Personal Finance

Student loan forgiveness chances lost to those who refinance: CFPB

Published

11 hours ago

December 17, 2024

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With the Federal Reserve’s recent moves to lower interest rates — and further cuts on the horizon — some federal student loan borrowers are wondering if now is a good time to refinance.

“We are already seeing more borrowers tempted to refinance their federal loans,” said Betsy Mayotte, president of The Institute of Student Loan Advisors.

Refinancing your federal student loans turns them into a private student loan and transfers the debt from the government to a private company. Borrowers usually refinance in search of a lower interest rate.

But the Consumer Financial Protection Bureau has new warnings about refinancing student debt.

In a report published Monday, the CFPB said that private lenders use “deceptive” practices in their marketing and disclosure materials, misleading student borrowers about a key pitfall of refinancing: Those who do so lose access to federal student loan forgiveness options.

“Companies break the law when they mislead student borrowers about their protections or deny borrowers their rightful benefits,” said CFPB Director Rohit Chopra. “Student loan companies should not profit by violating the law.”

Federal forgiveness chances dashed with refinancing

Some private lenders give the wrong impression “that refinancing federal loans might not result in forfeiting access to federal forgiveness programs, when, in fact, it was a certainty,” the CFPB report says.

The federal government offers a range of student debt forgiveness programs, including Public Service Loan Forgiveness and Teacher Loan Forgiveness.

PSLF allows certain not-for-profit and government employees to have their federal student loans cleared after 10 years of on-time payments. Under TLF, those who teach full-time for five consecutive academic years in a low-income school or educational service agency can be eligible for loan forgiveness of up to $17,500. These options are not available to private student loan borrowers.

Borrowers refinancing would also not be eligible for one-off forgiveness efforts like President Joe Biden’s Plan B.

Private student loan borrowers who are struggling to pay their bills don’t have a right to an income-driven repayment plan, either.

IDR plans allow federal student borrowers to pay just a share of their discretionary income toward their debt each month. The plans also lead to debt forgiveness after a certain period.

Borrowers who refinance their student loans lose access to these federal relief options, the CFPB said.

And this has cost borrowers.

“The lenders profited from borrowers paying the full amount of their loans, when the borrowers otherwise potentially could have had some or all of those loans forgiven,” the bureau wrote in its report.

Lenders do inform borrowers of what benefits they may give up by making moves like refinancing, said Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade group for student loan servicers.

Buchanan said the government’s changing promises around student loan forgiveness has led to a lack of clarity. (Republican-led legal challenges have stymied the Biden administration’s efforts to deliver wide-scale student loan forgiveness to borrowers.)

“That volatility and confusion is something the Bureau needs to take up with the Department of Education,” Buchanan said.

But the federal government’s long-standing student loan forgiveness programs and other relief measures are reasons alone to think twice before refinancing, Mayotte said.

“We almost always very strongly recommend against it,” she said.

Personal Finance

How to leverage the higher 401(k) plan contribution limit for 2025

Published

11 hours ago

December 17, 2024

Business Finance News

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If you’re eager to save more for retirement, it’s not too early to boost 401(k) plan contributions for 2025, financial experts say.

For 2025, you can defer up to $23,500 into 401(k) plans, up from $23,000 in 2024. For workers age 50 and older, the 401(k) catch-up contribution remains at $7,500 for 2025.

But there’s a “super funding” opportunity for 401(k) catch-up contributions for a subset of savers, according to Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida.

Enacted via Secure 2.0, the 2025 catch-up contribution limit will increase to $11,250 for employees ages 60 to 63, which brings the 401(k) deferral total to $34,750 for these investors.

“Probably no one knows about the extra increase,” and it could take time before the general public is aware of the new opportunity, said Boston-area CFP and enrolled agent Catherine Valega, founder of Green Bee Advisory.

However, boosting contributions later could still be beneficial for savers in this age range, experts say.

Increase 401(k) deferrals for 2025 now

If you plan to adjust 401(k) deferrals for 2025, “now is the time to be doing it,” Valega said.

Typically, it takes a couple of pay periods for 401(k) contribution changes to go into effect, and you could miss some higher contributions in January by waiting, she said.

If you miss bigger deposits early, you can still max out your plan by boosting deferrals later in the year. But higher percentages can “impact cash flow more than people are typically willing to do,” Valega said.

Lucas said he updated next year’s 401(k) contributions for his clients in early December.

“It’s already set for next year,” he said. “We’re on pace, starting with the first payroll.”

Financial advisors take on crypto: Here's what to know

Of course, many workers can’t afford to max out their 401(k) plan every year.

Roughly 14% of employees maxed out 401(k) plans in 2023, according to Vanguard’s 2024 How America Saves report, based on data from 1,500 qualified plans and nearly 5 million participants.

Personal Finance

Advisors remain reluctant to recommend crypto, even as prices soar

Published

12 hours ago

December 17, 2024

Business Finance News

Digital assets have rallied since the November U.S. election — with bitcoin notching a new high above $107,000 on Monday — and continue to gain ground as President-elect Donald Trump details his pro-cryptocurrency policy plans.

Still, many financial advisors remain wary.

“As traditional long-term planners, we currently do not incorporate crypto in our portfolio allocations,” said certified financial planner Marianela Collado, CEO of Tobias Financial Advisors in Plantation, Florida. She is also a certified public accountant. “We always advise our clients to put in crypto what you’re not necessarily needing for retirement, what you’re comfortable losing.”

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To be sure, regulatory uncertainty remains a clear area of concern for financial advisors when it comes to recommending crypto investments to clients.

In April, when crypto prices were lower, an annual survey of 2,000 financial advisors by Cerulli Associates found that 59% don’t currently use cryptocurrencies or plan to in the future. Another 26% said they don’t use it now but expect to in the future.

Meanwhile, about 12% of advisors said they use cryptocurrencies based on clients’ requests, according to the Cerulli report, and less than 3% of advisors said they use crypto based on their own recommendations.

ETFs an ‘easy solution’ to add crypto

If investors are interested in crypto, CFP Ashton Lawrence at Mariner Wealth Advisors in Greenville, South Carolina, advises many clients to use exchange-traded funds.

“It’s truly depending upon what the client is looking to achieve and how easy they feel in navigating this market,” he said. “If they’re looking for an easy solution. ETFs might be the best way to go.”

Spot bitcoin ETFs, first available in January, now have more than $100 billion in assets under management, which is about 1% of the overall ETF market.

“Bitcoin ETFs have become the vehicle of choice for bitcoin holders,” Brian Hartigan, global head of ETFs at Invesco, said during CNBC’s “Halftime Report” on Dec. 9.

Lawrence recommends clients interested in crypto limit the allocation to no more than 1% to 5% of their overall portfolio.

Most financial advisors agree that whether to have crypto investments in your portfolio depends on your risk tolerance, financial goals and time horizon.

Personal Finance

There’s ‘urgency to act’ to get best returns on cash

Published

16 hours ago

December 17, 2024

Business Finance News

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With the Federal Reserve expected to cut interest rates again this week, it’s a great time to earn competitive returns on cash, experts say.

“The best offers on savings accounts, money markets and CDs [certificates of deposit] are still well above inflation, and that’s likely to persist well into 2025,” said Greg McBride, chief financial analyst at Bankrate.

The Fed may cut interest rates by one-quarter of a percentage point on Dec. 18 at the end of its two-day meeting, experts predict. If it does, that would mark the third time the central bank has lowered rates since September, for a total reduction of one full percentage point.

“There’s an urgency to act now,” McBride said. “You won’t get better yields by waiting.”

Already a 'done deal' for Fed to cut rates in December meeting, says Morgan Stanley's Zentner

Yields may be lower by January

Consumers who are tempted to hold out may miss an opportunity to lock in better returns on their cash.

“If you’ve got money to put to work, there’s a good chance yields are going to be lower next month than where they are today,” McBride said.

By putting that money to work now, you can lock in yields that compare very favorably to inflation, he said.

Treasury bonds and many CDs are offering yields above 4%, with the ability to lock in that return for multiple years at a time, McBride said.

That could be an opportunity for savers who don’t need immediate access to their cash or who are looking to generate interest income or diversify their broader portfolio, he said.

Another investment — Series I bonds — offers a way to beat inflation, McBride said. I bonds currently pay a guaranteed 1.2% fixed rate above the rate of inflation.

Notably, I bonds have some limitations, including a cap on annual purchases. Moreover, you can’t cash them in in the first year, and you also have to give up three months’ interest if you cash in before the five-year mark, McBride said.

“You’ve got to be pretty sure about your ability to live without the cash in order to get the full bang for your buck,” McBride said.

Alternatively, investors may opt to invest in another government investment that also offers inflation protection — Treasury Inflation Protected Securities. TIPS allow for higher annual investments compared to I bonds, as well as more liquidity since they can be bought and sold on the secondary market. As of Dec. 16, a five-year TIP yields 1.88% above inflation.

When to prioritize cash liquidity

Whether it makes sense to lock in returns on your cash now largely depends on the outlook for 2025.

With less expectation for additional interest rate cuts in 2025, there may not be as much reason to lock in returns on cash now, said Ken Tumin, founder of DepositAccounts.com.

Moreover, high-yield online savings account rates are generally higher than what CDs now offer, he said. Some online banks are offering over 5% annual percentage yields even on small balances, while the best one-year CD provides 4.65% with a $50,000 deposit.

“One strategy now is just maintaining liquidity in one of the top online savings accounts and not necessarily locking it in,” Tumin said.

Alternatively, savers may hedge their bets, he said, and put half their cash deposits in a high-yield savings account and the other half in longer-term CDs.