With student loan payments resuming in just weeks, borrowers are facing major decisions about repayment plans.
Federal student loans offer nearly a dozen different repayment plan options. These include standard and extended repayment plans, with a fixed payment amount over a term of 10 to 30 years, depending on the specific type of loan. There are also graduated repayment plans, where payments start off relatively low (often just covering interest) and then ramp up over time.
Then there are income-driven repayment plans, referred to as IDR. IDR describes a collection of individual plans that tie a borrower’s monthly student loan payment to their income and family size. Payments are based on a formula and are recalculated every 12 months. Borrowers who are unable to repay their loans in full by the end of the term — typically 20 or 25 years, depending on the specific IDR plan — can receive student loan forgiveness. However, that loan forgiveness could be a taxable event, depending on the timing of it and the state where the borrower lives.
There are multiple IDR options. And the Biden administration is rolling out a new IDR program called the SAVE plan, which is designed to be more affordable than other student loan repayment plans. SAVE will also have unique interest-saving benefits, and the flexibility for married borrowers to exclude their spouse’s income by filing taxes separately.
With such a confusing array of options, it can be overwhelming to choose a specific student loan repayment plan, or to know whether you should switch to a different program. Here’s a breakdown of key considerations.
Switch To An IDR Plan For Lower Payments Or Student Loan Forgiveness
Many borrowers will have a lower monthly payment under IDR than under Standard, Extended, or Graduated plans. This is particularly true under the new SAVE plan, which is designed to be more affordable than other IDR options. Borrowers who need a lower monthly payment should consider switching to IDR.
IDR is also important for borrowers seeking student loan forgiveness. These plans result in the discharge of any remaining balance at the end of the repayment term, which is either 20 or 25 years, depending on the specific plan. IDR is also required for borrowers to make progress toward student loan forgiveness under the PSLF program, which can result in loan discharge for borrowers working in nonprofit or government jobs in as little as 10 years.
Some borrowers may pay more in total under an IDR plan than some other repayment plans because of the longer repayment term, which is something to be aware of.
Many Borrowers In IDR Should Switch To SAVE For Lower Student Loan Payments
The Biden administration’s new SAVE plan is being billed as the most affordable IDR program yet. SAVE will have a higher poverty exclusion limit than other IDR plans, meaning a larger initial portion of a borrower’s income will not be counted under the SAVE formula. And SAVE will have a more favorable repayment formula for borrowers who have undergraduate student loans. Education Department officials indicate that many borrowers will save $1,000 per month or more under SAVE as compared to other plans.
For borrowers on the IBR plan or the REPAYE plan, switching to SAVE will probably make sense. A single borrower with an Adjusted Gross Income of $75,000 and a family size of 2, with a federal student loan balance of $50,000, would pay around $555 per month under IBR, $380 per month under REPAYE, and $255 per month under SAVE.
Borrowers currently enrolled in REPAYE will be automatically converted to SAVE, so those borrowers do not have to take any steps to change plans (SAVE is replacing the REPAYE plan). But borrowers on IBR would need to change repayment plans. While new student loan interest rules prohibit interest capitalization for most borrowers changing IDR plans, that is not the case for those who leave IBR.
Some Borrowers On PAYE And ICR Plan Should Switch To SAVE, But Not All
Borrowers on two other IDR plans — the PAYE plan and the ICR plan — may also want to consider switching to SAVE. But it’s not as clear cut.
One unique benefit of the PAYE plan is that it has a 20-year repayment term for all eligible borrowers, meaning a borrower can receive student loan forgiveness after 20 years in the program. SAVE, on the other hand, only has a 20-year term for undergraduate loans; it has a 25-year term for graduate school loans. So even though SAVE will have lower payments, the five extra years of repayment for higher-earning graduate school borrowers could offset those savings. Borrowers eligible for PAYE will have to balance these considerations, along with the interest-saving features of SAVE.
The situation may also be complicated for borrowers on ICR. ICR is typically the most expensive IDR plan. However, for borrowers with relatively low loan balances compared to their income, ICR can actually have a lower monthly payment than other IDR plans. This is important for certain borrowers who must be on IDR even if they don’t necessarily need to be for affordability reasons, such as those pursuing PSLF.
Importantly, borrowers who switch from either PAYE or ICR to SAVE will not be able to return to those plans after July 1, 2024. So it’s important to know that changing to SAVE is the right move. Note that Parent PLUS borrowers are generally not eligible for SAVE.
Borrowers Should Consider Their Goals In Choosing A Student Loan Repayment Plan
There a number of factors that borrowers should review as student loan payments resume. These include monthly payments (and how those payments may change over time, particularly for Graduated plans and IDR plans), marital tax filing status, family size, and profession.
Borrowers should also consider whether their goal is full payoff of their loans — in which case, a Standard-like plan on an aggressive timetable may be the most cost-effective approach — or maximizing student loan forgiveness, which would likely require being on an IDR plan.
The Education Department has a free online calculator that can help borrowers navigate the confusing array of federal student loan repayment plans.
Further Student Loan Forgiveness Reading
5 Student Loan Forgiveness Updates As Payments Resume In A Matter Of Weeks
Student Loan Pause Extension? New Proposal Would Eliminate Interest For Current Borrowers
Critical Student Loan Repayment And Forgiveness Deadlines Loom In August — And Beyond
Student Loan Forgiveness Just Got Easier For These Borrowers
Read the full article here
