Student Loan Changes

By now, the news cycle has come and gone regarding the Supreme Court and their decision to strike down the Student Loan forgiveness plan proposed by the presidential administration. It didn’t come as much of a shock to the administration according to an announcement they released after the decision, but many are wondering what comes next and what there is still to expect.

 

The original proposal was to allow up to $10,000 of student loans to be forgiven for certain borrowers that fell under certain income thresholds. The amount of forgiveness could increase to $20,000 for students that held Pell Loans. However, since that was struck down, there have been several more announcements regarding specific repayment plans, and those could have a pretty significant impact on borrowers. My goal is to break down some of the news and what we can do about it to our benefit.

 

Payments Resume

 

Part of the budget deal that was struck in the spring was to require payments to restart this fall. Payments should officially resume in October, but if you are experiencing financial hardship, there are ways to gradually restart payments in a way that won’t penalize you for not making full payments on October 1^st.

 

Future Forgiveness

 

The official loans website leaves some cryptic information that debt relief still could come at some point: “The Secretary has begun a new rulemaking process to consider other ways to provide debt relief to as many working and middle-class borrowers as possible.”

 

New Repayment Plan

 

This is the big news to come out from the federal government regarding loan changes. The REPAYE plan is getting renamed to the SAVE plan, and it is adding some additional features. It is going to lower the required payment for undergraduate borrowers and create certain automatic forgiveness triggers for borrowers with certain amount of loans. Unfortunately, that number is pretty small ($12,000) and won’t affect a ton of borrowers.

 

However, everyone currently on the REPAYE plan should know that they will be automatically enrolled into the new SAVE plan. This shouldn’t come with any drawbacks, and depending on your situation, might even lower your monthly payment.

 

How it Matters

 

Here’s the meat and potatoes. We have until August 31^st to change plans if we want and need to, and so it’s worth doing a bit of work to see if that makes any sense or not.

 

There are three pretty big distinguishers between the two main repayment plans, the REPAYE (now SAVE plan) and the PAYE plan. Going forward, I’m just going to refer to REPAYE/SAVE as SAVE:

 

1. Under any income driven repayment plan, there is a formula to calculate your monthly payment. First, take your adjusted gross income (AGI) from last year’s taxes, subtract a certain percent of the federal poverty limit, and 10% of that number is your annual payment. Divide by 12 to find the monthly payment. Under SAVE, you can subtract 225% of the federal poverty number, and under PAYE you can only subtract 150%. That means that anyone under SAVE will have a smaller calculated payment each month. Don’t make your whole decision on that number though, read the other two points.
2. PSLF or Public Service Loan Forgiveness requires 10 years of qualifying payments made while working for a non-profit or government organization, and then your loans will be forgiven. Many people don’t know that if you make a certain number of payments while working for a private company, your loans will also be forgiven. Under SAVE, that number is 20 years for undergrad loans and 25 years for graduate loans. Under PAYE, it’s 20 years for all loans.
3. PAYE has one more unique feature – your payments are capped at a certain number. If you calculate what your payments would be each month if you did a straight 10 year repayment plan, that number is the max you can pay each month under PAYE, even if your income would push the calculated monthly payment higher. SAVE does not have a cap on monthly payments if your income climbs.

 

Break it Down

 

Still lots of jargon and loan terms, but here’s how this actually plays out:

 

• If you have undergrad loans, the SAVE plan is probably going to be the most helpful. The monthly payments will be lower than PAYE and forgiveness will kick in after 20 years if you aren’t going for PSLF.
• If you have graduate loans, it’s a bit more complicated. If you’re single and are making around the same amount of money now as you have been and plan on, SAVE is probably going to be the cheapest. We can run a calculation to see if your loans would get forgiven at the 20 year mark or 25 year mark and how much more or less you would pay over that time, but for now, SAVE will provide the lowest monthly payments.
• If you have graduate loans and have the potential for your income to increase, either by getting married or graduating a professional program like medical school, PAYE probably makes the most sense, especially if you have a large loan balance. Not only will your payment amount be capped at the cost of the 10 year plan, but you can plan on the 20 year forgiveness option outside of PSLF.

 

The only circumstance I can think of that would cause me to recommend switching from PAYE to SAVE is if you’re coming up on your forgiveness and don’t have a huge loan balance. “Huge” can be relatively defined as being larger than your annual income. But, I would think about the loans like this: if I am more worried about a monthly payment than forgiveness, SAVE is going to be cheaper. If I am more worried about forgiveness and can afford a monthly payment, PAYE will provide forgiveness after 20 years for all loan types.

 

 

Bottom Line

 

Lots to think about, lots of changes. At the end of the day, everyone’s circumstances are different, and we’d love to be helpful in recommending an appropriate plan to help get your loans gone. The SAVE plan will be a welcome help to many borrowers, but we also believe that the existing PAYE plan might still be the best option for others. Feel free to reach out with questions and for some help guiding through the changes.

 

 

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