A lot has happened since March 13, 2020. That’s the date in which the U.S. Department of Education paused federal loan payments and set the interest rate to 0% as part of their COVID-19 relief program.
With roughly $1.6 trillion of federal student loans outstanding spread across 43 million borrowers, the government has been missing out on significant “IOU’s”. Amid record inflation, national debt, and an extremely tight labor market, student loan repayments are back. The 0% interest rate ended on September 1, 2023, and repayments restarted this month (October 2023).
How Much Will You Owe?
Borrowers have several repayment options. They can be boiled down to the Standard 10-Year Repayment, Income-Driven Repayment (IDR), or refinancing with a private lender at terms of their choosing. According to Bankrate, interest rates on federal student loans disbursed over the past decade range from 2.75%-7.90%, versus private refinance fixed rates spanning 4.96%-11.18% among popular lenders. With the Fed keeping interest rates higher for longer, refinancing options have currently become less attractive.
Many recent graduates who are getting settled in their career as young professionals default to one of the Income Driven Repayment options (IDR). Underneath this umbrella are the Pay As You Earn (PAYE) Plan, Income-Based Repayment (IBR) Plan, Income-Contingent Repayment (ICR) Plan, and the new Saving on a Valuable Education (SAVE) Plan—formerly the REPAYE Plan. Here’s a breakdown of each:
- PAYE- generally 10% of your discretionary income, but never more than the 10-year Standard Repayment.
- SAVE- generally 10% of your discretionary income.
- IBR- generally 15% of your discretionary income for borrowers after July 1, 2014, but never more than Standard.
- ICR- the lesser of 20% of discretionary income OR what you would pay with a fixed payment over 12 years.
The most common choice for IDR will be between SAVE and PAYE. For the SAVE Plan, discretionary income is the difference between your adjusted gross income (AGI) and 225% of the Poverty Guideline. For PAYE, discretionary income is the difference of AGI and 150% of the Poverty Guideline.
Naturally, this will generate a lower monthly repayment under SAVE in most circumstances. Some new workers or low-income individuals may have $0 repayments under such IDR plans.
Also, the government will stop charging any monthly interest not covered by the borrower’s payment on the SAVE plan, whereas this subsidy only applies for three consecutive years since repayment began under PAYE. Under both PAYE and SAVE, married borrowers who file their taxes Separately will not have their spouse’s income factored into their repayment.
Since these are all Income-Driven Repayment options, income must obviously be reported. The earliest you could be required to recertify income is March 1, 2024. If your scheduled recertification date falls between now and March 1, 2024, it will be pushed back exactly one year (i.e. 11/15 recertification will be required on 11/15/2024). However, you are allowed to recertify earlier if you wish.
This could be beneficial for borrowers whose income has dropped compared to pre-COVID or had an increase in family size, as it would likely result in a lower monthly repayment. To recertify early, borrowers should go to the IDR application and click “Manage Your Income-Driven Repayment Plan”. The Federal Student Aid department offers a loan calculator to help borrowers select the appropriate repayment option. Borrowers should note that auto pay was automatically suspended when the COVID-19 payment pause began, and most borrowers will now need to reenroll to autopay through their servicer. IDR plans are also eligible for various forgiveness programs.
How to Have Your Student Loans Forgiven
The Public Service Loan Forgiveness (PSLF) program is one the most talked about goals for many borrowers. PLSF says that if the borrower is employed full-time by a government or not-for-profit organization and makes 120 qualifying IDR repayments, the balance of their Federal Direct Loans may be forgiven.
Another great benefit of PSLF is that any amounts forgiven will NOT be considered taxable income. Borrowers can search if their employer qualifies on Fed Student Aid’s search engine. It’s worth noting that the 120 payments do NOT need to be consecutive. Qualifying repayment plans include the ones mentioned earlier: SAVE—formerly REPAYE, PAYE, IBR, and ICR.
It is considered best practice to submit the PSLF form annually, or at least whenever you change employers to keep track of your credits. The total of qualifying payments will only update when the borrower certifies their employment. Months throughout the 3 ½ year COVID-19 payment pause can count as IDR credits for PSLF and Temporary Expanded Public Service Loan Forgiveness (TEPSLF).
TEPSLF was a program passed by Congress in 2018 meant to expand PSLF and make forgiveness more widely available. The program temporarily allows borrowers who were repaying their Fed Direct Loans under nonqualifying repayment plans (i.e. Graduated Repayment or Extended Repayment) to now qualify.
If you do not work at a qualifying place of employment, each IDR plan can still offer forgiveness. PAYE states that after 20 years of payments, any remaining balance will be forgiven. SAVE also follows the same 20-year rule but only for undergraduate loans, for graduate debt it requires 25 years of repayments. Since the American Rescue Plan Act, these forgiven balances will be exempt from federal income tax through January 1, 2026, however they can still be subject to state income taxes.
The Biden-Harris administration has been championing student loan debt relief since its campaign. The Supreme Court struck down President Biden’s plan to forgive some or all of federal student loan debt for tens of millions of borrowers earlier this summer. Chief Justice John Roberts said, “The authority to ‘modify’ statutes and regulations allows the Secretary [of Education] to make modest adjustments and additions to existing provisions, not transform them.”
Biden has vowed to continue finding relief options to what U.S. Secretary of Education Miguel Cardona calls a “broken student loan system”. Forgiveness options and relief will continue to be politicized as proponents empathize with cash-strapped borrowers while opponents fear further inflation, ballooning national debt, blank government checks to already pricy college tuitions, and aggravation from borrowers who already paid their full share.
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Bryan M. Kuderna is a Certified Financial Planner™ and the founder of Kuderna Financial Team, a New Jersey-based financial services firm. He is the host of The Kuderna Podcast. His new book, "WHAT SHOULD I DO WITH MY MONEY?: Economic Insights to Build Wealth Amid Chaos" is available wherever books are sold.