Student Loan rules are changing
Student Loan Payments Restart in October 2023
If you have student loans you should read this carefully. Per the Congressional Budget Office (CBO) 2/3 of those with student loans should apply for the new income-driven repayment plans.
Due to the Covid pandemic, student loan payments have been paused since March of 2020 and no interest has accrued. Interest starts accruing again September 1st, 2023, and payments will begin again in October of 2023. There will not be another delay in monthly payments.
Here is what you should do:
Update your contact info on studentaid.gov and your loan servicer’s website.
Look into the new income-driven repayment plans (SAVE plans). You could get a much lower payment by applying for the new income-driven repayment plans. You can find more information here. You can choose between the fastest payoff, lowest monthly payment, and lowest total paid. Note this is discussed a lot; further in this article.
Consider enrolling in autopay. Enrolling in autopay will save you 0.25% on your interest rate. You can sign up on your loan servicer’s website.
Check your loan servicer’s website for your payment amount. Some have payment information available now.
The new SAVE plans (Income-driven repayment plans) are extremely generous as compared to the old plans!
Parent loans do not qualify for the SAVE plans, and this is another reason to not take out parent loans. Private loans do not qualify for the new SAVE plans.
SAVE plans for undergraduate loans span 20 years unless the July 2024 changes apply to your smaller loan. SAVE plans for graduate loans span 25 years.
Remember, a normal student loan repayment plan spans only 10 years, this must be considered…
Benefits that start for SAVE plans now include:
The amount of income protected from payments increased from 150% of the poverty line to 225% of the poverty line. The following amounts in 2023 are excluded from income based on family size under the new rules:
Individuals $32,805
Family of 2 $44,370
Family of 3 $55,935
Family of 4 $67,500
Note the Department of Education expects well over a million student loan borrowers will see their payments under the SAVE plan go to zero.
If the minimum monthly payment is paid, and if it does not pay all of the interest accrued that month, the interest will not accrue and will not be added to the loan balance. The Department of Education feels this will benefit 70% of the borrowers in the current income-driven repayment plans.
Married borrowers who file their taxes separately (MFS) will no longer be required to include their spouse’s income in their payment calculation for the new SAVE program. These borrowers will have their spouse excluded from the family size calculation. Note this will cause more taxpayers to file married filing separately rather than married filing jointly.
Starting July of 2024 more changes will be implemented:
Payments on undergraduate loans will be cut from 10% of remaining income to 5% of remaining income. This is a huge deal.
Borrowers whose original principal balances were $12,000 or less will receive forgiveness after 10 years of repayment, with an additional year of repayment required for each additional $1,000 borrowed. So those borrowers with $23,000 or less in undergraduate student loans will have a repayment period of less than 20 years and this is a big deal as well.
Borrowers are in a temporary “on-ramp transition period” until September of 2024. This means that payments are still due, and interest will continue to accrue, but you will not be reported as delinquent to credit agencies. Further; all student loan borrowers have been given a completely fresh restart and can apply for the new SAVE plan regardless of delinquency status.
Under current law, unpaid student loan balances that are forgiven by the Federal government are taxable income starting on 1/1/2026. Each State handles this differently.
Note the new SAVE income-driven repayment plans are so generous that the Congressional Budget Office (Nonpartisan budget arm of Congress) projects:
The number of Americans in income-driven repayment plans will increase to 66% of all borrowers from 50%.
The CBO expects the program to cost about 26 billion dollars a year for the next ten years and for the cost to increase after that. This is because the CBO expects those borrowers who use the new SAVE program to only repay 61% of the amount borrowed; under previous plans, the CBO projected 110% of the amount borrowed would be repaid due to interest. Think about this! This will cost the Federal Government hundreds of billions of dollars and it will save borrowers the same amount!
Further, the CBO expects colleges to increase costs more than they are now since students will not have to repay the full amount.
The CBO also expects students to borrow more in the future since 2/3 of borrowers will only have to repay 61% of what they borrow under the new SAVE plans. The CBO projects 2/3 of borrowers to sign up and benefit from the SAVE plans.
Who should sign up for the new SAVE plans? It is extremely complicated and the following variables are some of the variables that must be considered: What will your income be over the length of the SAVE plan? What will your family size be over the life of the SAVE plan? Can you write off student loan interest on your income tax returns? What is the interest rate on the student loans? If you are married, will you be filing jointly or separately and you also have to consider what those different filing statuses will mean to each tax return filed and the cost to file those tax returns. If married, does your spouse have student loans? How much will the Federal poverty limit change. Will how AGI is calculated change? Anything that affects your AGI over the life of the SAVE plan must be considered including, side jobs, business income, rental income, accelerated depreciation, capital gains, capital losses, interest, dividends, taking taxable retirement distributions and on and on.
In very general terms, I think the following situations likely mean you should strongly consider signing up for the SAVE plan:
Anyone already on another income-driven repayment plan.
Anyone currently in default or forbearance since if you are financially struggling you might have zero or very low monthly payments.
Anyone who just cannot pay the normal 10-year repayment plan amount. Note in some situations this may cause you to pay more if you sign up for a SAVE plan!
The undergraduate SAVE plans are much better than the graduate SAVE plans. This means more with undergraduate loans will benefit from choosing a SAVE plan.
This is extremely complicated and best shown with examples:
Susan graduates from college with an undergraduate degree in July of 2024. Her student loan repayments begin in January of 2025. Susan has a student loan balance of $30,000 in January of 2025. At current student loan interest rates, if Susan does not apply for an income-driven repayment plan; her student loan payments are $326 a month for 10 years. Let’s assume Susan is paid $59,000 in wages in 2025.
Susan applies for a SAVE plan. Susan is an individual and she has no children. She is a family of one. 225% of the Federal poverty level for an individual will be about $35,000 in 2025. Under the Save plan Susan’s monthly payment is Susan’s Adjusted Gross Income (AGI) of $59,000 minus poverty limit of $35,000 = $24,000. $24,000 divided by 12 means Susan has $2,000 per month of discretionary income. $2,000 x 5% = $100. Susan will pay $100 a month 2025. Note Susan saves money on monthly payments in 2025 by signing up for a SAVE plan in this example.
Susan’s financial situation will change every year. Her income as reported on her 1040 will change. Her family size might change. Inflation will change the Federal poverty limits. This means Susan’s student loan payments will change annually under the SAVE plan. The more borrowers earn, the higher amounts the SAVE plan will make them pay every month. The SAVE plan will benefit low- and middle-income borrowers a lot. The SAVE plan will benefit high-income borrowers significantly less and often not at all. Remember, the SAVE calculation is made annually and will change every year.
Susan summary:
Susan can pay $326 a month for ten years and she might be able to write off the student loan interest on her personal income tax returns.
OR
Susan can sign up for a SAVE plan, pay $100 per month for 2025, recalculate the payment annually for the next 20 years, and then have debt forgiveness income on the balance remaining when forgiven that may or may not be taxable to the Federal Government and the state, she lives in.
Next example.
Tonya graduates from college with an undergraduate degree in July of 2024. Her student loan repayments begin in January of 2025. Tonya has a student loan balance of $30,000 in January of 2025. At current student loan interest rates, if Tonya does not apply for an income-driven repayment plan; her student loan payments are $326 a month for 10 years. Let’s assume Tonya is paid $107,000 in wages in 2025. She is a computer science major.
Tonya applies for a SAVE plan. Tonya is an individual and she has no children. She is a family of one. 225% of the Federal poverty level for an individual will be about $35,000 in 2025. Under the Save plan Tonya’s monthly payment is Tonya’s Adjusted Gross Income (AGI) of $107,000 minus poverty limit of $35,000 = $72,000. $72,000 divided by 12 means Tonya has $6,000 per month of discretionary income. $6,000 x 5% = $300. Tonya will pay $300 a month 2025. Note Susan saves $26 a month on monthly payments in 2025 by signing up for a SAVE plan in this example.
Tonya’s choice is much simpler that Susan’s choice. Paying $326 a month for ten years is generally going to be a better choice and Tonya very likely should not sign up for a SAVE plan.
The final section is a broad overview of the politics and ramifications of the SAVE plans. Most people (Not all) think this plan will survive challenge at The Supreme Court.
Winners:
President Biden and Democrats. They wanted to lower the student loan burden for low- and middle-income individuals with undergraduate student loans and this program will accomplish that.
Colleges, they will be able to charge even more for the same services per the non-partisan CBO.
Student loan borrowers that are lower and middle income. Those who sign up for the SAVE plans will repay 61% of what they borrowed rather than 110% under current rules per various studies.
The economy in the short run. As many as 30 million borrowers will see lower monthly student loan repayments, largely this means they will spend the money on other things and which helps the economy in the short run.
Private colleges. They already charge a lot more than public colleges and students who graduate with a lot of undergraduate debt and are lower or middle income will have a lot more of their student loan debt forgiven.
Losers:
Taxpayers, this adds 261 billion to the deficit over the next ten years and the CBO projects that to increase in following years.
Student loan borrowers who paid off their debt in full under the old rules.
The military; because this makes the GI Bill a little less valuable.
Current and future student loan borrowers who are high income since they will have to repay the normal 110% of the amount borrowed.
The economy in the long run. The Federal Government already is on an unsustainable path per the CBO and this makes that path a little worse.
Further increasing the future cost of college helps no one other than colleges.
Our clients can hire us to do a consulting engagement to determine if someone should sign up for SAVE plans or not. If you want to hire us to do this; please send your CPA an email and let us know all of the following in one email:
That you want us to help you determine if someone should sign up for a SAVE plan or not.
Who the calculation is for.
How much they have in undergraduate student loans rounded to the nearest thousand dollars.
How much they have in graduate student loans rounded to the nearest thousand dollars.
Please verify the loans are NOT parent loans or private loans.
These five items will get us started!
Mike Sylvester, CPA
