The $5k Student Loan Tax Deduction for Law Firm Owners and Other Creative Repayment Strategies (Ep. 127)
If you’re a law firm owner feeling the weight of student debt, you’re not alone. The pressures of hefty law school loans along with rising interest rates and shifting federal policies are more real than ever. But here’s good news: with the right strategies, law firm owners can turn student loan repayment into a smarter, more tax-efficient part of their financial plan. On this episode, I’ll break down the current landscape of student loans for attorneys, highlight creative repayment and forgiveness options, and show you how to leverage your law firm for significant tax savings no complex jargon, just straightforward advice you can act on today.
Understanding the Student Loan Landscape for Law Firm Owners
Recent changes in federal law have shifted the student loan repayment and forgiveness environment. Many law firm owners are now wondering: What options still exist? What new strategies make sense going forward? Here’s what you need to know:
Loan Forgiveness: What Still Works?
Public Service Loan Forgiveness (PSLF): This program remains available for law firm owners who work in government or non-profit settings. After making 120 qualifying payments over ten years, you could see your remaining balance wiped clean. However, pay attention to looming legislative changes and remember to submit your annual certification forms to safeguard your eligibility.
Income-Based Repayment (IBR): This is currently the only income driven plan with a clear path to forgiveness. However, with a massive processing backlog, applications can move slowly. If you’re on a legacy income driven plan, consolidating and re-enrolling in IBR may help preserve your forgiveness credit.
Major Changes to Watch Out For
Save Plan Gone: The Save Plan, introduced under President Biden, is now blocked due to court action. If you were on this plan, you’ll need to switch to a new repayment plan for future payments to count toward forgiveness.
New Repayment Assistance Plan (RAP): Starting July 1, 2026, all new federal student loan borrowers must choose either the Standard Repayment Plan or the new RAP. RAP caps monthly payments at 1–10% of income, extends forgiveness to 30 years, and may include interest waivers and principal matching credits but any forgiven amounts could be taxable.
Deadlines Matter: If you’re on a legacy plan, you must switch by July 1, 2028, or risk losing eligibility for forgiveness. Don’t let these dates slip by.
Creative and Tax-Efficient Repayment Strategies for Law Firm Owners
1. Take Advantage of the $5,250 Section 127 Deduction
One of the smartest moves for law firm owners is using your business to help pay down student loans with a tax advantage. Here’s how it works:
Set up a Section 127 Plan: Create an educational assistance program through your firm. This allows you (and any employees) to receive up to $5,250 per year tax-free for eligible student loan payments.
Fully Deductible: Payments are fully deductible to your firm and do not count as taxable income for the recipient, provided you follow program requirements and proper documentation.
Solo and Small Firms: Especially beneficial if you have a small team or are a solo firm owner. Just ensure the program is properly documented for IRS compliance.
2. The Family Bank Method
Got a supportive family member? Structuring a private loan with a fair interest rate often lower than federal rates can expedite repayment. Make sure you establish clear, written terms to avoid family strife and stick to your repayment plan.
3. Using Windfalls, Bonuses, and Extra Cash
Any unexpected income like bonuses or tax refunds can accelerate your loan payoff. Just beware of the impact on income-driven repayment plans; lump sum payments could change your monthly calculation if not handled carefully.
4. Tapping Home Equity
If you’ve built up equity in your home, a cash-out refinance or HELOC can allow you to pay off high-interest student loans with a lower-interest loan. Caution: This strategy turns unsecured debt into secured debt, putting your home at risk if you can’t repay.
5. Borrowing from Life Insurance
Some permanent life insurance policies build up cash value you can borrow against. This can be a flexible, tax-free resource, but be careful—borrowing too much can threaten your policy’s benefits and even produce a tax bill if the policy lapses.
Pitfalls to Avoid and Key Planning Reminders
Stay on Top of Recertifications: Missing important deadlines for income-based repayment or forgiveness can disqualify you from vital programs.
Plan Migration Deadlines: Mark July 1, 2028, on your calendar—this is when many legacy plans transition, so act early.
The “Tax Bomb” After Forgiveness: Unless Congress extends current rules, forgiven balances on income-driven plans could become taxable after 2026.
Don’t Over-Leverage: Be careful when tapping into home equity or life insurance. Don’t risk key assets or lose access to forgiveness opportunities.
Keep Excellent Records: Save every document related to certification, payments, and communications with servicers to back up your eligibility down the road.
Take Positive Action Today
Repaying student loans isn’t just a matter of chipping away at debt, it’s a chance to make strategic choices that build long-term wealth. With the right plan, your law firm can help you unlock valuable tax benefits while you reduce your financial burden.
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Transcript:
Darren Wurz [00:00:00]:
What if your law firm could write a check for your student loans and give you up to $5,250 tax free? Welcome to the Lawyer Millionaire helping law firm owners grow their businesses and their wealth. I'm your host, Darren Wurz. Are you suffocating under six figures in student debt while watching interest rise again and forgiveness stalled? With 68% of young attorneys reporting severe stress from education debt and up to $112,500 in median loan balances at graduation, the pressure is real. You're not alone. And today's episode is all about creative repayment options, including loan forgiveness. All right. Hey there lawyer millionaire friend. Before we dive in, I want to quickly tell you about our Lawyer Millionaire listener challenge.
Darren Wurz [00:00:53]:
All you need to do is leave a review and share your favorite episode with a friend or or on social media. Then head on over to lawyermillionaire.com/challenge to submit your proof. And you'll be entered to win a $100 gift card, a signed copy of my book, and even a private strategy session with yours truly. The link is in the show notes. Let's go get your entry in today. All right, so we're talking about student loans and we're in part four of our series on student loans and big, big topic. A lot of changes happening with the recent legislation. The one big beautiful bill passed here recently in July.
Darren Wurz [00:01:35]:
So let's talk about a few things. I want to give you some ideas on repaying those loans. That's the idea, right? We want to get those loans paid down. So we're talking about a few things today, forgiveness programs. We'll review what those are and what the changes are to forgiveness programs. Then we're going to talk about some creative repayment options that you may not have thought about before. And then we'll talk about some risks and mistakes to possibly avoid in that process. So let's begin with what still works and what's still available.
Darren Wurz [00:02:09]:
And what is still available is the Public Service Loan Forgiveness or PSLF. This is still a remaining option. It will Forgive up to 120. It will forgive your remaining balance after 120 qualifying payments while working full time for a government or a non profit employer on a qualifying repayment plan. So there's a lot of qualifying things in there. But basically if you're working for 10 years, you know, so 10 years times 12, that's 120 qualifying payments for a government or nonprofit institution. Then you can qualify for loan forgiveness under the public Service loan forgiveness option. It still is active today for borrowers who had it in place before July 1, 2025.
Darren Wurz [00:03:05]:
But there's still risk Congress could change that. New laws could come up and the future rules could change and future rules might even tighten employer eligibility or limit it complet. You want to be aware of that and pay attention to that. And one of the things you want to make sure if you're on this type of repayment plan and you're aiming to achieve this forgiveness is make sure that you are submitting your employer certification forms annually to avoid that forgiveness option being voided for you. Now what's gone? Well, there was a popular option called the Save Plan which was created under President Biden. The save plan has pretty much gone away by court injunction. It's pretty much blocked the Save plan and on August 1, 2025, interest accrual has, well, has now resumed for approximately 7 to 8 million borrowers who were previously an interest free forbearance. So what had happened was they knew that the save plan was going to be done away with and so President Biden put everybody that was on this plan into 0% forbearance.
Darren Wurz [00:04:16]:
Well, that is now over. Payments will remain paused for those borrowers, but interest will not be paused. Right. And none of those payments will count towards forgiveness unless you switch to a new plan. Let's talk about income driven repayment options. These are pretty popular. A lot of folks on income driven repayment plans, very helpful for when you're starting your law firm and you don't have a lot of income right away. So legacy income driven repayment plans are going away.
Darren Wurz [00:04:51]:
The repay plan or revised pay as you earn, the pay plan, pay as you earn and the income contingent repayment plan are now all functionally blocked for forgiveness as far as forgiveness goes. So those are no longer an option if you're looking to achieve forgiveness. The income based repayment plan is the only income driven option still intact and not blocked by court rulings. Though forgiveness processing is still paused. There's about a $1.5 million or million case backlog right now. So it's taking a while. Borrowers who are enrolled in income driven legacy plans should think about consolidating and re enrolling in the income based repayment plan to preserve your forgiveness credit. But applications may move slowly.
Darren Wurz [00:05:47]:
Just be aware of that. There is a new option that has come available. It's the WRAP plan or the repayment assistance plan passed under the recent bill on July 4, 2025. So starting July 1, 2026, all new federal student Loan borrowers must enroll in either one of two the standard repayment plan or the new Repayment assistance plan or rap. So what is wrap? Well, wrap caps your monthly payments somewhere between 1 and 10% of your income and extends your forgiveness timeline to 30 years. So it's kind of like the new Income Driven plan. It will include interest waivers and possible principal matching credits. But forgiveness could be taxable under this plan.
Darren Wurz [00:06:39]:
So just be aware of that. If you are on a legacy plan, you must switch by July 1, 2028. So you got some time to hang out on these other plans. But by July 1, 2028, you're going to have to switch or be automatically migrated to, to one of those two plans, the standard repayment plan or the rap. And if you don't make a decision, you could lose your forgiveness eligibility under the Income Based Repayment option or the Public Service Loan Forgiveness. So a lot of moving parts here. You may want to consult with somebody who knows a little bit more about this. If you want to speak one on one with me or a member of my team, we'd be happy to.
Darren Wurz [00:07:23]:
There's a lot of things that are changing in the forgiveness world and in the repayment options world. Okay, but enough about that. Let's get creative. Let's talk about creative and strategic options for repaying your student loans. So one of my favorites is paying your student loans through your law firm. If you're a law firm owner. And here's how this works. So instead of paying your loans personally, you're going to have the firm issue a draw to you or a bonus and earmark that for loan payments.
Darren Wurz [00:07:57]:
Now, if you just do that, okay, you know, it's going to be tax deductible to the firm, but you're going to still pay tax on it as income. But here's something you could do that's a little bit fancier. So there's something called a section127 plan. And you could create a section127 plan for your firm. And through this plan, you could pay up to $5,250 per year towards your employees, qualified education loans without triggering federal income for them or payroll taxes for you. Now, you could do this for yourself as an employee of the firm. The key is, you know, this has to be offered to everybody. So if you have a lot of employees, it may not be something you want to jump into right away.
Darren Wurz [00:08:43]:
But if you're a small firm or even a solo, you could do this, right? So you can have $5,250 from income that you pay towards your loans that you don't have to pay income taxes on. How does that sound? Well, that sounds pretty great. So it's fully deductible to the employer. Right. And then it's not taxable to the employee. If you're the employee, it's not going to be taxable to you. Now if you're a solo caution, you want to make sure that you have proper documentation so that the IRS doesn't come knocking, take you through an audit and say, man, we don't like this. Okay, all right.
Darren Wurz [00:09:22]:
Another option is the family bank method. Yes, we all have that one family member who always asks for money. This isn't that you're not going to be that person. You're going to borrow from the family perhaps and promise to repay, but borrow and pay at maybe a lower interest rate, 0% or more favorable rate. You may not want to do this for those loans that are, you know, have the possibility of being forgiven. But other types of loans that might be a great option for you, hey, mom or dad, could I borrow 50 grand to pay off my loans and I'll just pay you and pay you less interest maybe. Okay. Or maybe you have a rich aunt who can help you.
Darren Wurz [00:10:11]:
Bonuses and windfalls. We talked about this on the last episode or two episodes ago. Episode two Using found money, you know, lump sum distributions, extra money that comes in, those can all help accelerate your principal pay down and get those loans paid down faster. But you want to be careful because windfalls could have an effect on your repayment if you're in one of those income driven repayment plans. So be careful of that. Another option is using your home equity. Maybe you've been out of law school for a while and you know, you bought a house and you know, real estate market's been great over the past few years. Your home value's up, you've been paying down that mortgage and you have some equity.
Darren Wurz [00:10:58]:
You could do a cash out refi or do a HELOC home equity line of credit and basically borrow against your home to pay some of those high interest loans off. The interest on borrowing, as your home likely may be lower, will probably be lower than your interest rate on your loans, especially now that interest is resuming on student loans. So post2025, though there's something to be aware of. The interest is only deductible if, if the proceeds are used to buy, build or substantially improve the secured property. So no longer can you take out a HELOC to pay off your student loans and the interest be deductible for you. There is also a risk here you want to be aware of. You know, you're turning unsecured federal debt into secured mortgage debt and basically you're using your house as collateral. So there's the possibility if you're not able to pay that mortgage and pay off that home equity line of foreclosure, if you're not able to make those payments.
Darren Wurz [00:12:02]:
Another option is borrowing from life insurance policies. Now you may not be old enough to have accumulated cash value in those cash value life insurance policies and I'm not really a big fan of those cash value life insurance policies myself. But if you have them, and if you have about, you know, a nice cash value, perhaps you could borrow against that. But be aware policy loans. So the good news, policy loans are not taxable, but caveat when they are properly managed. They also don't require credit checks and they won't count against your credit score for having an inquiry. So that's kind of nice. But you could put your policy at risk.
Darren Wurz [00:12:46]:
You could reduce your death benefit and there's a potential for policy lapse or taxable consequences and taxable consequences if that policy lapses. Okay. And I want to wrap up with a few planning pitfalls and things for you to watch out for under the new law. Number one, missed recertifications and processing delays. Maybe you have been hiding your head in the sand as it regards your student loans. Just be careful not to miss those recertification deadlines, especially for income based repayment forgiveness. You want to make sure you're not avoiding your forgiveness eligibility. Number two, be aware of that plan migration deadline.
Darren Wurz [00:13:34]:
If you're not in an income based repayment in the IBR by July 1, 2028, you'll be automatically migrated to the RAP or the standard repayment plans and and possibly lose your forgiveness eligibility. Number three, the tax bomb risk for IDR forgiveness. Income driven repayment forgiveness forgiveness under IBR or Legacy Income driven Repayment Plans may be taxable after 2026 unless Congress intervenes. And so Congress needs to extend the tax exemption that was established under the American Rescue Plan Act. If they don't after 2026, there could be taxes on that forgiveness. Next one, over leveraging your assets. If you're going to use home equity or insurance policies, make sure that you're not over leveraging yourself. And also make sure you're not giving up the possibility of forgiveness and losing potential benefits that you have.
Darren Wurz [00:14:39]:
And last but not least, record keeping is critical, especially if you are on track for forgiveness. Collect and retain copies of your employer certification forms, loan consolidation paperwork, IDR elections, recertifications, payment logs, etc. Just make sure you're keeping all your records. Well folks, you know this isn't all about just knocking out debt. It's really about accelerating your long term wealth creation. When your firm can legally cover your student loans in an intelligent and tax efficient way, you're freeing up capital for real wealth building. And that's what we're all about here at the Lawyer Millionaire. And we help law firm owners every day map out exactly how to structure these opportunities safely and strategically.
Darren Wurz [00:15:33]:
So friend, if you enjoyed today's episode, help us spread the word by participating in our Lawyer Millionaire Listener Challenge. Leave a review, share an episode and submit your entry@lawyermillionaire.com challenge and you can submit multiple times and get multiple chances to win one of three great prizes. And if you want to talk one on one, you can always book an intro call with me using the link in the show notes. Who is the Lawyer Millionaire? It's you my friend. Own it and live it. I'm your host, Darren Wurz. Thanks for joining me. See you next time.