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In a few days, the interest on federal student loans will start accruing again, and payments will restart in October. Today’s column will look at a recently released repayment plan and whether it is right for you.
Borrowers will have to choose between a standard repayment plan that pays the balance in full after a fixed number of years, a forbearance, or an income driven repayment (IDR) plan where the monthly payment is determined based on income.
There are four IDR plans: Income Contingent Repayment (ICR), Income Based Repayment (IBR), Pay As You Earn (PAYE) plan, and Revised Pay As You Earn (REPAYE). Comparisons of these and other plans can be seen here.
Some borrowers have a Federal Family Education Loan (FFEL) where, in most cases, a third party financed the loan with the federal government being a guarantor. These loans are not eligible for forbearance although they can be converted into a federal direct loan.
A few months ago, the Department of Education and the White House unveiled the Saving on a Valuable Education (SAVE) plan. The SAVE plan will replace the REPAYE plan. It is considered the most generous IDR plan to date.
The SAVE plan increases the income exemption for loan payments from 150% to 225% of the poverty line. For example, borrowers will not owe loan payments in the case of a single borrower earning $32,800 or less or a family of four earning $67,500 or less.
Interest accrual will be limited under SAVE. So long as the monthly payments (which could include principal and accrued interest) are made, there will be no additional interest accrual. This does not mean interest accrual stops completely just because the borrower enrolled in this program. It stops rising loan balances where borrowers’ monthly payments do not cover the interest accrual.
Spousal income is excluded for borrowers who file their tax returns separately from their spouses. But filing separately can result in a higher tax bill. I wrote about the pros and cons of filing separately in a previous column.
According to guidance, starting in July 2024, borrowers with original principal balances of $12,000 or less will receive forgiveness of any remaining balance after making 10 years of payments, with the maximum repayment period before forgiveness rising by one year for every additional $1,000 borrowed. But in a possibly conflicting White House statement dated August 22, 2023, the additional time added will be capped at 20 or 25 years. Payments made before July 2024 will count toward these maximum forgiveness timeframes.
From the above, the following people should seriously consider applying for the SAVE program:
- Those already in REPAYE are automatically enrolled in the SAVE program. Married couples should look into filing their returns separately. Unfortunately, those who filed their 2022 returns jointly already cannot amend their returns to file separately.
- Anyone whose monthly payments will not cover the accrued interest, resulting in a bigger balance as time passes.
The one group of people who probably should not apply for the SAVE program are those with low balances and high incomes. Their monthly SAVE payment could be higher than a standard payment plan. Their payments will cover the interest accrual so SAVE’s interest cap will not help them.
Those who have made the required monthly payments for close to 20 years should keep a close eye for additional SAVE guidance from the Department of Education. As stated earlier, borrowers with original balances of $12,000 or less will receive forgiveness of any remaining balance after making 10 years of payments. The maximum repayment period rises by one year for every additional $1,000 borrowed up to 20 or 25 years according to the White House. It is possible that those who were not in an IDR plan could be eligible for loan forgiveness if their payments made before July 2024 count toward forgiveness. However, it is not clear whether a payment under a standard repayment plan counts retroactively as a payment under an IDR plan.
The Department of Education should provide clarification on whether people enrolled in standard repayment plans for 20 to 25 years could be eligible for loan forgiveness before the July 2024 deadline start date. However, it is worth noting this provision of SAVE was meant to expedite loan forgiveness for those with low balances. But the Joe Biden administration has tried to forgive loans for those making up to $125,000 per year and appears to be very open-minded on this issue.
The right repayment plan depends on the borrower’s current and projected financial situation and their long-term goals. The SAVE program will help wean people back into repayment after two years of forbearance. And for some, there may be possible forgiveness opportunities in the future.
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at stevenchungatl@gmail.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.
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