Financial

Managing student loan debt has become one of the biggest financial planning challenges for many. In the U.S., student loan debt rose to $1.51 trillion last year, according to the Federal Reserve Bank of New York. So, if you or family members are dealing with the burden of budgeting every month for a student loan, you’re not alone.

Fortunately, numerous payment and planning solutions are available to help student borrowers. In addition, this year, the Coronavirus Aid, Relief, and Economic Security (CARES) Act has provided substantial assistance for individuals holding federal student loans. It’s important to remember, though, that the CARES Act’s relief provisions are set to expire on December 31, 2020.

If you’re looking for a long-term solution for managing student debt, you’ll find a variety of considerations and options below to keep in mind.

Student Loan Relief Under the CARES Act

Interest and required payments on federal student loans owned by the U.S. Department of Education are currently suspended, without penalty, through December 31, 2020. On January 1, 2021, interest will start accruing again and borrowers will be responsible for making monthly payments. Auto-debit payments will automatically resume, if this feature was set up prior to payment suspension. If the required payments aren’t made, federal loan servicers may report delinquency for the period beginning January 1.

Income-driven repayment plans. The Department of Education offers several income-driven repayment plans that help you set an affordable monthly payment based on your income and family size. If you’re already on a payment plan but your financial situation has changed, you can update your information to see if you qualify for a new, lower payment amount. The plans are:

• Income-based repayment (IBR) plan. You’ll pay 10 percent of your discretionary income if you’re a new borroweron or after July 1, 2014, and 15 percent if you’re not a new borrower. You’ll never pay more than on the standard plan.
• Income-contingent repayment (ICR) plan. You’ll pay the lesser of 20 percent of your discretionary income or the amount of a fixed payment over 12 years, adjusted according to your income.
• Pay as you earn (PAYE) and revised pay as you earn (REPAYE) plans. Generally, undergraduate borrowers who qualify will pay 10 percent of their discretionary income toward their student loans each month, and after 20 years of on-time payments, the remaining balance may be forgiven (payments may be forgiven after 10 years for those in certain public interest jobs and after 25 years for graduate school borrowers).

Deferment, Forbearance, and Cancellation

Although repaying your student loan may become difficult, ignoring your payments is the worst thing you can do. Instead, talk to your lender about possible solutions. Depending on your situation, you may be able to apply for a deferment, forbearance, or cancellation of your loan.

These programs are not automatic. You’ll need to fill out the appropriate application from your lender, attach documentation, and follow up on the application process. Also, it’s important to keep in mind that interest accrues for most borrowers on a general forbearance (unlike forbearance under the CARES Act).

• With a deferment, the lender grants a temporary payment reprieve, based on a specific condition, such as unemployment, temporary disability, military service, or full-time enrollment in graduate school. For federal loans, the government pays the interest that accrues during the deferment period, so the loan balance doesn’t increase. A deferment usually lasts six months, and the total number of deferments that can be taken over the life of the loan is limited.
• With a forbearance, the lender has discretion to grant permission to reduce or cease loan payments for a certain period of time, though interest will continue to accrue—even on federal loans. Economic hardship is a common reason for forbearance. A forbearance usually lasts six months, and the total number permitted over the loan’s term is limited.
• With a cancellation, a loan is permanently erased, but qualifying isn’t easy. Cancellations may be allowed due to the death or permanent total disability of the borrower, or if the borrower teaches in certain geographic areas. Typically, student loans can’t be discharged in bankruptcy.

Loan Consolidation

With loan consolidation, you combine several student loans into one loan, sometimes at a lower interest rate, allowing you to write just one check each month. You need to apply, and different lenders have different rules about which loans qualify for consolidation. Generally, you can choose an extended repayment and/or graduated repayment plan in addition to a standard repayment plan.

Student Loan Forgiveness Programs

In addition to the repayment assistance programs described above, the federal government offers student loan forgiveness to qualified borrowers. Although the benefits can be substantial, you should carefully consider the potential long-term costs associated with changing you career path. Available programs include:

• Public Service Loan Forgiveness (PSLF). The PSLF program forgives the remaining balance on direct loansafter the borrower has made 120 qualifying payments (10 years’ worth) while working full-time for a qualifying employer. A loan simulator tool that can help you assess eligibility is available at studentaid.gov/loan-simulator.
• Teacher Loan Forgiveness (TLF). Borrowers must teach full-time for five complete and consecutive academic years in a low-income school or educational service agency and meet other qualifications. The TLF program offers forgiveness of up to $17,500 on direct subsidized and unsubsidized loansand your subsidized and unsubsidized federal Stafford loans.

Refinancing Option

Refinancing may be a good option for lowering your monthly loan payments. But, to do so, you must already have a private loan or be willing to convert your federal loan to a private loan—and this could mean losing some benefits. A federal loan cannot be refinanced as a new federal loan with a lower interest rate. Be sure you understand the cons and pros of refinancing:

Cons:

• Borrowers lose the option for student loan forgiveness.
• Private student loans don’t offer income-driven repayment plans.
• Deferments on private student loans are not as generous as on federal loans.
• Variable interest rates could increase.
• There’s no grace period for starting payments after leaving school.

Pros:

• Interest rates can be reduced, creating substantial savings.
• Less interest means loans can be paid off faster.
• Loan management is easier if multiple loans are combined.
• Monthly payments can be reduced.
• A cosigner can be released from the new loan.

Need Additional Information?

For assistance in evaluating your options, please a member of the Allen Financial team. We’ll talk through these strategies for managing student debt and explore other planning solutions that can help you get on track to financial security.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

By Sarah Ruef-Lindquist, JD, CTFA

Potential for higher federal income taxes is anticipated by experts due to 1) a growing national debt increased by trillion-dollar stimulus spending and 2) possible election results that mean a change in administrations and congressional profile. Increasing taxes levied on high-income earners is nothing new, and reasonably anticipated.

Income Taxes

Currently, the top federal rate is 37% (taxpayers with over half a million dollars a year) and could increase to 39.6%. It is also possible that those who do still itemize deductions will be limited to a cap of 28%.

Capital Gains

Long-term capital gains taxes are currently limited to 23.8% (combined highest rate of 20% plus 3.8% net investment income tax) for taxable incomes with over $441,450, but it is possible that rate could go to 39.6%, same as the top income tax rate.

These issues may impact the planning of high-income earners between the date of the election and year-end 2020. If you are at an income level that would be affected by these changes, good for you. Still consider talking with your financial and tax advisors soon about strategies that could be available to ameliorate the impact.

Tax on inheritances

For many years, when people have inherited long-term appreciated stock, they were able to avoid the capital gain that had accrued prior to inheriting it. The “step-up” in basis provisions made it possible for heirs to reap the benefit of the full value of appreciated securities because their tax basis would be the date of death value of the stock. If they sold it, their capital gain would be limited to any accrued since they inherited the stock. Often this results in significant tax savings.

However, it is possible that this “step-up” provision will be eliminated with new tax legislation. It is important, therefor, for those including such assets in their estate plans to consider what options they might have to preserve as much of the value of those assets for heirs as possible.

Considered “the father of value investing,” Benjamin Graham wrote The Intelligent Investor more than 70 years ago, and the principles in his book are still highly respected today. Investing legend Warren Buffet, who studied under Graham, called The Intelligent Investor “by far the best book about investing ever written.”

Despite what you might think, being an intelligent investor is not about your IQ. Rather, it’s learning how to harness emotions and think for yourself. Let’s explore how to do just that, by leaning on Graham’s advice.

What It Means to Be an Intelligent Investor

“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”

The above quote reflects Graham’s definition of defensive investing, which he originally described in his first book, Security Analysis. Here, his focus is on distinguishing the best practices that separate a defensive investor from a speculator. Specifically, defensive investors reach their long-term financial goals by being sustainably and reliably right. In other words, you need to find a balance between controlling risk and maximizing gains, as well as curbing the self-defeating behavior that can reduce portfolio returns.

Consider what can happen when investors blindly follow the crowd. The January effect, for example, occurs when investors try to follow a mechanical formula for higher stock performance at the beginning of the year. But when investors pile in—assuming that stock prices will follow a traditional trajectory of going up in January after dipping in December—they can create a crowded trade and ultimately lead to underperformance.

Stay the Course and Follow Core Principles

“With every new wave of optimism or pessimism, we are ready to abandon history and time-tested principles, but we cling tenaciously and unquestioningly to our prejudices.”

As market volatility resulting from the coronavirus pandemic demonstrated, investors tend to let their emotions sway their decisions. In volatile markets, some are tempted to abandon the sound investing principles that have stood the test of time. How can you help control those knee-jerk tendencies? Graham recommends the following for a defensive investing strategy:

• Start with a 50/50 portfolio design composed of high-quality stocks and bonds. (Graham defines high quality as stocks and bonds of important companies with long records of profitable operations and in strong financial condition.)
• Hold up to a maximum of 75 percent in stocks as the market drops or a minimum of 25 percent in stocks as the market rises. (Buy low and sell high—otherwise known as the rule of opposites.)

Under Graham’s rationale, the intelligent investor may actually welcome a bear market as an opportunity to buy low. Other time-tested strategies include buying funds over individual stocks and dollar-cost-averaging into the market.

Determine a Criteria for Investment

“It is our argument that a sufficiently low price can turn a security of mediocre quality into a sound investment opportunity . . . For, if the price is low enough to create a substantial margin of safety, the security thereby meets our criterion of investment.”

The margin of safety is dependent on price paid, and it is defined as the favorable difference between price, on one hand, and the indicated or appraised value, on the other. To determine the appraised (also known as intrinsic) value of a stock, Graham recommends finding companies that meet the following margin of safety criteria:

• Market cap of more than $2 billion; no small-caps except through a small-cap index fund
• Strong financial condition; current assets are 2 times liabilities; long-term debt less than net current assets
• Continued dividends for at least the past 20 years
• No earnings deficit in the past 10 years
• 10-year growth of at least one-third in per-share earnings
• Stock price not more than 1.5 times net asset value
• Stock price not more than 15 times average earnings of past 3 years

The overriding philosophy behind these requirements? There really is no such thing as a good or bad stock. Instead, think of stocks as either cheap or expensive.

Adopting the Intelligent Investor Mind-Set

“There will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham . . . will continue to prosper.” — Warren Buffett, appendix of The Intelligent Investor

Investing can be difficult. It involves uncertainty and risk, two things most of us aren’t naturally comfortable with. But with some guidance supplied by the rules and best practices advocated by Graham, and (of course) your financial advisor, you can become an intelligent investor and achieve your investment goals.

This material has been provided for general informational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Although 2020 has been a year of unexpected changes, one routine has remained consistent: the fourth quarter means it’s time to begin organizing your finances for the new year. To help you get started, here’s a checklist of key topics to think about, including new tax and retirement considerations related to the COVID-19 pandemic.

1) Max out retirement contributions.

Are you taking full advantage of your employer’s match to your workplace retirement account? If not, it’s a great time to consider increasing your contribution. If you’re already maxing out your match or your employer doesn’t offer one, boosting your contribution to an IRA could still offer tax advantages. Keep in mind that the SECURE Act repealed the maximum age for contributions to a traditional IRA, effective January 1, 2020. As long as you’ve earned income in 2020, you can contribute to a traditional IRA after age 70½—and, depending on your modified adjusted gross income (MAGI), you may be able to deduct the contribution.

2) Refocus on your goals.

Did you set savings goals for 2020? Evaluate how you did and set realistic goals for next year. If you’re off track, we’d be happy to help you develop a financial plan.

3) Spend flexible spending account (FSA) dollars.

If you have an FSA, note that the Internal Revenue Service (IRS) relaxed certain “use or lose” rules this year because of the pandemic. Employers can modify plans through the end of this year to allow employees to “spend down” unused FSA funds on any health care expense incurred in 2020—and let you carry over $550 to the 2021 plan year. If you don’t have an FSA, you may want to calculate your qualifying health care costs to see if establishing one for 2021 makes sense.

4) Manage your marginal tax rate.

If you’re on the threshold of a tax bracket, you may be able to put yourself in the lower bracket by deferring some of your income to 2021. Accelerating deductions such as medical expenses or charitable donations into 2020 (rather than paying for deductible items in 2021) may have the same effect.

Here are a few key 2020 tax thresholds to keep in mind:

• The 37 percent marginal tax rate affects those with taxable incomes in excess of $518,400 (individual), $622,050 (married filing jointly), $518,400 (head of household), and $311,025 (married filing separately).
• The 20 percent capital gains tax rate applies to those with taxable incomes in excess of $441,450 (individual), $496,600 (married filing jointly), $469,050 (head of household), and $248,300 (married filing separately).
• The 3.8 percent surtax on investment income applies to the lesser of net investment income or the excess of MAGI greater than $200,000 (individual), $250,000 (married filing jointly), $200,000 (head of household), and $125,000 (married filing separately).

5) Rebalance your portfolio.

Reviewing your capital gains and losses may reveal tax planning opportunities; for example, you may be able to harvest losses to offset capital gains.

6) Make charitable gifts.

Donating to charity is another good strategy worth exploring to reduce taxable income—and help a worthy cause. Take a look at various gifting alternatives, including donor-advised funds.

7) Form a strategy for stock options.

If you hold stock options, be sure to develop a strategy for managing current and future income. Consider the timing of a nonqualified stock option exercise based on your estimated tax picture. Does it make sense to avoid accelerating income into the current tax year or to defer income to future years? If you’re considering exercising incentive stock options before year-end, don’t forget to have your tax advisor prepare an alternative minimum tax projection to see if there’s any tax benefit to waiting until January.

8) Plan for estimated taxes and required minimum distributions (RMDs).

Both the SECURE and CARES acts affect 2020 tax planning and RMDs. Under the SECURE Act, if you reached age 70½ after January 1, 2020, you can now wait until you turn 72 to start taking RMDs—and the CARES Act waived RMDs for 2020. If you took a coronavirus-related distribution (CRD) from a retirement plan in 2020, you’ll need to elect on your 2020 income tax return how you plan to pay taxes associated with the CRD. You can choose to repay the CRD, pay income tax related to the CRD in 2020, or pay the tax liability over a three-year period. But remember: once you elect a strategy, you can’t change it. Also, if you took a 401(k) loan after March 27, 2020, you’ll need to establish a repayment plan and confirm the amount of accrued interest.

9) Adjust your withholding.

If you think you may be subject to an estimated tax penalty, consider asking your employer (via Form W-4) to increase your withholding for the remainder of the year to cover the shortfall. The biggest advantage of this is that withholding is considered to be paid evenly throughout the year instead of when the dollars are actually taken from your paycheck. You can also use this strategy to make up for low or missing quarterly estimated tax payments. If you collected unemployment in 2020, remember that any benefits you received are subject to federal income tax. Taxes at the state level vary, and not all states tax unemployment benefits. If you received unemployment benefits and did not have taxes withheld, you may need to plan for owing taxes when you file your 2020 return.

10) Review your estate documents.

Review and update your estate plan on an ongoing basis to make sure it stays in tune with your goals and accounts for any life changes or other circumstances. Take time to:

• Check trust funding
• Update beneficiary designations
• Take a fresh look at trustee and agent appointments
• Review provisions of powers of attorney and health care directives
• Ensure that you fully understand all of your documents

Be Proactive and Get Professional Advice

Remember to get a jump on planning now so you don’t find yourself scrambling at year-end. Although this list offers a good starting point, you may have unique planning concerns. As you get ready for the year ahead, please feel free to reach out to us to talk through the issues and deadlines that are most relevant to you.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.