We have all heard about the changes revolving around student loan repayments and we are here to give you some clarity on the matter. In 2022, Biden announced an administrative package that included a one-time cancellation of up to $10,000 of federal student debt and a new Income-Driven Repayment (IDR) plan, now known as the SAVE plan. This past summer the Supreme Court struck down the student loan cancellation part of the package but allowed the SAVE plan to move forward. With student loan repayments starting again in October, you should know what to expect.
The SAVE plan will be replacing the previously existing Revised Pay As You Earn (REPAYE) plan and is, essentially, a modification of the REPAYE plan to be eligible for all borrowers with federal student debt (except Parent PLUS loans). Borrowers enrolled in the REPAYE plan will automatically be transitioned to the new SAVE plan before payments begin. As for the other repayment plans, the Pay As You Earn (PAYE) plan will be closed to new enrollees, and the Income-Contingent Repayment and Income-Based Repayment plans will be restricted to certain borrowers.
A major change that happened this summer with the SAVE plan allowed married couples to exclude their spouse's income when filing their taxes separately to determine their monthly student loan repayment in hopes of having a lower monthly payment. This would be beneficial for couples with significant differences in income to appropriately calculate their respective student loan repayments. Keep in mind that if a married couple chooses to file their taxes separately, they could face higher taxation and fewer credits or deductions than couples filing jointly. It would be important to consider if filing separately (paying more in taxes and having a lower monthly student loan payment) would be beneficial over filing jointly (paying less in taxes and having a potentially higher monthly student loan payment).
Starting July 1, 2024, the new plan will allow for lower monthly student loan payments for undergraduate loans calculated on 5% of a borrower's “discretionary income” compared to 10% with the REPAYE Plan. This could significantly change the monthly repayment amount for a borrower depending on their household adjusted gross income (AGI) and size to determine their “discretionary income” using the appropriate Federal Poverty Level divided into 12 monthly payments.
The existing IDR plans allow for forgiveness to borrowers of their student loans after making payments for 20 years for undergraduate loans or 25 years for graduate loans. The SAVE plan will offer another tier which includes all loans (undergraduate and graduate) to be forgiven after 10 years of payments if the balance under the plan was $12,000 or less. The plan allows an adjustment to the forgiveness time period if the loan balance exceeds $12,000. For every $1,000 exceeding $12,000, 12 monthly payments are added before loan forgiveness.
The new plan has also expanded the list of deferment and forbearance periods that count towards forgiveness to include unemployment deferments but excludes deferments for borrowers who are in school or return part-time. The borrower has the opportunity to catch up on their payments within 3 years of the original due date to still receive credit for those months of missed payments.
The new plan will also eliminate negative amortization, which causes the loan balance to grow as it is being paid off, which was allowed in the previous REPAYE plan. For interest that is not included in the required monthly payment of the loan, the SAVE plan will not add the remaining interest to the principal balance of the loan causing the loan balance to increase. This change is important because when student loans are forgiven after their required years of repayment, the amount is considered taxable income to you in the year of forgiveness. If negative amortization were to continue, then eventually when the loan is forgiven, the borrower could be taxed on more than the original amount of their loan.
These are the main changes that will be going into effect over the next year to student loans, so it is important to understand where you stand with your loans and what options are available.
As financial planners, we take pride in offering insightful advice on these topics and would love to help guide you through these decisions. Schedule a free 30-minute consultation with us to talk about how to get prepared for your student loan repayments!
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