August 2023
Income driven repayment plans previously had four options: income based, income-contingent, pay as you earn, and revised pay as you earn. The revised pay as you earn option is now replaced by the SAVE plan. Under SAVE, payments will be reduced from 10% to 5% of discretionary income. The discretionary income threshold will also increase to 225% of the poverty line (it was 150% before), so for borrowers making $32,800 or less (or $67,500 in a family of four), monthly payments will be reduced to $0. Furthermore, those with balances of up to $12,000 can reach total forgiveness after 10 years of payments.
Patrice and Chris also highlight that remaining interest for both subsidized and unsubsidized loans will be eliminated after a scheduled payment is made under the SAVE plan. This means that when a borrower’s monthly payment is less than the new interest that accrues, the excess interest will be waived. The SAVE plan also excludes spousal income for borrowers who are married and file separately. Moreover, when one consolidates loans, they will not lose time towards their forgiveness, and payments made before 2024 will count towards time to forgiveness.
Finally, Patrice and Chris encourage listeners to consult with experts and financial planners before making decisions on consolidation and repayment plans.
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Hello everybody, and thank you for joining us for another episode of THE FINANCIAL COMMUTE. I'm your host, Chris Galeski, joined by Wealth Advisor Patrice Benning. Patrice, thank you for joining us. Thanks for having me, Chris. In the news over the past several weeks, there's been a lot with regards to student loans. Before we get into kind of what the program was and what it transitioned to, it sounds like forbearance ends at the end of August, so interest starts accruing in September and people are going to have to start making student loan payments again in October.
Is that right? Yep. And it's been three and a half years. That's about 44 months of zero payments for a lot of people. And that's been wonderful, obviously, to have to be able to pause on that. However, you know, some planning has to be done, I think, and that's why it's important we have this conversation. Just creating awareness around what's available right now compared to what it was before COVID started.
Without a doubt. I mean, student loans are one of the largest debts that the economy has here in the U.S. And I often wonder how much the lack of needing to make payments on your student loans led towards or helped cause the inflation boom that we had in so many areas of our economy over the last three years, specifically, you know, with travel and hotels.
I mean, if people aren’t paying their student loans, they’re using those dollars for other things and helping drive the economy going forward. Well, you know, if you were to think about even a college degree can be almost tagged as the one of the American dreams, but it really comes at a steep price. So to your point, when you look at the average student loan balance out there for undergrad is about 30,000 and you're looking at in the hundreds of thousands for graduate or professional degrees.
Having to pause those, it's you know, now you've got this extra income in your pocket that can be reallocated to other. And it sounds like from some of the changes that income, that percentage of your income is significantly getting reduced. So let's start with the plan that we were under and then what some of these proposed changes are.
So before, this applies to federal student loans only, not private loans. So the goal is to understand what's available if you took out a federal student loan and before they were, you had four options. They're all income driven plans. You had an income based repayment, you had an income contingent, you had a pay as you earn and a revised pay as you earn.
So those were the four options you had before. And based on where you were in your life, that's what you chose. The main change is applies to the last one. The revised pay as you earn it was called repay for short. Now it's been renamed SAVE, saving a valuable education.
And to your point, before the way that the payments that you had to make on your student loans were based on your discretionary income. Yeah. And when you think of discretionary income in this situation is really you're looking at your modified, adjustable gross.
So before that was 10%. And also you looked at the federal poverty level limit and you had to be 150%. That was the calculation that were taken. That's been increased by 50%. So now it's it's up to 225 above the federal poverty level. And also the amount that you make monthly, it's down to five from ten.
So for folks that especially on the undergraduate loan program, it's almost half their payment that they actually will only have to make. For graduate loans. It's not as significant because it doesn't apply the same 5 to 10. It's still the 10%. However, because it's considered less, because of the ratio of the 225% above the federal poverty level increased, it still reduces.
So those folks should also see a reduction in their payments as well. Well, that's fantastic. That's fascinating and fantastic for some people. I mean, you know, for, I guess undergraduate students, their student loan is going to be halved. And again, there's many nuances to these particular plans.
But let's say if you were on the repay program before, you will automatically go into the SAVE program. So your payments would automatically see this particular, you know, reduced monthly payments. If you were in the other three that I mentioned earlier, if it makes sense and this is having to really consult with your tax advisor, even your financial planner, to see if it makes sense to consolidate your federal loans into one.
And it's not refinancing your loans, make sure you don't want to refinance. You want to consolidate into one and then put it underneath the SAVE program. And that way you can then be streamlined to have one payment that's subject to this particular reduction. Well, thank you for sort of clarifying the four different options and then the new proposed changes, really just that last option, the repaid program switching to save, which is going to be payments over a specific amount of time, whether it's anywhere from 10 to 25 years, percentage of your income, but that income's going to be reduced.
Tell us a little bit more about that. So the other significant change that's made to a particular period of time is that if you have student loans that are $12,000 or less, typically it doesn't matter that, you know, you were still subject to the 25, 20 to 25 year period. You will have, after ten years if you still have any amount owed, that's forgiven.
So that's really big. And that actually applies to both undergrad and graduate loans. Consolidated as a dollar amount, but it has to be $12,000 or less. And then the other big nuance that has to do with the SAVE program that I think before, let's say you you know, you went to medical school, you started a family, you're making really good income.
And typically some of the programs available for the income driven repayment plans is that, you know, a lot of folks decided to, if they were married and there's benefits to filing jointly when you're married. But a lot of them had to choose to file separately. However, the income payment plans still typically took into consideration the joint income.
Regardless of their filing status. So with the new SAVE plan, you are able to, if you are filing jointly before and again, it has to make sense because you will lose certain credits. There's little nuances to, you know, having how you both, you know, can take deductions. And also that if you claim children who's who's going to claim who.
However, there might be benefits of going from filing jointly to filing separately. If you have a person in that relationship that makes significantly less income and that's the person who has the student loan, that will actually save you quite a bit of money under the SAVE plan. Well, so just to summarize kind of some of those points there, if you're in the income driven repayment plan, it's going from 10% of your income, modified adjusted gross income to 5%.
So significant reduction in your minimum payment that you need to make. You do have the ability to now choose whether you're filing joint or filing separate as it relates to making these student loan payments. And then if you made payments for ten years and your balance is $12,000 or less, that will be forgiven. Correct. And there were some problems with the system.
So the administration is basically coming out and saying, hey, we know that there's been problems with the record keeping in the system and we're trying to, you know, start from scratch. So there were people that maybe were delinquent or missed a payment, everybody starting with a clean slate going forward. And they're trying to make up for the calculation of payments and figure out where people are at between those 20 and 25 year timetables.
This is all really confusing. It is. So the the other thing that I think it's very important to understand is that before when you consolidated your loans, your clock started again. So you were going back to a 20 to 25 year term where now that doesn't happen anymore. So one of the changes they've made is that even if you were, you know, if you have four or five loans out there, you can consolidate, but your clock doesn't start again.
You will get credit for all the months that you've made payments, which is wonderful. And then the other thing that's happening is that there's no longer a negative amortization. So, for example. Yeah, the negative amortization. So before let's say that you made payments, but you made less than what you couldn't afford to make the full payment.
Whatever you did not make would get tacked on at the end of the loan. So even if you know, typically if you at the end of 25 years, you still owed a balance that would be forgiven. But because you, let's say, did not make full payments all the time, that interest that accrued will be tackled at the end of the loan, at the end of the period will be forgiven.
But it's considered as taxable income to you at that time. So that goes away. So if you, you know, could not make full payments throughout the period, the time of the loan, it's no longer going to be accrued at the end. Is there a minimum amount that people would still need to make? I mean, if you're in the income driven repayment and it's 5% of your income and let's say for whatever reason you can only pay 1% or less, is there a minimum or that hasn't been ironed out?
That hasn't been ironed out? I was I was looking for that information, but it doesn't quite even before I doesn't quite delineate what that amount is, the percentages, I should say. I think that this is a very confusing topic and there's a lot more to come on the impact of this and what the purpose is. But from my understanding and please clarify if I said anything that's incorrect.
The purpose of this is to kind of clean up some issues that they have under the current system, but also make things easier now that we are starting student loan payments again in October, that both helps give relief for student loans, but also sets people up for success to be on an income driven repayment plan that is not too much of a burden, so that way they can pay back their loans, but also, you know, live a comfortable life and have some options towards getting this relief.
And to your point, actually, the four options I mentioned in the beginning, they are looking to actually really streamline them. So they'll probably be like maybe two instead of four. So SAVE is to replace repay, but the one that's most likely going to stay is the income based repayment plan IBR for short.
And it's actually advisable folks that have started with that program, it's advisable they stay in that and don't switch to SAVE. If you are right now making more income than you made in the past because switching to SAVE you'll end up paying more just because you'll have to recertify your income on an annual basis.
So it is very important that you talk to a tax expert, a financial advisor, a financial planner to fully understand the impact before you make those decisions. We want to talk to experts, want to talk to a CPA tax professional, financial planner, financial advisor, somebody that can help you make the right decision on whether to stay with the current plan
You're on consolidate and go in to save. But if you do have student loans, just be mindful that, you know, it's important to start making those payments again in October. If you're on an income driven repayment plan, odds are pretty good that your your monthly payments are going to be a little bit lower. And there's some nuances to whether or not you choose to married, filing joint or married filing separate and what's the right one for you as it relates to that income that they're using towards the repayment plan?
Patrice, thank you so much.
My pleasure, Chris.
Disclosure: Information presented herein is for discussion and illustrative purposes only. The views and opinions expressed by the speakers are as of the date of the recording and are subject to change. These views are not intended as a recommendation to buy or sell any securities, and should not be relied on as financial, tax or legal advice. You should consult with your financial, legal, and tax professionals before implementing any transactions and/or strategies concerning your finances.
