Navigating a New Era for Student Loan Borrowers

If you are one of the people who borrowed money for college and found that paying those student loans back has been far more challenging than expected, you are in the company of a large number of people, many of whom have watched with great interest in recent years as the U.S. Department of Education attempted to streamline Federal Student loan repayment and provide opportunities for forgiveness from those loans. Since the initial pause of the requirement to make payments on Federal Student Loans as part of COVID relief, many borrowers have gotten out of the habit of making student loan payments, and many were looking forward to the possibility of having their loans forgiven in total or in part. Over the last several months, however, court challenges halted plans that were in place that would have allowed reduced student loan payment requirements and broader options for loan forgiveness. With the incoming Presidential administration set to take office on January 20th, it is widely expected that the approach towards Federal Student Loan borrowers will change considerably. Because of the changes that have occurred since 2020 relative to Federal Student Loan payments, borrowers may have become accustomed to not having to make their loan payments. While it is unknown what the new administration will do differently than the old one, it would be a good idea for Federal Student Loan borrowers to get ready to resume making payments on their loans in the near future. With that in mind, in this issue of the newsletter, we will provide some updates in the world of student loans and highlight some things that have not and are likely not to be affected by the activity of the last several years.

Guidance on Interest Accrual and Forgiveness from the Department of Education
Many Federal Student Loan servicers began sending communications to their borrowers who had attempted to enroll in the SAVE repayment plan (a loan repayment plan that was intended to provide both lower payments and a more defined forgiveness structure). Because the SAVE plan was the subject of court cases, the full implementation of the plan was put on hold, but because some borrowers had already enrolled and others had applications pending, all borrowers in a current or pending status with SAVE had their loans placed in forbearance. During this forbearance period, no interest would accrue on those loans even though payments were not being made. In the communications from servicers, some seemed to indicate that interest was in fact going to start accruing even while loans were in forbearance. The Department of Education has clarified that is not the case and that interest will in fact not accrue as long as the loan is in forbearance. However, they did state that the time that loans are in forbearance due to the SAVE Plan litigation, does not count towards loan forgiveness. This differs from the treatment of COVID, when the requirement to make loan payments was paused and the interest rate was reduced to 0% between March 13, 2020 and September 1, 2023. Even though no payments were due during that time frame, for the purpose of calculating the number of months of payments made towards loan forgiveness, those months were treated as months during which current borrowers were making payments either for an Income Driven Repayment (IDR) plan or for Public Service Loan Forgiveness (PSLF).

What Hasn’t Changed and Probably Will Not Change
As noted, it was an emphasis of the Department of Education under the Biden Administration to put reforms in place to provide relief to Federal Student Loan borrowers in the form of reduced payments and avenues for loan forgiveness. Many of the initiatives they promoted had not been through the legislative process to allow Congress to pass them as law. As a result, when proposals were challenged in court, those efforts had to be put on hold because there was no standing law in place. The SAVE Plan is a perfect example of this situation. For many borrowers, it would have reduced their monthly payment by half, and it could have put them on a track for loan forgiveness earlier. Again, while there is no way of knowing what will happen in the future, it is highly unlikely that the Department of Education under the incoming Trump Administration will seek to promote the SAVE Plan. Nevertheless, there are still long-standing avenues for loan forgiveness through existing programs that have been passed as law. One of those is PSLF, which provides the opportunity for loan forgiveness if you have worked full-time in a covered job and made on-time payments for 120 months while in that covered job. Another avenue is the loan forgiveness terms that are a part of other IDR plans like Pay As You Earn (PAYE), Income Based Repayment (IBR), and Income Contingent Repayment (ICR), which allow forgiveness of the remainder of the loan balance after 20-25 years. Keep in mind that outside of PSLF forgiveness, when a Federal Student Loan is forgiven, the forgiveness amount is considered taxable income to the borrower. If you find yourself in a situation where you are evaluating a forgiveness option and are concerned about the tax implications, it is best to consult with a tax advisor.

Making Your Plans for Loan Repayment
Because there has been so much that has changed in the world of student loans over the last 4+ years, and many have gotten out of the habit of making their payments, settling into this new era may be a challenge. While the time at which new policies will be enacted is uncertain, it would be wise to expect that things will be changing in the near future, which means if you have had a pause in making student loan payments, it makes sense to put that line item back in your budget and making any other alterations necessary to manage your income. At the same time, if you have Federal loans, you can also reach out to your loan servicer to get an assessment of where you stand, what payment options you have available to you to help you manage the payment, and determine if you could take advantage of any of the forgiveness options in place. Of course, not all loan servicers are created equal, so if you have not had a great experience with getting quality information from your loan servicer, there are other avenues where you can receive help with keeping up with your student loan status. While this is not an endorsement, one such entity I have seen information from is an organization called Savi, which you can research by going to https://www.bysavi.com. Depending on what your needs are, they have free and paid membership packages that allow them to provide guidance to you on your payment and forgiveness options. There are other organizations and individuals who may be able to provide similar assistance if you are looking for help outside of your servicer. Whether you choose to do it yourself or engage an outside entity, it is likely that very soon, not addressing your student loan situation will no longer be an option, so it would be a good idea to begin now preparing yourself for what is coming down the road.

Stewardship Emphasis

Using somebody else’s money to help you take care of your own needs can be a wise use of leverage, but it can be a fine line between the positive use of leverage and negative impact of shackles.

The Empowerment Channel    |   Volume CCXXXIII   |    Dedicated to Promoting Financial Education through Stewardship