Student Loans Update

The new student loan update, which introduces a new payment plan and a list of small changes to the formulas for other plans, is hefty! Whether this directly applies to you or you send along this post to someone it helps, you still may want to understand the basics of this new plan.

SAVE Plan Math

First off, there will not be any forgiveness on Student Loans…yet. The Supreme Court struck down the Biden Administration’s original student loan forgiveness initiative. What has followed in the wake of this ruling are two things: a new attempt at student loan forgiveness that will take time to work out and the implementation of a change to student loan payments. I will talk about the latter here and keep you updated on the former, should it ever come to pass.

The new IDR (Income Driven Repayment) Plan for Student Loans is here! And what a mouthful, am I right? The new arrival is called the Saving on A Valuable Education (SAVE) plan. In short, the plan is very preferential toward those with undergraduate student loans. It may end up reducing your student loan payments by as much as half, if your balance is mostly undergraduate loans. For graduates it still may help lower your payment, as it modifies the definition of discretionary income in a slightly more favorable way.

The plan replaces the REPAYE plan, which made your payment 10% of your discretionary income. In that plan, they defined discretionary income as adjusted gross income (AGI) above 150% of the federal poverty line for your household. You can find the current federal poverty line chart here.

Under the new plan, your payment will be 5% of your discretionary income for undergraduate loans or 10% for graduate loans. However, the plan also revises the definition of discretionary income as AGI above 225% of the federal poverty line for your household. So even graduate loans will get a slightly better deal under this plan, as it raises the amount the federal government determines necessary to exclude from the calculation.

Other Changes to Student Loans

A few other changes to the plan include the elimination of negative amortization (your loans will no longer “go infinite” by accruing more interest than your minimum payment), the ability to exclude a spouse’s income from payment calculation by filing separately on taxes, and a slightly expanded forgiveness option. The new forgiveness makes it so that you will be forgiven for your loan balance if you make 20 years of payments on undergraduate loans (25 on graduate) and for those whose original student loan balances were under $12,000 combined, they will have them forgiven after 10 years of payments (if they aren’t already paid off!) There is a gradient in there for original balances between $12,000 and $21,000 as well, which adds on one year per $1,000 above $12,000.

The final thing to know about this new plan is that it will be phased in. This year they will be implementing the changes to the discretionary income threshold, stopping the negative interest accrual if you are making minimum payments, and implementing the married filing separately income exclusion. Starting in July of next year they will be implementing the changes to the payments and forgiveness options.

In Conclusion

Well, as I promised, that was a lot! It’s truly a mouthful to talk about student loans these days. That said, if you have further questions, please don’t hesitate to reply to this email with them. You can also reference this article for more detail and insight.

I hope you enjoyed the information!

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