By: Henry VanBuskirk, CFP®, Wealth Manager
On August 24, 2022, President Biden signed an executive order that would cancel up to $10,000 of federal student debt or $20,000 for Pell Grant recipients for borrowers with income below $125,000 for single filers and $250,000 for married filers. Like most decisions made in Washington D.C., this divided politicians and voters alike with Republicans ardently fighting to repeal this executive order and Democrats aggressively standing by the President’s actions. Fast forward a year later and the moratorium on student loan repayments in effect since 2020 will expire on August 31, 2023, and President Biden’s executive order on student loan cancelation was struck down by the conservative US Supreme Court on June 30, 2023, with a 6-3 vote. The student loans are not forgiven, and unpaid interest will start to accrue on the outstanding balance of the loans after August 31, 2023.
According to The Brookings Institute, one out of six people with a federal student loan are unprepared to make their student loan debt repayments. My job is not to debate whether that is morally right or wrong. That debate is better served from the musings between your favorite right-wing cousin and your favorite liberal friend who’ve each had a few too many at the Thanksgiving dinner table (I’ll let you decide whether or not I’m speaking from personal experience). All kidding aside, my job is to illustrate the facts as they stand today and what you can do about it.
Options Available for Borrowers:
Income-Driven Repayment Plans
The Department of Education (DOE) approved forgiveness for some borrowers through income-driven repayment plans, with some borrowers able to make $0 payments if income is below certain thresholds. Even if you are in the $0 repayment bracket, this still is considered a repayment of the student loan and can help with your credit score. To get this one-time adjustment, the DOE looks at items like long-term forbearances, economic hardships, military duty, or if you have been in repayment for longer than 20 years. Here are the details of the one-time payment count adjustments for eligible borrowers, as taken from the www.studentaid.gov.
The DOE will automatically take what is the most generous restructuring repayment plan to the borrower. Loan consolidation may also be an option for the borrower.
SAVE Plan
Another recent revamp towards student loan repayment options is the SAVE (Saving on a Valuable Education) Plan. The income limits have increased from 150% to 225% and starting in July 2024, undergrad loans will have a 5% discretionary income threshold (down from 10% prior to the SAVE plan), and there will no longer be any negative amortization on the loan. Eliminating negative amortization is a big deal in the SAVE plan. It is the culprit to why many borrowers feel like their student loan debt never goes away and just keeps growing (this is because if your monthly payment is less than the interest accrued on the loan, your loan balance will increase, and this compounding effect can be dire for your student loan balance).
What does this change mean for you and how much are you able to save under the SAVE plan? The DOE has a helpful table on its website to estimate what your monthly payment could be.
An example of what this new payment could be is illustrated here:
Please check with your loan servicer to have them calculate what the actual monthly payment could be under the SAVE plan.
PSLF (Public Student Loan Forgiveness)
For those borrowers who work for a government or non-profit organization, it is possible that you may be entitled to student loan forgiveness if you are working full-time for an eligible employer and you’ve made the equivalent of 120 qualifying monthly payments under an accepted repayment plan (repayment plans that are not accepted by PSLF are Standard Repayment Plan for Direct Consolidation Loans, Graduated Repayment Plans, or Extended Repayment Plans). Some examples of qualifying employment are if you:
- Are working full-time (30+ hours a week)
- Are a government employee (including military)
- Are part of a 501(c)(3) non-profit organization
- Work in Law Enforcement or Public Health
A tool to help you determine whether or not your employer qualifies for PSLF can be found here.
Conclusions:
For aspiring college students, why is this important to you? Well, it is better to be prepared about how utilizing student loans to help fund post-secondary education means for you over the long term. Interest rates on federal student loans have increased for the 2023-2024 school year because the rate increases or decreases are influenced by the 10-year treasury yield, which is up to 4.05% today and was at 2.74% a year ago today. Here are the updates to the interest rates on Direct Loans:
Here is a graph of the 10-year Treasury Yield to illustrate why these changes occurred.
The rise in client questions about paying down existing student loans also has a very similar trajectory to the graph above. Since it now looks like the moratorium on student loan repayments will be expiring, it is now more important than ever to develop a comprehensive financial plan to tackle this issue head-on. If you’re burdened by student loan debt, reach out to us for help with coordinating discussions with your loan servicer and developing a debt payoff plan where you can get that student loan debt monkey off of your back without having to eat Top Ramen every day (and if you want to eat Top Ramen every day, more power to you). We’re all about making sure that “future you” isn’t mad at “current you” for not dealing with your student loan debt now. Our team of Certified Financial Planner™ professionals are ready to help you with the next steps and schedule time for a free consultation. Please give us a call at 714-282-1566 or email us at financialplanning@bfsg.com to get the conversation started.
Sources:
- https://www.brookings.edu/articles/student-loan-pause-has-benefitted-affluent-borrowers-the-most-others-may-struggle-when-payments-resume/
- https://www.brookings.edu/articles/the-long-path-forward-for-student-loan-forgiveness/
- https://studentaid.gov/manage-loans/forgiveness-cancellation/debt-relief-info
- UCLA Student Loan Repayments Webinar ‘Understanding Your Student Loan Repayment Options’.
- https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/24/fact-sheet-president-biden-announces-student-loan-relief-for-borrowers-who-need-it-most/
- https://www.scotusblog.com/2023/06/supreme-court-strikes-down-biden-student-loan-forgiveness-program/#:~:text=Supreme%20Court%20strikes%20down%20Biden%20student%2Dloan%20forgiveness%20program,-By%20Amy%20Howe&text=By%20a%20vote%20of%206,%24400%20billion%20in%20student%20loans.
- https://studentaid.gov/announcements-events/save-plan
Prepared by Broadridge. Edited by BFSG. Copyright 2023.
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