Nobody ever said paying off student loans would be fun. In fact, that may be one of the very few lies high schoolers are not told about such loans. Despite Biden’s efforts to forgive some student loans, change is tricky and slow. For freelancers whose financial situation is constantly changing, student loan policy is even more complicated. Here’s what you need to know.
Biden’s plan has three parts: a final extension of the student loan repayment pause, a one-time cancellation of up to $20,000 in student debt for eligible borrowers, and a reform of the income-driven repayment (IDR) plans. As of mid-2022, if your total income is less than $125,000, you should qualify for up to $10,000 in student loan forgiveness under the American Rescue Act. And I say “should,” because we’re still awaiting a court decision on whether or not it will come to fruition.
But—the current pause aside—let’s assume you’re a freelancer with student loans. It’s a match made anywhere but heaven, as freelancing is unstable, and student loans are annoyingly stable. Extremely, extremely stable. In fact, your loan payment can be the same for months and months and months, and your principal will barely decrease—it’s nice to have a shred of predictability in your life!
How Biden’s Plan Will Affect You
It depends on your income. But if you’re a freelancer, that’s not quite a straightforward calculation. The number you should be looking at is your adjusted gross income, which means that you get to deduct your business expenses, if you’re a freelancer. So if you make $150,000 and spend $30,000 on an office, you’re in the clear. If you make $125,003 and buy one business-related latte, you should also be in the clear (and if you’re not, make sure to get it with oat milk).
But, while no one’s income is 100% steady, freelancers’ incomes mimic those pirate ship rides you see at street fairs. The ones that make little kids vomit. Not only do most freelancers not earn the same amount every year, many of us don’t earn the same amount every week. So, what if your income is sometimes above $125,000, sometimes below? What matters is what you filed on your 2020 and 2021 taxes. If your Adjusted Gross Income is less than $125,000 either of those years, you would qualify.
The good news is that the extension of the student loan repayment pause means that you don’t have to make any payments on your federally-held loans for 60 days after the Supreme Court gets around to deciding on it. If there’s no decision by June 30, 2023 (a date that quite literally gets closer every day), payments pick up 60 days after that. This applies to everyone with federally-held student loans—even freelancers.
What You Can Do Before Biden’s Plan Is Passed
I want to offer general advice on how freelancers can manage student loans. Even it the Supreme Court caves, Biden’s plan only covers $10,000-worth of federally-held (not private) loans ($20,000 if you have a Pell Grant), so the loans that get forgiven may only be a small fraction of your total amount. As such, I have some tips on how freelancers can manage the rest of it.
If your income varies, you may want to apply for an income-driven repayment plan, in which you never have to pay more than 10% of your income. This is great for months when you don’t make any money, and bad for all other months—but as a freelancer, you’ll probably have both. I mentioned Biden’s reform of the IDR plans—this will cap your monthly payments at 10% of your “discretionary income”—your AGI minus 150% of the poverty guideline for your family size and state of residence. Again, this plan is held up in the Supreme Court, but even if it doesn’t go through, you can use an existing IDR. Hopefully, this offers a much-needed sense of stability, to know that your loans will never eat up a whole month’s income. If you’ve set up an LLC or S-Corp, you may also be able to create your own student loan repayment benefits program, which does offer tax benefits. For tips on how to set that up, check out this guide.
For now, though, freelancers—like everyone else—can’t count on any of their loans vanishing, at least not until we get word on Biden’s plan. However, if there’s any upside to the holdup, it’s that it won’t affect your taxes until it’s law. Praise Be for that.