On The Agenda

1. This new student loan repayment plan might make your payments $0.

2. Your student loans get forgiven after 20 years, but you get taxed. ^LUMINARY

3. Understanding Federal Reserve jargon.

4. How the Federal Reserve changes our economy. ^LUMINARY 

5. How should you feel about the tight Labor Market?

6. Don’t worry about the US credit downgrade. ^LUMINARY 

The SAVE Plan

From Nate Hoskin, Founder & Lead Advisor

The Saving on a Valuable Education (SAVE) Plan makes payments smaller for everyone using a REPAYE student loan repayment plan. If you’re already on a REPAYE Plan, you will automatically get the benefits of the new SAVE Plan.

Why you should care:

SAVE brings the income exemption (which means $0 payments) up from 150% of the Federal Poverty Line to 225%. For a single person, this means $0 payments up to $32,805 of income.

If you’re married but file separately, you no longer have to include your spouse’s income when calculating your payments.

As long as you make your payments, your balance will never go up from unpaid interest. That said, if you’re paying less than the total interest per year, your balance will never go down.

Luckily, your loans get forgiven after you use the SAVE Plan for 20 years.

Unluckily, you get taxed on the forgiveness, which I’ll explain in the next section. 

Taxed on Forgiveness ^{LUMINARY SECTION} 

When you use an Income-Driven Repayment Plan, whatever balance is left over after 20 years gets forgiven.

This is great for people whose income isn’t keeping up with their loans, and it ensures that no one will be in student debt forever.

The problem is that you get taxed on that money when it gets forgiven.

Read that again, then I’ll give you some good news. For anyone who is getting their loans forgiven between now and 2025, you won’t owe any taxes. You have the American Rescue Plan to thank for that.

More good news: your loan can also be forgiven by working in public service for 10 years through the PSLF program and you won’t get taxed on forgiveness through this program. You can also check out the 9 other forgiveness programs, but taxation varies.

After 2025, any loan that is forgiven is counted as regular income. This means it will get added to the income you made for that year and taxed based on your marginal tax bracket.

So you might be asking the question, “But where will I get the money for those taxes?” and you would be right to be concerned. Forgiven doesn’t mean refunded so you won’t get any extra cash that year to make the payments. You’ll have to come up with it some other way.

That’s why it’s important to start planning now, so we wrote a full article teaching you everything you need to know about student loans.

Understanding Federal Reserve jargon 

From Jon Scott, Lead Author 

Federal Funds Rate - “The federal funds rate is the FOMC's main policy rate. Changes in the federal funds rate trigger changes in other short- and medium-term interest rates, the foreign exchange value of the U.S. dollar, and other asset prices that influence households' and businesses' spending and investment decisions.” To summarize, the Federal Funds Rate is the basis for all other interest rates (US treasuries, mortgages, car loans, etc.)

Reserve Requirements - Reserve requirements are a percentage of a depository institution’s (commercial banks, savings banks, savings and loans, credit unions, and U.S. branches and agencies of foreign banks) deposits that they legally have to put aside and cannot loan out. The Fed has the ability to control this percentage.

Quantitate Easing (QE) - Refers to the Federal Reserve buying assets (typically US treasuries) on the open market in order to push prices on these assets prices up and lower their yield. The Fed’s hope is to spur economic activity by pushing firms and individuals to search for higher returns instead of the low-yielding safety of government bonds.

Quantitative Tightening (QT) - Refers to the Fed selling assets or allowing the assets to mature on their balance sheet (instead of repurchasing more assets) in an attempt to push up long-term treasury yields and restrain the Fed’s support of further economic activity.

Why you should care:

The basic idea is that the Federal Reserve has the ability to cool down or heat up the economy. The Fed’s toolkit not only affects the United States, but thanks to the dollar’s status as the world’s reserve currency, the Fed’s action can affect the entire world (including a large contributor to the Arab Spring revolutions).

I’ll explain in more depth in the Luminary section what the Fed and their increase in interest rates means for the near future of the US economy.

How the Federal Reserve changes our economy ^{LUMINARY SECTION}

The Federal Reserve sets the pace for the entire global economy. Here in the United States, the Federal Reserve’s Federal Funds Rate sets the basis for the cost of money. More specifically, the profitability of all debt is based on the yield on the 10-year treasuries (currently sitting around 4%). However, the 10-year is strongly influenced by the Fed Funds Rate and what this rate will be in the future. The changing of the Fed Funds Rate changes 10-year projections, which can change the baseline interest rate which all other investments are measured against. Lastly, the Fed Funds Rate also sets a benchmark amount for banks lending money to each other on a short-term basis. The higher the Fed Funds Rate the more expensive it is for banks to borrow money and they are likely to reduce the movement of money.

In terms of reserve requirements, fewer reserves mean banks can loan out more money, increasing companies’ and consumers’ spending on investments such as capital (borrowing money or selling equity), employees, goods, and services. Higher reserve requirements mean banks must hold more cash which will likely lead to less investment by companies and consumers, therefore, slowing down the economy.

Despite positive economic data lately, each Federal Reserve increase we see in this cycle increases the risk of a recession but also decreases the risk of persistent inflation.

If you’d like a more in-depth perspective. Please review our full article here.

How should you feel about the tight Labor Market?

From Bennett Fees, Economic Research Associate

Continuing our discussion from last week on the jobs-to-workers gap, job openings data released Tuesday in the Job Openings and Labor Turnover Survey, known as the JOLTS report showed slight improvement.

Two important data points are Job Openings and Quits. Job openings fell to the lowest level since April 2021. Similarly, Quits fell to the lowest level since January 2021. Declines in both areas indicate that demand for labor, and worker comfort in leaving their job have decreased though not to the extent that layoffs have increased.

This is mainly good news. To start, the decreased wage pressure may dissuade the Fed from hiking interest rates into a recession. The recent uptick in productivity growth bolsters this as it lowers labor costs for employers. Secondly, and as long as inflation continues to slow, the hope is that the resilient labor market will secure a soft landing. In fact, as of this morning, unemployment actually decreased slightly to 3.5%, down from 3.6% in June.

Don’t Worry Over the US Credit Downgrade ^{LUMINARY SECTION}

Fitch, a Credit Rating Agency, downgraded the United State’s long-standing AAA rating to AA+ citing an expected “fiscal deterioration over the next three years”, a debt burden, and an “erosion of governance” particularly seen in last-minute debt limit negotiations.

Is there a need to worry? Not really. This has actually happened before, back in 2011, then with S&P, during another debt ceiling debacle like the one that took place earlier this year. Plenty of experts have weighed in with an essentially unanimous view that the decision is unlikely to deter investors from utilizing treasuries. Indeed, this downgrade will have zero effect on the ability for commercial banks to continue to use treasuries as high-quality liquid assets in line with their regulations. For personal investors, while the market was slightly down on Wednesday, it will hardly put a dent in what has been a good year for stocks with the S&P 500 up 18% on the year.