For better or worse, it has been an eventful summer for Washington. We’ve seen the “Inflation Reduction Act” (that doesn’t do anything to reduce inflation), the chip bill, an infrastructure bill, and now the student loan forgiveness, all within a few short months.
The year is not over yet, either. Still on the table are the elections and maybe even an expansion of the SECURE act, which will impact retirees.
With all these bills, you may wonder what the impacts on you and your finances are. You may also wonder why we would agree with Pelosi. Let’s look at some of the highlights impacting individuals.
Student Loan Forgiveness
In July of 2021, Pelosi told reporters, “People think that the president of the United States has the power for debt forgiveness. He does not. He can postpone. He can delay. But he does not have that power.” For once, we agree with Pelosi; that if this is to be done, it should be negotiated and voted on by our representatives in congress, not done through an executive order. Yet here we are.
Last week President Biden announced a wide-scale student loan forgiveness program. It forgives federal direct loans up to $10,000 for graduates with annual salaries below $125,000 if single or $250,000 for married couples. He will also forgive up to $20,000 for Pell Grant recipients who meet the same income requirements. Parents who took out Parent PLUS loans also look to be eligible. Additionally, the plan will change income-driven repayment formulas, capping the monthly payments at 5% of income, down from 10%.
With a stroke of a pen and no debate or votes by representatives, the Biden plan is expected to cost between 469 billion and 519 billion dollars. Debt forgiveness and easing of payment plans will help millions of borrowers and their families. It also adds to our country's massive debt and would seemingly be inflationary. Student loan debt is a burdensome issue in our country. In my opinion, though, this is just putting a temporary band-aid on the problem and does not do enough to address the cause.
Inflation Reduction Act
On August 16th, President Biden signed the Inflation Reduction Act into law. Despite its name, studies by the Penn Wharton Budget Model and the Congressional Budget Office forecast that the bill will not make a dent in inflation in the near term and could even bump it higher. It’s really a slimmed-up version of the Build Back Better bill that failed that does reduce the deficit by an estimated $100 billion over the next decade, which is why they say it will reduce inflation. That sounds like a lot until you realize that the government deficit in 2021 was $2.8 trillion; it’s just a drop in a bucket.
Three areas likely have the most impact on individuals:
- Tax credits for energy-related home improvements - The bill includes a 30% tax credit for installing energy-efficient windows, heat pumps, or newer appliances. There’s another tax credit for installing solar panels and up to $14,000 worth of rebates for upgrading to new, energy-efficient appliances.
- Expanded EV tax credits - If you have an electric vehicle, you’re in luck! New tax credits are immediately available, with up to $4,000 offered for used EVs and up to $7,500 for new EVs. There’s also a tax credit for installing an electric charger in your home (just read the fine print to ensure you qualify).
- Prescription drug caps - Take note, some changes don’t take effect right away. For example, insulin payments will be limited to $35 per month for Medicare Part D beneficiaries starting next year. In 2024, overall out-of-pocket drug costs will be limited to $4,000 annually, dropping to $2,000 in 2025.
There’s a pretty good chance the expansion of the SECURE Act (known as Secure Act 2.0) will pass this year. The biggest changes for investors are likely to be an increase in the Required Minimum Distribution age to 75 and increases in the catch-up provisions for those nearing retirement.
We are also in the depths of an important mid-term election season. Queue the endless political ads. That mid-term election season is likely why some of these bills are being scrambled through; to try to win votes and somewhat fulfill campaign promises. Everyone knows by now that pollsters don’t have the greatest track record for accuracy. Still, using them as a gauge, the Senate and House races are starting to look a bit tighter than the GOP would like.
The critical thing to remember with politics is that issues get blown up to seem bigger than they are. We are staunch believers that things are rarely as good or bad as they seem. There will absolutely be a lot of grandstanding and nonsense from both sides over the next few months. Here’s to keeping a level mindset through it all.
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