In March 2020, due to COVID-19, the government paused mandatory student loans and set interest rates to 0%. This policy was meant to give student borrowers relief from student loan payments during the pandemic. Now, over three years later, after the policy had been extended multiple times, it is finally set to expire. Starting on September 1st, loans began accruing interest once again and the first payment will be due in October. In this blog post, we’ll talk about some of the changes to student loans as well as a number of repayment options available to borrowers.
Standard Repayment Plans
There are three standard repayment plans, “Standard Repayment Plan”, “Graduated Repayment Plan”, and “Extended Repayment Plan”. Each of these has unique features while functioning similarly to any other loan. You choose a term usually anywhere from 10 to 30 years, and your payments will be calculated to pay off the loan in that amount of time. The benefit of standard repayment plans is the payments will generally remain the same, allowing for predictable payments. You may also accrue less interest if you repay your loans in a shorter time period. One thing to keep in mind is that these repayment times are not eligible for the Public Student Loan Forgiveness (PSLF) program.
Income-Driven Repayment (IDR)
Unlike standard repayment plans, Income-Driven Repayment plans are based on your annual income while also factoring in your family size. There are four income-driven repayment plans “Income Based (IBR)”, “Pay as You Earn (PAYE)”, “Revised Pay as You Earn (REPAYE)”, and “Income-Contingent Repayment (ICR)”. Each of these payment types has different features but generally includes a repayment term of anywhere from 20-25 years. The main benefit of income-driven repayment plans is that the payment is based on what the government calculates as ‘discretionary income’. Because of this, monthly payments may be more affordable and change as your income changes. After the loan term of 20-25 years, any remaining balance is generally forgiven.
Saving on a Valuable Education (SAVE) Repayment
The Biden administration recently unveiled the Saving on a Valuable Education (SAVE) Plan. This is an income-driven repayment plan that is set to replace the REPAYE plan. If you are already enrolled in REPAYE, you will receive the benefits of the SAVE plan. This plan has been touted as the most affordable repayment plan, with some low to moderate-income borrowers owing as little as $0/month. Another key benefit of this plan is that as long as you make your monthly payment, your loan will not grow due to unpaid interest.
Public Service Loan Forgiveness (PSLF)
Another option for repayment may be to take advantage of the Public Service Loan Forgiveness program. This is available to borrowers who work for government organizations or other nonprofit organizations under IRS Section 501(c)(3). Generally, if you are in an income-based repayment program and enroll in the PSLF program, after 120 qualifying payments (generally 10 years), any remaining student loan balance is forgiven. The Public Service Loan Forgiveness Help Tool Ninja can help determine if the type of loans you have and your employer qualify you for the program.
Student Loan Forgiveness Update
As you may know, earlier in 2023 the Biden administration’s plan to forgive anywhere from $10,000 – $20,000 in student loans was struck down as unconstitutional by the Supreme Court. The Biden Administration has announced an alternate plan using the Higher Education Act to forgive student loans, however, the first step in a more complicated process is not set to begin until July 2024.
Student Loan Matching
One of the challenges you may have with student loans beginning again is finding the income to contribute towards retirement. With the passing of the Secure Act 2.0 in 2022, a provision was added to allow employers to match qualified student loan payments. This will be allowed starting in 2024, however, it is subject to adoption by the employer as well as the ability of retirement plan record-keepers to offer this option. This would allow your employer to make a matching contribution using your student loan payment amount, even if you are not contributing to your retirement plan.
While your employer may or may not adopt this, it is important to ensure that you are saving for retirement. While you are able to borrow money for student loans, unfortunately, we cannot borrow money to retire. Therefore, it is likely beneficial to choose a student loan repayment option that allows you the income flexibility to also contribute towards your retirement savings.
It is important to note that the landscape of student loan repayments can be quite complex to navigate. Each program discussed may only apply to certain loans. This blog is meant for educational purposes only, and due diligence should be completed on the Federal Student Aid website before making any changes to your student loan repayment plan.