers who defaulted on their loans were able to have their good standing reinstated in the last couple of years. However, with current soaring inflation and looming recession, it’s hard to say whether that so called “fresh start” student loan relief will translate to fewer defaults.

Before default relief was put in place, the penalties associated with student loan default could be significant and included things like high negatives on your credit rating and wage garnishment. Tax consequences for defaulting on your federal student loan were also hefty. For example, the federal government could seize your tax refunds and even some of the refundable portions of certain tax credits.

Even though student loan payments are currently paused, if you think that you might default on your federal student loan, reach out to the Department of Education or your loan servicer to find out about any available loan rehabilitation program.

Various Tax Forms Associated with Student Loans

When you have a student loan, the interest you pay on it is reported to you on Form 1098-E if you paid at least $600 in interest during the tax year. (But remember, you probably didn’t pay interest recently because of the pause on student loan interest and payments).

Normally Form 1098-E is mailed to you, but you can also find a copy of your Form 1098-E on your loan servicer’s website or by contacting your loan servicer. You use the information provided on the form to claim the student loan interest deduction.

Another tax form that can be related to your student loans is Form 1098-T, which shows the amount of qualified tuition and related education expenses that you paid during the tax year. Form 1098-T can be useful in claiming education tax credits that might also help to reduce your tax bill.

Time is running out if you haven't already filed your 2021 federal tax return. For most people, the tax return filing deadline is April 18 this year (residents of Maine and Massachusetts get one extra day). So, for all you tax procrastinators out there, it's time to get moving. One of the first things you should do is collect and organize your tax records. If you're going to file your own 1040, you should also check out tax software options. If you need more time to file your return, request a tax filing extension (although you'll still have to pay any tax you expect to owe). And, no matter when you fill out your 2021 tax return, you first want to familiarize yourself with the tax law changes that may impact it.

Many (but not all) of the new items on the 2021 1040 form come from the American Rescue Plan Act, which was enacted last March. This Covid-relief bill made changes to the child tax credit, child and dependent care credit, earned income tax credit, and more. Other changes stem from the expiration of earlier Covid-related provisions that expired at the end of 2020. There are a few modifications to some of the main 1040 schedules, too. And, of course, there are the normal inflation-based adjustments that occur every year.

There are many reasons why you should know and understanding these changes up front. First and foremost, it very well may result in a larger tax refund or a smaller tax bill. You're also likely to get through your return faster if you're already aware of any new twists and turns. If someone else prepares your 1040, it will be easier to catch any errors when you review the return. But since "Tax Day" is right around the corner, you don't have much time left to get up-to-speed on what's new and changed for your 2021 tax return. So take a look at our list below and study up now so you know what to look for before tackling your 1040.

"Tax Day" is the day that federal personal income tax returns are due. It was delayed the past two years because of COVID-19. In 2020, Tax Day was pushed back to July 15, and last year it was moved to May 17. This year, however, the tax return filing deadline is moved back to its normal spot on the calendar…well, sort of.

Federal income tax returns are normally due on April 15. But this year most 2021 tax returns aren't due until April 18. That's because of a holiday in the District of Columbia. If you live in Maine or Massachusetts, your federal return isn't due until April 19, thanks to a local holiday in those states. Victims of certain recent natural disaster can wait even longer to file their return.

There are some subtle, but important, changes to the 1040 form itself for 2021 tax returns. Generally, they're needed to account for changes to the tax laws that are discussed below. For instance, the line on page 1 of the 1040 used for reporting the $300 deduction for charitable cash contributions was moved down on the form so that the deduction no longer impacts your federal adjusted gross income (AGI). This is important because your federal AGI is used to calculate several other tax breaks and obligations. It's also used by many states as the starting point for determining your state income tax liability.

Lines 19 and 28 on page 2 of the 1040 form were also adjusted to account for the fact that the child tax credit is fully refundable for the 2021 tax year. Line 27 was also modified and expanded (including a new check box) to satisfy changes to the earned income tax credit. (See more about changes to the child tax credit and earned income credit below.)

The idea of having a postcard-size tax form has been totally abandoned, too. We see this in the expansion of Schedules 1, 2, and 3 that go with the 1040 form. For 2020 returns, each of these schedules fit on one page. Now, for 2021 tax returns, they're each two pages long. The extra length is due to various additions to income, "above-the-line" deductions, extra taxes, and less common credits now getting their own line on these forms instead of being lump together as an "other" item to include.

Approximately 90% of all taxpayers claim the standard deduction instead of itemized deductions. Fortunately, the standard deduction amounts you'll use on your 2021 tax return are larger than last year, thanks to the annual adjustment for inflation. For the 1040 form you'll complete this year, married couples filing a joint return can claim a $25,100 standard deduction. That's a $300 increase over the 2020 tax year amount. For each spouse 65 years of age or older, you can tack on an additional $1,350 ($1,300 for 2020).

Single filers can claim a $12,550 standard deduction on their 2021 tax return ($12,400 for 2020). That jumps to $14,250 if you're at least 65 years old ($14,050 for 2020).

For head-of-household filers, the standard deduction for 2021 tax returns is $18,800 ($18,650 for 2020), plus an additional $1,700 if they're at least 65 years old.

Regardless of their filing status, blind people can add an additional $1,350 to their 2021 standard deduction ($1,700 if they're unmarried and not a surviving spouse).

The tax rates you'll see on your 2021 tax return are the same as they were last year: 10%, 12%, 22%, 24%, 32%, 35% and 37%. However, the income ranges that apply to each tax rate bracket have changed. Use the tables below to find the appropriate tax bracket for your 2021 return. It's based on your filing status and taxable income (Line 15 of your 1040 form).

Remember, though, that the tax rate associated with the bracket you fall into doesn't apply to all your income. It only applies to the amount of your taxable income that's within the bracket's range. So, for example, if you're single with $50,000 of taxable income in 2021, only the last $9,475 of your taxable income is taxed at the 22% rate ($50,000 - $40,525 = $9,475). The rest is taxed at either the 10% or 12% rate.

2021 Tax Brackets for Single Filers and Married Couples Filing Jointly

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2021 Tax Brackets for Married Couples Filing Separately and Head-of-Household Filers

If you hold on to a capital asset (e.g., stocks, bonds, real estate, art, etc.) for at least one year, any gains from the sale of the asset are taxed at a lower capital gains rate – either 0%, 15%, or 20%. The same rates apply to qualified dividends. Which rate applies to you depends on your taxable income.

For your 2021 federal income tax return, the 0% rate applies if you're single with taxable income up to $40,400 ($40,000 for 2020), a head-of-household filer with taxable income up to $54,100 ($53,600 for 2020), or a married couple filing a joint return with up to $80,800 of taxable income ($80,000 for 2020).

The 20% rate kicks in at $445,851 of taxable income for single filers ($441,451 for 2020), $473,751 for head-of-household filers ($469,051 for 2020), and $501,601 for joint filers ($496,601 for 2020).

If your taxable income falls between the 0% and 20% thresholds for your filing status, then the 15% rate applies.

As mentioned above, the $300 deduction for cash contributions to charity no longer affects your federal AGI. There's also another important change to this deduction for 2021 tax year returns – married couples can now deduct up to $600. For 2020 returns, married couples who filed jointly could only deduct $300. However, one deduction is allowed per person now, which means each spouse can deduct up to $300 on a joint 2021 return.

Note that this deduction is only available if you claim the standard deduction. It also expired at the end of 2021, so you won't be able to claim it on your 2022 return.

Several significant upgrades to the 2021 earned income tax credit (EITC) were made by the American Rescue Plan Act. The biggest changes will allow more childless workers to claim the EITC on their 2021 tax return. For one thing, the minimum age for claiming the credit without a qualifying child is lowered from 25 to 19 (except for certain full-time students). Workers over the age of 65 can claim the credit on their 2021 return, too. The maximum credit available for workers without a qualifying child also jumps from $543 to $1,502. Expanded eligibility rules for former foster youth and homeless youth were put in place for the 2021 tax year as well.

While the modified rules listed above for childless workers only apply for the 2021 tax year, the American Rescue Plan Act made a few other changes to the EITC that are permanent. For example, the $3,650 limit on a worker's investment income is bumped up to $10,000, and the cap will be adjusted for inflation each year going forward. In addition, certain married couples who are separated can now claim the credit on separate tax returns. And certain workers who can't satisfy the EITC identification requirements for their children can now qualify for the credit as a childless worker.

Finally, as with the 2020 EITC, you can use your 2019 earned income to calculate your 2021 EITC if it's more than your 2021 earned income. Since this can increase or decrease your EITC, calculate the credit using both your 2019 and 2021 earned income to see which method will save you the most money.

To calculate your EITC, complete the worksheets associated with Lines 27a, 27b, and 27c of Form 1040 in the instructions for Form 1040. If you have a qualifying child, also complete Schedule EIC and attach it to your 1040 form.

As with the earned income tax credit, the American Rescue Plan Act made major improvements to the child tax credit for the 2021 tax year. For instance, the credit amount for 2021 tax returns was increased from $2,000-per-child to $3,000-per-child six to 17 years of age and to $3,600-per-child five years old and younger. However, the extra $1,000 or $1,600 is phased out for single filers with a federal AGI above $75,000, head-of-household filers with a federal AGI above $112,500, and joint filers with a federal AGI above $150,000. The credit is further reduced under pre-existing rules for single and head-of-household filers with a federal AGI above $200,000 and married couples filing jointly with a federal AGI above $400,000.

Any child tax credit claimed on your 2021 return is also fully refundable for most parents, even if you don't have any earned income (normally, the credit is only partially refundable – up to $1,400-per-child – and you must have at least $2,500 of earned income). Children who are 17 years old also qualify for the 2021 credit (child normally must be 16 or younger to qualify). Finally, unless you opted-out of the payments, families received 50% of their estimated 2021 child tax credit amount in advance through monthly payments sent between July 15 and December 15 last year.

To calculate the child tax credit allowed on your 2021 tax return, you must subtract the monthly payments you received last year from the total credit that you're otherwise entitled to claim for the 2021 tax year. (The IRS will send you a Letter 6419 showing the amount paid to you in monthly payments.) If the total child tax credit amount is more than your combined monthly payments, you can claim the excess amount as a credit on your return. However, if the total credit amount is less than your payments, you might have to pay back the extra child credit payments.

Use Schedule 8812 to reconcile the advance payments you received last year with the actual child tax credit you're entitled to claim on your 1040 form, and to see if you need to pay back any payments (they will be paid back in the form of an additional tax calculated Part III of the schedule).

For more information about claiming the 2021 credit, see Child Tax Credit FAQs for Your 2021 Tax Return.

Parents benefiting from the child tax credit enhancements may be able to cut their 2021 tax bill even further because of big changes to the child and dependent care credit made by the American Rescue Plan Act. For example, the maximum credit is increased from 35% to 50% of eligible expenses for the 2021 tax year. Plus, the credit percentage won't be reduced for families making less than $125,000 a year (instead of $15,000 per year), and all taxpayers earning less than $438,000 can claim at least a partial credit on their 2021 return.

The 2021 credit applies to more child or dependent care expenses, too. The credit percentage is applied to as much as $8,000 of eligible expenses for one child/disabled person and up to $16,000 of expenses for two or more (the amounts are usually $3,000 and $6,000, respectively). That means the total credit amount can be as high as $4,000 if you have just one child/disabled person and $8,000 if you have more ($1,050 and $2,100, respectively, for 2020).

The child and dependent care credit for the 2021 tax year is also fully refundable for most people (it's usually a nonrefundable credit). Form 2441 is used to calculate the credit.

See Your Child Care Tax Credit May Be Bigger on Your 2021 Tax Return for details.

The American Rescue Plan Act improved the premium tax credit for 2021 and 2022 to lower premiums for people who buy health insurance through an Obamacare exchange (e.g., HealthCare.gov) on their own. The credit amount was increased for eligible taxpayers by reducing the percentage of annual income that households are required to contribute toward their health insurance premium. The law also allowed the credit to be claimed by people with an income above 400% of the federal poverty line.

For certain people who purchase health insurance through an exchange, an estimated premium tax credit amount is paid in advance to the insurance company. If advance payments are made on your behalf, you must reconcile the credit and the advance payments when you file your tax return. If the advance payments are greater than the actual allowable credit, the difference (subject to certain repayment caps) usually must be paid back. However, the American Rescue Plan Act eliminated the repayment requirement – but only for the 2020 tax year. As a result, excess advance payments made in 2021 will have to be repaid when you file your 2021 tax return.

Use Form 8962 to calculate your premium tax credit and reconcile it with any advance payments. Also make sure you submit Form 8962 with the rest of your 2021 tax return.

The nonrefundable credit for expenses related to the adoption of a child is a little larger for the 2021 tax year. For 1040 forms filed this year, the credit can be worth up to $14,440 ($14,300 for 2020). Plus, the full credit is available for a special-needs adoption, even if it costs less.

The credit begins to phase out if your modified AGI is over $216,660 and it's eliminated altogether if your modified AGI reaches $256,660 ($214,520 and $254,520, respectively, for 2020). To claim the credit, complete Form 8839 and report the credit amount on Line 6c of Schedule 3. Also submit Form 8839 with the rest of your 2021 tax return.

The income tax exclusion for company-paid adoption aid was also increased from $14,300 to $14,440 for the 2021 tax year.

The alternative minimum tax (AMT) was originally designed to hit only wealthier Americans. However, the AMT exemption amount wasn't always adjusted annual for inflation – but it is now. For the 2021 tax year, the AMT exemption jumped from $113,400 to $114,600 for married couples filing a joint return and from $72,900 to $73,600 for single and head-of-household filers.

The phase-out ranges for the AMT exemption are adjusted for inflation each year, too. For 2021 tax returns, the exemption is gradually reduced and can ultimately be eliminated if alternative minimum taxable income (AMTI) on a joint return is between $1,047,200 and $1,505,600 ($1,036,800 and $1,490,400 for 2020). For single and head-of-household filers, the 2021 phase-out range is $523,600 to $818,000 of AMTI ($518,400 to $810,000 for 2020). The 2021 range for married people filing a separate return is $523,600 to $752,800 ($518,400 to $745,200 for 2020).

In addition, the 28% AMT tax rate doesn't kick on 2021 tax returns until you hit $199,900 of AMTI. That's an increase over the 2020 threshold, which was AMTI of $197,900 or more.

Use Form 6251 to calculate your AMT and file the form with your 2021 Form 1040.

Say goodbye to the tuition and fees deduction, which was worth up to $4,000 per year. It was repealed starting with the 2021 tax year.

On the bright side, the phase-out thresholds for the lifetime learning credit were increased. They're now the same as the phase-out amounts for the American Opportunity credit. So, beginning with 2021 tax returns, the lifetime learning credit is gradually reduced to zero for joint filers with a modified AGI from $160,000 to $180,000 ($118,000 to $138,000 for 2020) and single filers with a modified AGI between $80,000 to $90,000 ($59,000 and $69,000 for 2020). If you're claiming either the lifetime learning credit or the American Opportunity credit, you must first complete Form 8863 and then attach it to your 1040 form.

The phase-out ranges are also higher in 2021 for the exclusion of interest on Series EE and I savings bonds redeemed to help pay for tuition and fees for college, graduate school, or vocational school. For 2021 tax returns, the exclusion starts to phase out for joint filers with a modified AGI exceeding $124,800 and for other people with a modified AGI of $83,200 or more ($123,550 and $82,350, respectively, for 2020). The exclusion is totally phased-out for joint filers with a modified AGI of $154,800 or more and for other taxpayers with a modified AGI of at least $98,200 ($153,550 and $97,350, respectively, for 2020). You must compete Form 8815 to claim the exclusion and then report the exclusion amount on Line 3 of Schedule B.

The recovery rebate credit is back, but with one important change. As you may recall, this credit made its first appearance on the 2020 Form 1040 and was available for people who didn't receive a first or second stimulus check, or who didn't receive the full stimulus check amount they were entitled to.

For 2021 tax returns, the credit is for people who didn't receive a third stimulus check (or didn't receive the full amount). Those payments were for up to $1,400, plus an additional $1,400 for each dependent in your family. Similar to the monthly child tax credit payments the IRS sent last year, your third stimulus check was an advance payment of the recovery rebate credit. As a result, when you file your 2021 return, you must reduce the recovery rebate credit you're entitled to claim by the amount of your third stimulus check. (The IRS will send you a Letter 6475 showing the amount of your third stimulus check.) For most people, your third stimulus check payment will equal the 2021 recovery rebate credit allowed. If that's the case for you, the credit will be reduced to zero. But if your third stimulus check was less than the credit, your recovery rebate credit will equal the difference. And what if your third stimulus check was more than your 2021 recovery rebate credit? You get to keep the difference!

Use our Third Stimulus Check Calculator to see you how large your third stimulus check should have been.

Two tax breaks that encourage saving for retirement were tweaked for the 2021 tax year. In both cases, the changes are the result of annual adjustments for inflation.

The first retirement-related change for 2021 tax returns is to the deduction for contributions to a traditional IRA. If either you or your spouse was covered by an employer retirement plan, your IRA deduction may be reduced (potentially to zero), depending on your filing status and income. The income levels that trigger a reduction for 2021 returns have been adjusted. For married couples filing a joint return, the deduction is gradually phased out if you're modified AGI is between $105,000 and $125,000 (between $104,000 and $124,000 for 2020 returns). For single and head-of-household filers, the phase-out range is from $66,000 to $76,000 ($65,000 to $75,000 for 2020).

If only one spouse is covered by a retirement plan at work, the deduction is reduced if the couple's modified AGI exceeds $198,000, and it's totally eliminated if their modified AGI hits $208,000 ($196,000 and $206,000, respectively, for 2020). (NOTE: If you made any nondeductible contributions to a traditional IRA for 2021, report them on Form 8606.)

The second change is to the "Saver's Credit," which encourages lower- and middle-income people to save for retirement. The credit is allowed for either 10%, 20%, or 50% of the first $2,000 ($4,000 for joint filers) you contribute to retirement accounts, depending on your filing status and income. The lower your income, the higher the percentage you can use to calculate the credit. For 2021 tax returns, single filers, married people filing a separate return, and qualified widow(er)s can claim a 50% credit if their AGI is $19,750 or less ($19,500 for 2020). They can claim a 20% credit if their AGI is from $19,751 to $21,500 ($19,501 to $21,250 for 2020), and the 10% credit is available if their AGI is from $21,501 to $33,000 ($21,251 to $32,500).

For married couples filing a joint return, the 50% credit is available if their AGI doesn't exceed $39,500 ($39,000 for 2020), the 20% credit is available if their AGI is from $39,501 to $43,000 ($39,001 to $42,500 for 2020), and the 10% credit is available if their AGI is from $43,001 to $66,000 ($42,501 to $65,000 for 2020).

The 50% credit can be claimed by head-of-household filers with an AGI of $29,625 or less ($29,250 for 2020), while they can claim the 20% credit with an AGI from $29,626 to $32,250 ($29,251 to $31,875 for 2020) and the 10% credit with an AGI from $32,251 to $49,500 ($31,876 to $48,750 for 2020).

To claim the credit, complete Form 8880 and send it to the IRS with your 1040 form.

For 2021 tax returns, standard mileage rate for business driving is 56¢ a mile – that's less than the 57.5¢ per mile for 2020. The rate for medical travel and military moves also dropped for the 2021 tax year from 17¢ to 16¢ a mile.

The mileage rate for charitable driving doesn't change from year-to-year. So, it stayed put at 14¢ a mile for 2021 returns.

Self-employed taxpayers can claim some tax breaks that other people can't. And some of those tax breaks are tweaked for 2021 tax returns. For instance, the sick or family leave credits self-employed people could claim on their 2020 tax return if they missed work for Covid-related reasons was extended for 2021 – but not for the full year. For 2021 returns, the credits are only available for qualified absences through September 30, 2021. In addition, the family leave credit can only be claimed for 50 days missed from January 1 to March 31, 2021, but it can be claimed for up to 60 days missed from April 1 to September 30, 2021. Self-employed people should use Form 7202 to calculate the sick and family leave credits they're entitled to claim on their 2021 1040 form.

The income threshold for limits on the 20% deduction for qualified business income were also adjusted for the 2021 tax year. The taxable income threshold is $329,800 for married couples filing a joint return, $164,925 for married people filing a separate return, and $164,900 for all others ($326,600 for joint filers and $163,300 for all others for 2020 returns). Use Form 8995 or Form 8995-A to figure your qualified business income deduction.

Self-employed people who are wining and dining clients can take advantage of another perk for both the 2021 and 2022 tax years. The deduction for business meals at a restaurant is increased from 50% to 100%. This deduction is claimed on Line 24b of Schedule C.

If a self-employed person had a Paycheck Protection Program (PPP) loan forgiven in 2021, the canceled debt is not taxable income and doesn't have to be reported on Form 1040. However, if you have tax-exempt income resulting from the discharge of a PPP loan last year, you must attach a statement to your 2021 tax return that includes certain information related to your PPP loan (see the instructions to Form 1040 for details). You should also write "RP2021-48" at the top of the statement.

Unfortunately, there are also a couple of negative changes that may increase the 2021 tax bill for some self-employed taxpayers. First, none of the self-employment taxes owed for the 2021 tax year can be deferred as they could on 2020 returns. In fact, half of any 2020 tax deferred had to be paid by the end of 2021, while the rest is due by the end of 2022. Second, the cap on deductible business losses is back after being suspended for the 2018 to 2020 tax years. For 2021 tax returns, the inflation-adjusted limit is $262,000 ($524,000 for married couples filing a joint return). Form 461 is used to calculate a self-employed taxpayer's limitation on business losses.

The $10,200 exemption for unemployment compensation in effect for the 2020 tax year is no more. Under the American Rescue Plan Act, which authorized the exemption for families with a federal AGI less than $150,000, the tax break was for one year only.

As a result, any unemployment compensation you received last year will be fully taxed on your 2021 tax return. Report the benefits on Line 7 of Schedule 1.

If you're paying for long-term care insurance, you might be able to deduct a portion of your premiums – and the deduction maximums, which are based on age, are higher for the 2021 tax year. Taxpayers age 71 or older can deduct up to $5,640 per person on their 2021 tax return ($5,430 for 2020). If you're 61 to 70 years old, you can deduct as much as $4,520 of your premiums ($4,350 for 2020). Anyone 51 to 60 years old can write-off up to $1,690 ($1,630 for 2020). For people 41 to 50 years of age, the max is $850 ($810 for 2020). And, finally, the maximum deduction is $450 if you're 40 or younger ($430 for 2020).

Long-term care insurance premiums are only deductible as medical expenses for most people, which means they must itemize deductions on Schedule A to claim the tax break. However, self-employed people can deduct their premiums on Line 17 of Schedule 1 without having to itemize.

Before the 2021 tax year, canceled or forgiven student loan debt was considered taxable income. However, from 2021 to 2025, most canceled student loan debt that was incurred for a post-secondary education is tax-free. Therefore, you shouldn't report qualified student loan debt that was canceled last year on Line 8c of Schedule 1.

The IRS has also told lenders and student loan servicer providers not to file Form 1099-C or submit payee statements for qualified student loan debt that's discharged, canceled, or otherwise forgiven through 2025. So, if you do receive a 1099-C form reporting discharged student loan debt that you believe is not taxable, contact the lender or loan service provider that issued the form and ask them to send a corrected form.

Americans working abroad may be able to exclude all or a portion of their foreign-earned income from taxable income on their U.S. tax return. For 2021 returns, the maximum exclusion amount is $1,100 higher than it was for the 2020 tax year – it jumped from $107,600 to $108,700.

In addition to the foreign earned income exclusion, taxpayers living abroad may also be able to claim an exclusion or deduction for their foreign housing. For the 2021 tax year, the maximum foreign housing exclusion is generally $15,218 ($15,064 for 2020), although it can be higher in certain high-cost areas.

Use Form 2555 to figure both your foreign earned income exclusion and foreign housing exclusion/deduction.

If you have federal student loans, you’ve probably seen e-mails reminding you that payments will restart after January 31. During the pandemic, the federal government suspended payments on federal student loans, with no interest accrual on loan balances.

If your budget can’t handle payments on your federal student loans, you may be eligible to lower them by enrolling in an income-driven repayment plan. There are several IDR plans available through the Department of Education, but all base your monthly payments on your earnings. If you’re already enrolled in an income-driven plan and your income has declined a lot, you can also ask your loan servicer to recertify your income and recalculate the payment.

You can apply for an IDR plan on the federal Student Aid website and select the plan you qualify for with the lowest monthly payment. You may pay more in interest because you’re extending the repayment period, but after 20 years of payments, you may be eligible to have the balance forgiven.

Another option is to re­finance your loans with a private lender. At below 3%, interest rates are enticing. But read the fine print on any offer you consider. Some plans offer low interest rates in the first year and hike them later. To avoid interest rate hikes down the road, look for a low fixed rate rather than a variable rate.

If you can’t afford to make payments, you may qualify for deferment or a forbearance. There are two types of deferments: economic hardship and unemployment deferment. You must be out of work to qualify for the unemployment deferment, but you may qualify for economic hardship if you receive federal or state public assistance, you’re a Peace Corps volunteer, you work full-time but earn less than or equal to the federal minimum wage, or you have income that’s less than or equal to 150% of the poverty line for your family size and state (about $26,000 a year for a two-person household).

The American Rescue Plan Act – the massive, $1.9 trillion economic stimulus package that President Biden signed on March 11 – sends a lot of money in many different directions. Almost every American will be impacted in one way or another. But when it comes to providing significant financial relief directly to Americans suffering the most through the COVID-19 pandemic, a lot of the American Rescue Plan's provisions really don't provide a lot of bang for the buck. In other words, they won't necessarily make an immediate and/or meaningful impact on the financial health of Americans who need help the most.

However, there are a handful of provisions in the new stimulus law that go above and beyond when it comes to putting (or keeping) substantial amounts of money in the pockets of millions of Americans who are struggling financially right now. These six American Rescue Plan provisions will provide the most financial relief for the greatest number of people. As outlined below, most of them involve some sort of tax break, a couple of them provide direct payments, but all of them provide (or could provide) financial assistance that is both deep and wide.

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$1,400 Stimulus Checks

The American Rescue Plan authorizes a third round of $1,400 stimulus checks for each eligible person ($2,800 for couples), plus an additional $1,400 for each dependent (regardless of the dependent's age). However, as with the first- and second-round payments, the third-round stimulus checks will be reduced – or eliminated – for people with an income above a certain amount.

If you filed your most recent tax return as a single filer, your third stimulus check will start to be "phased-out" (i.e., reduced) if your adjusted gross income (AGI) is $75,000 or more. That threshold jumps to $112,500 for head-of-household filers, and to $150,000 for married couples filing a joint return. Third-round stimulus checks will be completely phased out for single filers with an AGI above $80,000, head-of-household filers with an AGI over $120,000, and joint filers with an AGI exceeding $160,000. Use our Third Stimulus Check Calculator to estimate the amount of your stimulus payment.

Nonresident aliens and anyone who can be claimed as a dependent on someone else's tax return do not qualify for a stimulus check.

Eligible Americans who don't receive a third stimulus check, or don't receive the full amount, can claim the difference as a Recovery Rebate credit when they file their 2021 tax return next year.

For more information, see Your Third Stimulus Check: How Much? When? And Other FAQs.

Unemployment Benefits

Last March, the CARES Act was a life saver for people who lost their job because of the pandemic. Unemployment benefits were provided to self-employed people, independent contractors, and others out of work because of the coronavirus pandemic who don't otherwise qualify for benefits. Weekly unemployment checks were also increased by $600 through July 2020. Benefits were made available for a longer period of time, too.

In December, the COVID-Related Tax Relief Act extended benefits for people who usually don't qualify for unemployment. An extra payment was also authorized, but at $300 per week instead of $600 per week. The number of weeks of benefits someone may claim was increased from 39 to 50, too. However, these benefits were set to expire on March 14.

Under the American Rescue Plan, the enhanced unemployment benefits are extended to September 6, 2021. That includes the $300-per-week of additional payments beyond the normal unemployment compensation allowed. (Progressives wanted a minimum of $400 in extra weekly benefits, but the amount was pushed back down to $300 during negotiations in the Senate.)

There's also a new tax break for the unemployed. Thanks to the American Rescue Plan, the first $10,200 of unemployment benefits received in 2020 are exempt from tax for households with an adjusted gross income of $150,000 or less (although unemployment compensation received doesn't count toward the $150,000 cut off). The IRS is figuring out how people who already filed their 2020 tax return can claim this new tax exemption. They will probably be able to automatically issue a refund to affected taxpayers – so don't file an amended return at this point. (Also remember that state taxes may still apply to the full amount of unemployment benefits you received in 2020.)

For more information on these new developments, see American Workers Get Enhanced Unemployment Benefits as Biden Signs Stimulus Package.

Child and Dependent Care Tax Credit

Finding and affording childcare is one of the more difficult challenges workers are facing during the pandemic. To help address the childcare affordability crisis, the American Rescue Plan significantly expands the child and dependent care tax credit for one year.

For the 2020 tax year, if your children were younger than 13, you were eligible for a 20% to 35% non-refundable credit for up to $3,000 in child-care expenses for one child or $6,000 for two or more. The percentage decreased as income exceeded $15,000.

The American Rescue Plan makes a number of enhancements to the credit for the 2021 tax year. First of all, the new stimulus law makes the credit refundable for this year. That helps lower-income people the most, since they are more likely to lose all or some of the credit's worth when it's non-refundable. It also bumps the maximum credit percentage up from 35% to 50% for 2021.

More of your childcare expenses are subject to the credit, too. Instead of up to $3,000 in childcare expenses for one child and $6,000 for two or more, the American Rescue Plan allows the credit for up to $8,000 in expenses for one child and $16,000 for multiple children in 2021. When combined with the 50% maximum credit percentage, that puts the top credit for this tax year at $4,000 if you have just one child and $8,000 for more kids.

In addition, the full credit will be allowed for families making less than $125,000 a year (instead of $15,000 per year). After that, the credit starts to phase-out. However, all families making between $125,000 and $440,000 will receive at least a partial credit.

See Child Care Tax Credit Expanded for 2021 for more information.

Child Tax Credit

Another way to help families with children is to increase the child tax credit. For 2020 tax returns that you're filing this year, the credit is worth $2,000 per child age 16 or younger. It also begins to disappear as income rises above $400,000 on joint returns and above $200,000 on single and head-of-household returns. For some lower-income taxpayers, the credit is partially "refundable" (up to $1,400 per qualifying child) if they have earned income of at least $2,500. That means the IRS will issue you a refund check for the refundable amount if the credit is worth more than your income tax liability.

The American Rescue Plan provides a dramatic, one-year expansion of the child tax credit for the 2021 tax year. One of the biggest changes is to the amount of the credit. For 2021, it jumps from $2,000 to $3,000 for most children – but to $3,600 for children 5 years old and younger. The extra amount ($1,000 or $1,600) is reduced – potentially to zero – for families with higher incomes, though. For people filing their tax return as a single person, the extra amount starts to phase-out if their adjusted gross income is above $75,000. The phase-out begins at $112,500 for head-of-household filers and $150,000 for married couples filing a joint return. The credit amount is further reduced under the pre-existing $200,000/$400,000 phase-out rules.

Another important change is that the 2021 credit is fully refundable. That means refund checks triggered by this year's credit can be greater than $1,400. The $2,500-of-earned-income required is dropped for 2021, too.

Children age 17 also qualify for the 2021 credit. That will make a huge difference for parents with kids turning 17 this year – that's an additional $3,000 they weren't expecting.

Last but not least, half of the 2021 credit amount will be paid in advance through periodic payments issued between July and December of this year. We expect the periodic payments to be monthly, but that will be up to the IRS (they might make payments on a different schedule). You'll claim the other half of the credit on your 2021 tax return, which you'll file next year. Kiplinger's 2021 Child Tax Credit Calculator lets you know how much your credit will be for 2021 (including how much your advance payments will be if paid monthly).

For more information about the 2021 child tax credit, see Families Get a $3,000 Child Tax Credit for 2021.

Earned Income Tax Credit

The earned income tax credit (EITC) provides an incentive for people to work. And, for 2021, many more workers without qualifying children will be able to claim this valuable credit, including both younger and older Americans. The "childless EITC" amounts will be higher, too. Plus, there are other changes that will help the bottom line for lower-income Americans as well.

For the 2020 tax returns that people are filing now, the maximum EITC ranges from $538 to $6,660 depending on your income and how many children you have. But there are income limits for the credit. For example, if you have no children, your 2020 earned income and adjusted gross income (AGI) must each be less than $15,820 for singles and $21,710 for joint filers. If you have three or more children and are married, though, your 2020 earned income and AGI can be as high as $56,844. (Note: People can use their earned income from 2019 to determine the EITC for the 2020 tax year if it results in a higher credit amount.) If you don't have a qualifying child, you must be between 25 and 64 years old at the end of the tax year to claim the EITC.

The American Rescue Plan expands the 2021 EITC for childless workers in a few ways. First, the new law generally lowers the minimum age from 25 to 19 (except for certain full-time students). It also eliminates the maximum age limit (65), so older people without qualifying children can claim the 2021 credit, too. The maximum credit available for childless workers is also increased from $543 to $1,502 for the 2021 tax year. Expanded eligibility rules for former foster youth and homeless youth apply as well.

As with the 2020 EITC, you can use your 2019 earned income instead of your 2021 income if that will boost your credit amount. That will help many people who were laid off, furloughed, or otherwise suffer an income loss this year.

There are also a few permanent EITC changes in the American Rescue Plan. For instance, workers who otherwise wouldn't be able to claim the credit because their children can't satisfy the identification requirements can now claim the childless EITC. Certain married but separated couples can now claim the EITC on separate tax returns, too. The limit on a worker's investment income is also increased from $3,650 (for 2020) to $10,000 (adjusted for inflation after 2021).

Student Loan Debt

Our final power punching piece of the American Rescue Plan won't affect very many people right now. But it will save millions of Americans big bucks if it's eventually paired with another financial benefit on President Biden's wish list – student loan forgiveness.

Normally, the amount of any debt that is canceled, forgiven, or discharged for less than the full amount you owe is taxable and must be reported on your tax return. For example, if you have a $20,000 loan that is forgiven for some reason, you must report $20,000 of additional income on your tax return. There are several exceptions to this general rule, but in most cases forgiven student loans currently result in a higher tax bill.

The American Rescue Plan adds a temporary exception to the general rule for student loans. From 2021 to 2025, forgiven student loan debt is not subject to federal income tax. (To be clear, the American Rescue Plan doesn't forgive any student loan debt. At this time, the tax exemption only applies to debt cancelled under current student loan forgiveness programs.)

Right now, relatively few people have their student loans wiped away. But President Biden promised to forgive up to $10,000 of student loan debt per person when he was running for office. If he keeps that promise, the tax exemption could save millions of people thousands of dollars. If, for example, you're in the 22% tax bracket, having $10,000 of forgiven student loan debt taken off your tax return will save you $2,200. So, as you can see, the tax exemption for forgiven student loan debt has a lot of potential.

For more on this development, see Forgiven Student Loan Debt Will Be Tax-Free.

Relatively few Americans itemize deductions on their tax return. You can either claim the standard deduction or itemized deductions on your return — but not both. And, of course, you always want to pick the higher amount, which is the standard deduction for the vast majority of people.

That means most Americans can't claim some very well-known tax breaks. No deduction for medical expenses. Zero tax savings for mortgage interest payments. Nothing for state and local taxes, either. If you claim the standard deduction, you can't claim any of these popular write-offs.

But there are several other popular tax deductions that people taking the standard deduction can still claim on their tax return. Most of these so-called "above-the-line" deductions have no income limits, so anybody can claim them on Schedule 1 of their Form 1040. Plus, because these deductions will lower your adjusted gross income (AGI), you may be able to claim other tax breaks that have AGI-based income limits. (They're called "above-the-line" deductions because you record them on the 1040 form above the line showing your AGI.) So, if you're claiming the standard deduction and want to lower your tax bill, keep reading to see if you qualify for any of these common money-saving write-offs.

Contributing to a traditional individual retirement account (IRA) is a win-win move that lets you boost your retirement savings and trim your tax bill at the same time (assuming you have earned income). For 2021, the contribution limit is $6,000 ($7,000 if you're 50 or older) or your taxable compensation for the year, whichever is less. Plus, if you (and your spouse, if you're married) don't have a retirement plan at work, every dollar of that can be knocked off your taxable income. If you're covered by a retirement plan at the office (or your spouse is) then that deduction might be limited if your income exceeds certain levels. Most people have until April 18, 2022, to make deductible IRA contributions for the 2021 tax year (residents of Maine and Massachusetts have until April 19, and certain natural disaster victims have until May 16).

For 2022, the contribution limits remain the same as they were for 2021. However, the income limits for the deduction are slightly higher. You can make deductible IRA contributions for the 2022 tax year until April 18, 2023.

Are you funding a health savings account (HSA) in conjunction with a high-deductible health plan? If so, that's a smart move.

You get an above-the-line deduction for contributions to the HSA, assuming you made them with after-tax money. If you contribute pre-tax funds through payroll deduction on the job, there's no double-dipping — so no write off. In either case, you need to file a Form 8889 with your return.

The maximum contribution for 2021 was $7,200 for family coverage and $3,600 if you're an individual (they're $7,300 and $3,650, respectively, for 2022). If you're 55 or over at any time in the year, you can contribute (and deduct) another $1,000.

People who have an Archer medical savings account (MSA) can also deduct contributions to the account. The deduction is limited by a portion of the related high deductible health plan's (HDHP's) annual deductible, and your compensation from the employer maintaining the HDHP.

Note that contributions can't be made to an Archer MSA for you after 2007 unless:

• You were an active Archer MSA participant before 2008; or
• You became an active Archer MSA participant after 2007 because of coverage under an employer's HDHP.

Use Form 8853 to calculate the Archer MSA deduction.

If you work for yourself, you have to pay both the employer and the employee share of Social Security and Medicare taxes — a whopping 15.3% of net self-employment income. But at least you get to write off half of what you pay as an adjustment to income. Use Schedule SE to calculate this deduction.

You can also deduct your contributions to a self-directed retirement plan such as a SEP, SIMPLE, or qualified plan. Special rules for computing the maximum deduction apply to self-employed people who contribute to their own SEP. If your SEP contributions exceed the maximum deduction amount, you can carry over and deduct the difference in later years.

Also deductible as an adjustment to income: Health insurance costs for the self-employed (and their families) — including Medicare premiums and supplemental Medicare (Medigap), up to your business' net income. You can't claim this deduction if you're eligible to be covered under a health plan subsidized either by your employer (if you have a job as well as your business) or your spouse's employer (if he or she has a job that offers family medical coverage).

(Note that self-employed people operating as a sole proprietor may also be able to claim the 20% deduction for qualified business income. It's not considered an "above-the-line" deduction, since it's reported on the 1040 form after AGI is calculated. However, it can put a significant dent in your tax bill if you can satisfy all the requirements. But it won't help you qualify for other tax breaks by lowering your AGI.)

Up to $2,500 in student loan interest (for you, your spouse or a dependent) can be deducted on your 2021 tax return if your modified AGI is less than $70,000 if you're single or $140,000 if you're married and filing a joint return. The deduction is phased out above those levels, disappearing completely if you earn more than $85,000 if single or $170,000 if filing a joint return.

You can't claim this deduction if you're married, and you and your spouse are filing separate tax returns. You're also disqualified if someone else (e.g., a parent) claims you as a dependent on their tax return.

The loan must have been used to pay qualified higher education expenses, such as tuition, fees, room and board, books and supplies, and other related expenses. The expenses must also be for education in a degree, certificate, or similar program at a college, university, or qualified vocational school.

You may be able to deduct alimony you pay to a former spouse as long as your divorce agreement was in place before the end of 2018 and the monetary payments are spelled out in the agreement. The deduction disappears if the agreement is changed after 2018 to exclude the alimony from your former spouse's income.

You must also report your ex-spouse's Social Security number, so the IRS can make sure he or she reports the same amount as taxable income. (Child support, however, is not deductible.)

The 2017 tax reform law did away with almost all employee deductions that were taken on Schedule A by itemizers. But in certain lines of work, under certain conditions, you can still write off some of your costs with an "above-the-line" tax deduction. Here are those adjustments to income, which are now found on Schedule 1 (Form 1040):

• You're a schoolteacher and you buy supplies for your classroom. Educators can write off up to $250 each year of classroom expenses if they teach kindergarten through 12th grade and put in at least 900 hours a year on the job. Expenses paid or incurred in 2021 for personal protective equipment, disinfectant, and other supplies used to prevent the spread of COVID-19 are included. You don't have to be a teacher to claim this break. Aides, counselors and principals may claim it if they have the receipts to back it up. But parents who home-school their children are out of luck.
• You're in the National Guard or military reserves and you travel to drills. You must travel more than 100 miles from home and be away from home overnight. If you qualify, you can deduct the cost of lodging and meals (following the federal per diem schedule) plus an allowance for driving your own car. For 2021 travel, the rate is 56 cents per mile, plus what you paid for parking, fees and tolls. (For 2022, it's 58.5 cents for each mile.)
• You're a performing artist making less than $16,000 (sorry Beyoncé, not for you). The IRS will expect you to show that at least two employers paid you $200 each for your services and that the expenses you intend to deduct are more than 10% of what you made from performing. Note that the IRS specifies that you need to be an employee receiving wage income.
• You're disabled, have a job, and incur expenses that allow you to work. Here's an example from the IRS: You're deaf and use a sign-language interpreter during meetings while you're at work — that's a deductible expense.
• You're a "fee-basis" public official and want to write off job expenses. This does not mean people employed by any government. Rather, it's for individuals who perform a public function and are paid directly by the people they serve (e.g., a justice of the peace). If you meet that definition, you can deduct your work-related expenses.

Unless you're an educator deducting classroom expenses, file Form 2106 with your tax return if you're claiming one of these deductions.

Did you break into a certificate of deposit (CD) early and get slapped by a bank penalty? Bank penalties can vary widely, but one thing is constant: You can deduct the penalty, no matter how lenient or how stiff, as an adjustment to income.

A Form 1099-INT or Form 1099-OID from the bank will show the amount of any penalty you paid.

(Note that the additional 10% tax on early distributions from qualified retirement plans doesn't qualify as a deductible penalty for withdrawal of savings.)

The 2017 tax reform new tax law killed the moving expense deduction, but with one significant exception: If you're an active member of the U.S. Armed Forces, the cost of any move associated with a permanent change of station is still deductible if the move was due to a military order. This includes a move from your home to your first post of active duty, a move from one permanent post of duty to another, and a move from your last post of duty to your home or to a nearer point in the United States.

You can write-off the unreimbursed costs of getting yourself and your household goods to the new location. If you drove your own car for a move in 2021, deduct 16 cents per mile plus what you paid for parking and tolls (18 cents per mile for 2022). (Use Form 3903 to tally your moving deductions.)

While technically not an "above-the-line" deduction because it's reported on Form 1040 after your AGI is set, people who take the standard deduction on their 2021 tax return can deduct up to $300 of cash donations made to charity last year (up to $600 for joint filers). Donations to donor advised funds and certain organizations that support charities aren't deductible. Contributions carried forward from prior years and most cash contributions to charitable remainder trusts are excluded, too.

Since this deduction is recorded on your tax return after your AGI is calculated, it won't lower your AGI. So, it won't help you qualify for other tax breaks. Nevertheless, it's a nice little tax break that millions of Americans can claim.

Unfortunately, though, the deduction expired at the end of 2021. So, while you can claim it on your 2021 tax return that's due this year, you won't be able to claim it on the tax return you'll file next year.

There are several other "above-the-line" deductions that aren't very common, but nonetheless are allowed and can save you money if you qualify. Here's a quick rundown of the "other" deductions that a relatively few number of people can take on Schedule 1 to lower their AGI:

• Attorney fees and court costs for lawsuits involving certain unlawful discrimination claims (limited to the extent of gross income from the lawsuit) or paid in connection with a whistleblower award from the IRS (limited to the award includible in gross income);
• Contributions to Section 501(c)(18)(D) pension plans;
• Contributions by certain chaplains to Section 403(b) retirement plans;
• Expenses reported to you as a beneficiary on the final return of the estate or trust if reported as Section 67(e) expenses on Schedule K-1 (Form 1041), box 11, code A;
• Foreign housing expenses (file Form 2555);
• Jury duty pay if you gave the pay to an employer because your salary was paid while you served on the jury;
• Olympic and Paralympic medals and U.S. Olympic Committee prize money (nontaxable amount of the value);
• Reforestation amortization and expenses;
• Rental-related expenses if you rent personal property for profit and you aren't in the business of renting the property (only expenses related to taxable income); and
• Supplemental unemployment benefit repayments.

At the request of President Biden, the Department of Education is extending the pause on federal student loan payments and collections, and keeping the interest rate on loans at 0%, through the end of September 2021. The new president made the request hours after becoming the 46th President of the United States. This was something he pledged to do on "day one," and he followed through on that promise.

The CARES Act, which was enacted in March 2020, first suspended student loan payments until September 30, 2020, without penalty or interest for all federally owned loans. This covered over 95% of student loan borrowers. Collection activities against borrowers who were already behind on payments was also suspended.

At the time, most people thought the coronavirus crisis would be behind us by September 30. However, as the pandemic dragged on and got worse, the CARES Act student loan relief provisions were extended multiple times. The latest extension paused student loan payments until January 31, 2021. But with that date approaching, people with student loan debt were getting worried that payment requirements and interest would start up again while the pandemic is still raging. President Biden's action puts those fears to rest – at least until the end of September.

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Student Loan Forgiveness?

The next big question for the Biden administration is whether to push for – or how hard to push for – student loan forgiveness. Although it wasn't included in President Biden's $1.9 trillion "American Rescue Plan" economic package, the new president supports a plan to forgive $10,000 or more of federally-backed student loan debt for each American (private student loan debt probably won't be eligible for forgiveness). Some progressives want more student loan debt forgiveness – up to $50,000 per person. However, we don't expect Biden to endorse anything near that level. He promised to release a second economic plan in February, and student loan forgiveness could be in that package.

President Biden has also said that forgiven student loan debt should not be subject to tax. Normally, the amount of any debt that is canceled, forgiven or discharged for less than the full amount you owe is taxable and must be reported on your tax return. There are a number of exceptions to this general rule, but in most cases forgiven student loans currently result in a higher tax bill. Expect any Biden plan to include an additional exception for any student loan debt he is able to cancel.

Other Possible Student Loan Relief Measures

As a candidate running for president, Biden also put out a plan that would lower or eliminate student loan debt by:

• Limiting student loan payments to 5% of a person's discretionary income (income minus taxes and essential spending like housing and food) over $25,000;
• Forgiving student loan debt for people who made payments for 20 years;
• Granting $10,000 of undergraduate or graduate student loan relief for every year of national or community service, up to five years; and
• Allowing the discharge of private student loans in bankruptcy.

President Biden's pre-election plan would also provide two years of community college or other high-quality training program without debt. The federal government would pay for 75% of the cost and states would cover the rest (the federal government would cover up to 95% of the cost for Indian Tribes operating community colleges serving low-income students). Biden also called for making public colleges and universities tuition-free for all families with incomes below $125,000.

In addition to student loan forgiveness, some of these ideas could make it into the second economic growth plan that the president will release in February.

Student Loans Paid by Employers

And there's some additional student loan relief that's already in the books. The CARES Act created a temporary income tax exclusion for up to $5,250 of student loan debt paid by your employer in 2020. However, the Taxpayer Certainty and Disaster Tax Relief Act, which was enacted in December, extended that tax break through 2025. The $5,250 cap applies to both student loan repayment benefits and other educational assistance (e.g., tuition, fees, books, etc.) offered by your employer.

Anyone who graduates with a massive pile of student debt has some tough choices to make. Refinance to a seemingly cheaper private loan? Keep your federal student loan and pay it off in the standard way? Take advantage of forbearance to put payments off? A look at three new doctors, each facing $250,000 in debt, highlights some shocking differences between each choice.

As their cases illustrate, oftentimes the best option isn’t the most obvious, and one repayment method could save almost $200,000 over the life of the loan.

Sarah Was Tempted to Go Private, But Then …

In my previous article about private student loans, I stressed that students should consider taking out federal student loans before taking out any private loans. Federal student loans have protections and benefits that private student loans most likely don’t. Federal loans can be discharged if the borrower dies or becomes totally and permanently disabled. Also, borrowers may have access to income-driven repayment (IDR) plans and loan forgiveness programs.

Sarah was my example in that article. She is a physician making $250,000 a year and has a federal loan balance of $250,000 with a 6% interest rate and monthly payments of $2,776 over 10 years. Sarah learned she could lower her payment to $2,413 a month by privately refinancing her federal loans — potentially saving her $43,000 over 10 years. But are there any benefits for Sarah to keep her loans in the federal system?

What if she were thinking about starting a family and possibly working part time in a few years? If she refinanced to a private loan, her payments would be locked in at $2,413 a month even as her income temporarily fell while working part time.

If she kept her loans under the federal system, Sarah would have some flexibility over the amount she must pay every month. First, she can pay more than her minimum monthly amount in any repayment plan if she wants to pay her loans off faster. She may also have the option to enroll in an income-driven repayment plan and make much lower payments when and if her income decreases.

Under income-driven repayment (IDR) plans, the borrower’s minimum monthly payment is calculated based on a portion of their income. The borrower may not be required to pay back the full amount of the loan. That is unlike the federal standard repayment plan or private loans, which require the borrower to pay the principal and the interest of the loan in full over a specified term. For example, if Sarah got married, had a child, and her income temporarily decreased to $150,000, she may qualify for one of the IDR plans, such as the Pay As You Earn (PAYE) repayment plan. Then her monthly minimum payment could be reduced to $978.

So, for Sarah, the possibility of $43,000 in savings from a private loan might not be as good as it sounded at first glance. The federal loan’s flexibility for changing life circumstances may be worth it for her.

Jimmy and Tom Are Leaning Toward Forbearance (But That Would be a Mistake)

To see how income-driven repayment (IDR) plans and forgiveness programs work together, let’s look at another example. Jimmy is a recent medical school graduate making $60,000 a year in a residency program with $250,000 of federal student loans. He feels that it would be difficult to pay $2,776 every month in the 10-year standard plan or $2,413 a month after refinancing. He is wondering if he should apply for forbearance to suspend payments until he can afford the high payments as an attending physician, just as one of his classmates from medical school, Tom, decided to do after graduation.

My answer to that question is no. Instead of applying for forbearance, Jimmy should consider enrolling in an IDR plan (and so should Tom). For example, in the Revised Pay As You Earn (REPAYE) repayment plan, he would be required to make monthly payments based on 10% of his income for a maximum of 25 years, and the remaining balance would be forgiven and taxed as income. If Jimmy’s loans are eligible for REPAYE, his monthly payment would start at $337, which would free up $2,439 a month compared to the standard plan!

But why should Jimmy choose to make payments when he has the option to suspend payments using Medical Residency Forbearance? It becomes apparent when you consider how forgiveness programs work. To see how much they could potentially save with one of the forgiveness programs, let’s say that both Jimmy and Tom will be working for a not-for-profit or a government employer while they repay their loans, making them candidates for Public Service Loan Forgiveness (PSLF).

Under the PSLF program, Jimmy would only make 120 payments in an IDR plan (REPAYE in his case) based on his income and get the remaining balance forgiven tax-free, which means that he should try to repay as little as possible. Assuming that he gets his monthly payments calculated based on his resident salary of $60,000 for five years before he starts making $250,000, he can be done with his loan payments after 10 years of payments totaling about $141,000!

Compared to the standard 10-year repayment plan — in which he pays a total of $333,061, including principal and interest — he would save over $190,000 by pursuing Public Service Loan Forgiveness.

Making Low IDR Payments May Be Better Than No Payment

Because Jimmy started his PSLF-qualifying payments based on his lower salary as a resident, he gets his loans forgiven earlier and pays less in total compared to Tom, who chose forbearance and waited to enroll in an IDR plan and pursue PSLF until after residency. Assuming that Tom had the same loans and circumstances as Jimmy but made all of his PSLF-qualifying payments based on a $250,000 salary, Tom would pay a total of around $263,000, which is over $121,000 more than what Jimmy paid in total.

As you can see, it is important to explore your options if you have student loans (especially federal student loans) and have a strategy that aligns with your life and career plans. It can save you tens or hundreds of thousands of dollars.

Perhaps more importantly, knowing that you have a plan and are in control of your debt can help you prepare for life events and give you peace of mind. However, it is a complicated process full of traps. If you are not sure what to do with your student loans, contact a professional who has specialized knowledge of student loans!

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

A lot of college students (and their parents) were mad as hell back in March when they found out they weren't getting a $1,200 stimulus check. But now there's a second stimulus check of up to $600 on the way to most Americans. But will college students get a check this time around?

The short answer: It depends.

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Dependent College Students Won't Get a Second Stimulus Check

For both the first round of payments authorized by the CARES Act in March and the second round of stimulus checks included in the COVID-Related Tax Relief Act, anyone who could be claimed as a dependent on someone else's 2019 tax return (regardless of whether they're actually claimed as a dependent) isn't eligible for the cash.

Unfortunately, that hits most college students hard. College students who were 23 or younger at the end of 2019 and who didn't pay at least half of their own expenses that year could be claimed as a dependent on their parents' 2019 tax return. So, those students are out of luck when it comes to stimulus checks.

Independent and Older College Students Can Get Stimulus Money

But what about self-supporting college students? If a student paid at least 50% of their own living expenses in 2019, they generally couldn't be claimed as a dependent on their parents' 2019 tax return. Likewise, college students who were 24 years of age or older last year typically couldn't be claimed as a dependent on their parents' latest return. So, despite what they may have heard about college students in general not being eligible for a second stimulus check, self-supporting and older students can receive stimulus money.

Under the COVID-Related Tax Relief Act, these college students are eligible for a second stimulus check of up to $600 ($1,200 in total for married couples). Plus, if they have dependent children, they can get an extra $600 for each qualifying child. That kind of money can buy a lot of textbooks!

Second stimulus checks will be phased-out for people with higher incomes, though. So, the amounts mentioned above can be lower — or even knocked down to zero — for wealthier Americans. Payments will gradually be reduced to zero if for single people with a 2019 adjusted gross income above $75,000. Married couples filing a joint return will start to see their second stimulus check shrink if their AGI exceeded $150,000. (Use our Second Stimulus Check Calculator to see if your payment will be reduced.)

How Eligible College Students Will Receive Their Money

The IRS must send all second stimulus checks (or direct deposit payments) by January 15, 2021, according to the COVID-Related Tax Relief Act. The tax agency will look at your 2019 federal income tax return to get the information it needs to calculate and process your payment.

The problem is that many self-supporting and older college students don't file a tax return, because their income isn't high enough to require one. (For 2019 returns, single people with income below $12,200 and married couples with income under $24,400 weren't required to file.) Eligible college students who didn't file a 2019 tax return might not get a second stimulus check, since the IRS won't have the information it requires to cut a check.

But don't worry too much. Even if you don't get a check now, you won't lose out on the money—you'll just have to wait a little longer for it. If the IRS doesn't send you a second stimulus check by January 15, 2021, you can claim the amount you're owed as a refund or reduction of the tax you owe when you file a 2020 tax return. (You'll have to file your return, or request an extension, by April 15, 2021.)

Recent Grads Could Get $600 Next Year

There's also good news for college students who don't receive a second stimulus check because they were claimed as a dependent on their parents' 2019 tax return, but who can't be claimed as a dependent on their parents' 2020 tax return. (Recent college graduates could fall into this category.) While they won't receive a second stimulus check now, they may still be eligible for an equivalent tax credit when they file their own 2020 tax return next year. So, while they won't get paid in 2020, they'll still benefit from the stimulus check program in 2021.

Q. I’m hearing proposals for the forgiveness of all student debt—an estimated $1.5 trillion—to stimulate retail spending, marriage, homeownership and entrepreneurship among the 44 million people (many of them millennials) now burdened with having to make college-loan payments. What do you think of this idea?

A. Not much. There are many things wrong with how we’ve been financing higher education in recent decades—and there are much better ways to do it—but the wholesale transfer of all this debt to the U.S. taxpayer, without regard for a borrower’s ability to repay, would be morally wrong. It would be an affront to the majority of borrowers who either have already paid off their loans or are managing them okay. And it would disproportionately benefit higher-earning borrowers.

Yes, many students over-borrowed to attend more-expensive colleges than they needed to, or to major in fields without good employment prospects—in each case, their own choices. Yes, many colleges took advantage of excessively easy student credit to jack up their tuitions and expand operating budgets.

And, yes, many for-profit colleges (some later closed by regulators) grew fat on government-guaranteed loans they arranged for unqualified applicants who got an inferior education and often didn’t graduate. This last group of borrowers can and should get their debts discharged through the classic borrower defense that they were misled and defrauded by the school.

But canceling all student debt isn’t the answer. My favorite reform would be making the repayment of all student loans pro­portional to the borrower’s future earnings. Monthly loan payments would be capped at, say, 10% of earnings and deducted from one’s paycheck, like income taxes and Social Security. After 25 years, the unpaid balance would be forgiven.

We should also overhaul the many public-service loan-forgiveness programs now in place. These are supposed to allow borrowers who choose certain nonprofit and/or governmental occupations, such as the military, teaching and social work, to discharge their debts, typically after 10 years of timely loan re­payment. But the rules are bizarrely complex and the outcomes often uncertain.