The reinstatement of student loan payments, the SAVE plan, and what it means for you
Author’s Note: even if you don’t have student loans, please use this information to help your friends, children, or grandchildren. In March of 2020, COVID-19 emergency relief measures were put into place for federal education loans. Borrowers received a payment pause along with a reduction of interest to 0% on their outstanding balances. In September of 2023, these relief measures lapsed, and tens of millions of Americans are again required to restart their student loan payments. For many, this meant making their first student loan payment in almost three and a half years!
A large-scale crisis
According to the Federal Reserve, the total amount of outstanding student loan debt is over $1.7 trillion dollars and the US. Department of Education reports that the balance is held by over 43 million recipients.
It is widely debated as to how the resumption of student loan repayments could impact individual households and the economy as a whole. At a minimum, loan repayments will impact the disposable income and/or savings rates for many families. Predictions on the more dire end of the spectrum extrapolate this into a factor that could contribute to a future economic downturn.
Rather than discuss the unknown impact of this policy change, rising education costs, and the American debt load, we want to discuss some of the student loan payment options, including the newly introduced SAVE plan, that are available for borrowers.
Review your loans & current repayment plan
Most borrowers have accumulated several loans (and possibly multiple loan types) to cover their educational borrowing needs. Loans are generally offered on a year-to-year basis, so it is not uncommon for a recent graduate to have four or more separate Federal student loans.
The most common type are Direct undergraduate loans which are offered to undergraduate students each year (between $5,500 and $7,500) and have an interest rate associated with what the 10-year Treasury note was at the time of offering. This interest rate has varied between 2.75% and 6.8% over the past 15 years.
Additionally, a borrower may have Direct PLUS loans which are offered to parents and Graduate or Professional Students. These programs are designed to support needs above the Direct undergraduate loans, which are offered at a higher interest rate.
Upon student loan payment commencement, each of these loan payments are calculated separately using their own balance and interest rates if they are not consolidated. Consolidation has advantages and disadvantages. Once consolidated, this cannot be undone; it is important to review all options available prior to making this decision.
Fixed repayment options
If no repayment was elected, students are automatically enrolled in the Standard Repayment Plan which is a fixed payment over a 10-year period (120 months). The Graduated Repayment Plan allows payments to be lower at first, and then rise over time with the goal of paying off balances over the same 10-year period. There’s also an Extended Repayment Plan for those with balances over $30,000 with a goal of paying off loans within 25 years.
The Fixed Plans payment options are available to borrowers of Direct loans, Stafford loans, PLUS loans, and consolidated loans.
The SAVE plan
Income Driven Repayment (IDR) plans have been around for some time and allow borrowers to have a monthly payment that is based upon their income and family size.
After the Biden administration was unsuccessful in accomplishing their goal of outright $10,000 of student loan forgiveness, they worked to create a new plan called the Saving on a Valuable Education Plan (SAVE).
Some of the features that make this new plan unique to its predecessors:
Unpaid interest does not accrue. In prior plans, unpaid interest was added back to the balance of the loan so that the amount owed would increase over time until it was repaid or the loan was forgiven. Under this plan, unpaid interest is immediately forgiven.
Ex. A $48,000 loan @ 5% = $200 / month of interest charged. If the borrower qualifies for a $100 payment, they would not be required to service that entire interest payment. Instead of the loan balance growing by $100 each month to $49,200 by the end of the year, the borrower makes their $100 payment, and the balance stays at $48,000.
Increased the income exemption from 150% to 225% of the poverty line. When determining a discretionary income payment, under this plan a single person earning $32,800 or less or a family of 4 earning $67,500 or less will qualify for a $0 monthly payment.
Excludes a spouse’s income if filing separately. If spouses file their taxes separately, the monthly payment will be based only upon the borrowing spouse’s income. This creates a potential opportunity for tax planning because while filing separately can result in additional taxes being owed in some situation, the available savings in interest payments under this plan may provide a greater total benefit to the family.
Tackling your Student Loan Payments: steps to take
Review Your Expenses
Faced with a renewed monthly expense of several hundred dollars (or more) a month, the first place to begin is with a review of your budget. Can you afford this new payment with your current cash flow? If not, can you cut expenses or should you register for an IDR Plan?
Hopefully, if you had excess cash flow during the student loan pause, it was not entirely committed to long-term obligations such as a car payment or housing and was instead used to reduce other debts, build an emergency fund, or add to savings.
Determine Your Repayment Goals
Is your goal to repay your student debt as quickly and as efficiently as possible, or do you need to reduce your monthly payment? If you are looking to repay the loans more quickly, perhaps you can afford extra payments on the loans with the highest interest rates. Or maybe you are able to apply a lump sum from savings to a high interest loan. Maybe you can afford to pay off the loans but need extra flexibility due to a career change or a move and want to keep your payment low temporarily. Student loan payments (and all debt) can be managed through the lens of what makes the most sense for your long-term goals.
Select Your Payment Plan
Not all student loan payment options are available to all borrowers depending upon the type of loans received and if consolidation was elected. Use the Loan Simulator to review available options and determine the best loan plan for your situation.
If you wish to discuss how to manage your student loan payments in concert with a sound wealth management strategy, contact us to set up a time to speak.
CONTRIBUTOR
Andrew Hoffarth, CFP® is a Lead Advisor with Financial Alternatives. When he’s not enjoying outdoor activities with his family, he excels at finding solutions for complex financial situations, allowing successful families to focus on what is most important to them. Schedule a time to chat with Andrew.