On June 30, 2023, the United States Supreme Court struck down the Biden administration’s plan to cancel up to $400 billion in student loans. By a vote of 6-3, it was decided that the Biden administration had acted unconstitutionally and overstepped its authority by proposing this loan forgiveness program. It is estimated that approximately 43 million Americans would have benefitted from this program if it was approved. Student loan payments have been on hold since the beginning of the pandemic, under the Trump administration. The financial unpredictability of COVID-19 left many in upheaval, and the responsibility of loan payments would have simply been salt in the wound. As the public health emergency comes to a reassuring calamity, many government programs that individuals had benefited from in the last three years are being reevaluated. Nobody knew when the pandemic would end, and in lieu of student loan payments, individuals began saving for houses, or to start families. What happens now that millions will still be required to pay off their debt?
What is happening to your college debt?
Under Biden’s loan forgiveness plan, up to $20,000 was going to be forgiven for millions of borrowers. Now that this is no longer in play, many have to rethink how they view their finances. The good news is that interest has not been accruing, so you are starting where you left off in 2020. You will need to restructure your personal finances to pay off these loans regularly. This should be your top priority since tardiness on a payment could induce a late fee or lower your credit score. This could be detrimental when taking out another loan, getting a mortgage, or renting a home. In the worst-case scenario, if you do not pay for an extended amount of time, you may enter into loan default. In this situation, your assets will be significantly at risk because creditors have the right to seize assets to pay back your loans. In terms of debt inheritance, your children are not required to pay off your federal student loans after passing. However, private investors are legally allowed to pursue your assets for repayment, even after you die. In any case, it is important to pay back your loans and make sure to protect your estate so that your children do not suffer the consequences of your actions.
Why does asset protection matter?
In some cases, but not all, creditors have the right to come after your estate to pay off your debt. This means that, especially if you die without a will, your estate will go through the probate process before it goes to your children – paying off all of your debts. In addition to paying off your debts, the probate process will often drain your account balance, leaving your heirs with little to nothing. The best way to ensure that your assets are protected is to adhere to your loan repayment schedule. Paying regularly is the cheapest option because it prevents interest from accruing and will prevent legal troubles. However, there are other ways to help your financial legacy even if you have an overwhelming amount of college debt.
What is the best way to protect your financial future if you have a lot of college debt?
You may not have enough liquid assets to pay off college debt, but you still have assets to give your children. Creating an irrevocable trust early on, before you are in financial trouble, can help you leave something to your heirs. Creditors have limited ability to come after assets held in an irrevocable trust because they are not legally considered yours anymore. It is imperative to keep in mind that transferring assets into an irrevocable trust with the intent to defraud creditors is illegal. You cannot set up an irrevocable trust if you have debt that you do not intend to pay off. Including spendthrift provisions in the trust is a helpful tactic for physical assets such as homes for your children. Spendthrift provisions completely restrict the beneficiaries’ ability to sell or use the assets in the trust as collateral. This means that the asset will be theirs until they decide to get rid of it. Typically, if you have debt, the money from the sale will go to the creditors instead of those who sold the asset. Spendthrift provisions are useful if you have a family home that you believe your children will inherit and make good use of.
The bottom line is that without this student loan forgiveness initiative, your savings may be at risk because of your responsibility to pay off debt. While you can take certain steps to secure your assets, you will likely not have many assets if you cannot pay off your debt. There are certain types of trusts that limit your access to the assets enclosed within them but will allow your children to benefit after your passing. If you plan to have children, it is important to know that while they do not inherit all debt, they likely will inherit some. It is important that you create an estate plan while keeping in mind your current and future debt situation so that you can most effectively protect yourself and subsequent generations. As you begin thinking about your estate plan, it is important to have an experienced attorney that will advocate for you and make sure you are left with the best-case scenario for you and your family. If you are ready to begin your estate planning journey or have any questions, please contact the Law Office of Inna Fershteyn at (718) 333–2394.