After an excessive level of drama and confusion, interest on student loans and payments on balances are right around the corner. On Sept. 1 balances will begin accruing interest after a nearly four-year hiatus, and payments on student loans are due to resume on Oct. 1. So, if you or someone in your family has student loans, it’s time to start paying attention.
In addition, after its loss in the Supreme Court, the Biden Administration has rolled out its “back-up” student debt relief plan. After reviewing the plan, I think a lot of this new more compromised program could have probably garnered Congressional support, skipping much of the political football match of the past three years. I have heard no murmurs of additional legal challenges, so I think students and families may have enough information to do some planning at this point. Let’s go over the key part of the new repayment program.
The features of the new repayment program are intended to simplify options for borrowers. But this is the federal government we are talking about here, so even its simplification schemes end up being confusing. First, it’s important to understand that only borrowers with direct loans are eligible for the new repayment rules. This means borrowers with commercially-held federal loans must consolidate into a direct loan. Those with commercially-held FFELP, Perkins or Health Education Assistance Loan (HEAL) Program loans must consolidate by the end of 2023 to be included.
Talk to your loan servicers for details on your particular loan and the consolidation process. I would suggest starting early, but from what I am reading online, loan servicers are also confused by this development, so I think the key thing to do right now is just try to gain as much understanding of options as possible, and set some time aside this fall to begin the process.
Once the balances are consolidated to a direct loan, or for those with a direct loan now, the government is providing four new income-based repayment plans. The plan receiving the most attention and promotion is the SAVE plan, which is designed to replace the current REPAYE plan. Borrowers already using the REPAYE payment option, will automatically move to the SAVE option, those with consolidated federally held student loans not already using REPAYE, will need to apply through www.studentaid.gov.
While the full scope of this large and complex new program is beyond the scope of this column, highlights of the SAVE repayment option are that when the program is fully implemented borrowers will be limited to paying only 5% of “disposable income” toward their student loans, and after 120 monthly payments will be eligible for forgiveness of principal and interest. In addition, single borrowers earning less than $32,805 will have no payments due on their loans and those who have already made 240 monthly payments may see their loan balances forgiven.
The government is also expanding and simplifying the Public Service Loan Forgiveness (PSLF) program, which allows those working in government, education, non-profit or the military to receive loan forgiveness after a certain period of service and payments. The new program also has options for parents with direct PLUS loans.
Loans must be in good standing to be eligible for SAVE, and once fully implemented, calculators I’ve played around with online are saying loan payments could be reduced to about 20% to 40% of current payment levels. There’s a lot to learn about this new program, so if you or your child has student loan debt spend some time getting familiar with options.
OK, now for a little advice. I know student loans are very necessary to many families to help get kids educated and independent. When used correctly, these products can be solid solutions to help improve the economic prospects for young adults. In my opinion, however, these products are easy to abuse and can have potential unintended consequences far in excess of their benefits. They have also been used and abused as a political football in Washington, D.C., creating uncertainty and confusion for many families, and the bottom line is I just don’t trust the federal government when it comes to this issue.
While every person’s situation is unique, my advice is to apply for payment relief, which should reduce the risk of default, and then if feasible work to pay these things off like any other debt. Hopefully the education financed with the loan has created a solid career and as income rises the opportunity to eliminate this debt from the balance sheet may present itself. A paid off student loan is even better than reduced payment student loan.
One more thing, thanks for all the comments on my new video version of this column being posted on Oak Partners YouTube and Facebook. Based on my feedback so far, these little video podcasts are something people enjoy, so I will keep doing them. Please seek me out online if you get a moment, the video was less painful to do than I expected.
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