Individuals may consider using these retirement plan funds to make student loan repayments until the borrower’s financial condition improves

Aida Gadelkarim

April 5, 2022

Individuals may consider using these retirement plan funds to make student loan repayments <a href="https://badcreditloanshelp.net/payday-loans-wv/">payday loans in West Virginia</a> until the borrower’s financial condition improves

As of this writing, the CARES Act’s exclusion from income for employer – made student loan repayments is set to expire after 2020

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For plan years beginning after 2018, account earnings and employer contributions may be included in hardship distributions. 56 One disadvantage of taking a distribution from a qualified savings plan is that the withdrawal reduces the amount in the account that is growing tax deferred. 57

Section 2202 of the CARES Act provides expanded distribution options and favorable tax treatment for up to $100,000 of COVID – 19- related distributions from qualified retirement plans to qualified individuals. To qualify for the special treatment, the individual, his or her spouse, or a dependent of the individual must have been diagnosed with COVID – 19 or experienced certain financial or work – related hardships due to COVID – 19 . The distribution can be included in the employee’s gross income over a three – year period and is not subject to either 20% withholding or a 10% penalty. The CARES Act also temporarily increased the limit on nontaxable loans from qualified employer retirement plans to individuals who meet the same COVID – 19-r elated criteria discussed above. Further discussion of these changes is beyond the scope of this article.

1. With interest rates near record lows, it is a good time to refinance private student loans. Not everyone will be able to refinance. Individuals with good credit scores and sufficient income are most likely to be approved.

2. While federal student loans are in forbearance due to the pandemic and no payments are required, individuals who are able to make debt payments should consider doing so. Any payments made will go straight to the principal and save interest. 58

3panies can assist employees in paying student loans and in saving for retirement. Abbott’s Freedom 2 Save program is an example of how to amend an existing qualified retirement plan to provide a valuable tax – favored benefit to employees with student debt.

Under the CARES Act’s exclusion, any amount paid by an employer toward student loan interest is not eligible for a student loan interest deduction by the employee

4. The exclusion is subject to a $5,250 limit and is not phased out. The student loan interest deduction is phased out based upon income. Individuals may be able to structure these benefits for the optimum tax savings.

5. Employers may be able to work around this restriction by targeting their payments to apply to just principal, thereby allowing the borrower’s payment to cover the interest and qualify for the student loan interest deduction.

6. Public service loan forgiveness programs provide that amounts discharged are not considered income. Individuals must be careful to comply with the specific program requirements. The Education Department’s Federal Student Aid Office’s Public Service Loan Forgiveness webpage provides guidance and helpful tools, available at .

7. Individuals whose institutions of higher education ceased operations and folded (or misled borrowers) should be aware of the safe harbor relief provided by Rev. Proc. 2020 – 11 for debt discharged under the Closed School discharge process or the Defense to Repayment discharge process. Individuals to whom Rev. Proc. 2020 – 11 applies may claim a credit or refund for an overpayment of tax for the years for which the period of limitation has not expired. 59

8. Income – share agreements ultimately benefit students who are unable to find a job with a high enough salary to repay a loan. However, students who end up earning high salaries may pay more than they would have with a student loan. Individuals and their advisers should investigate the costs of ISA programs carefully, as well as the tax effects.