Handling Student Loan Debt

08 August 2023

Starting September 1, 2023, federal student loans will begin accruing interest again. And loan payments will officially restart in October 2023.

As part of federal relief measures during the COVID-19 pandemic, individuals with federal student loan debt weren't required to make payments, and interest charges were suspended. Those relief measures have been in place since March 20, 2020. If borrowers made payments during this period, the amounts paid went directly toward principal, not interest.

Since taking office, President Biden has tried to implement additional relief measures for federal student loan borrowers. On June 30, 2023, the U.S. Supreme Court struck down Biden's proposed student loan forgiveness program. This program would have canceled up to $20,000 of debt for approximately 43 million eligible borrowers. The majority opinion found the forgiveness program exceeded the legal authority of the U.S. Department of Education (DOE).

The Biden administration is still trying to find ways to help student loan borrowers. Here's an overview of his latest proposal and other programs that may provide relief to certain individuals with federal student loans.  

The SAVE Plan

President Biden's latest relief measure is the Saving on a Valuable Education (SAVE) plan. On July 14, 2023, the DOE reported that the SAVE plan would go into effect immediately and replace the existing Revised Pay as You Earn (REPAYE) plan. These programs target income-driven repayment (IDR) programs, which make student loan debt more manageable by basing the monthly payment on income and family size. It's estimated that the SAVE Plan will provide relief to more than 804,000 borrowers with $39 billion in debt.

Eligible individuals hold Direct or Federal Family Education loans (FFEL) issued by the DOE, including Parent PLUS loans. They must have hit the necessary forgiveness threshold upon receiving IDR credit during any of the following periods:

• Any month of active repayment, partial or late, no matter what loan type or term,
• 12 or more consecutive months of lender-approved loan payment reductions or suspensions,
• 36 or more consecutive months of paused loan payments,
• The months in deferment prior to 2013, not including in-school deferment, and
• Months spent in military deferment or economic hardship on or after January 1, 2013.

The SAVE plan is expected to face legal challenges and could take several months to even years before the details are locked in. In the meantime, the following provisions of the SAVE plan are expected to go into effect in 2023:

More income protection. The SAVE plan limits monthly payments to a percentage of discretionary income, presently 10%. Discretionary income is defined as the difference between your adjusted gross income and 150% of the federal poverty guidelines (about $21,870 per individual for 2023) under the REPAYE plan. That threshold will increase to 225% of the poverty line (about $32,800 per individual) under the SAVE plan. So, essentially any borrower who's earning less than $15 per hour for a full-time position could qualify for a $0 monthly payment under the SAVE plan.

Cap on interest payments. The SAVE plan eliminates interest that exceeds the monthly payment. For example, if a loan accrues $50 of interest per month and the monthly payment is $30, the remaining $20 of interest won't be charged, according to the DOE.

No co-signer for married borrowers. You can apply for the SAVE plan without having your spouse co-sign. The REPAYE plan currently requires married borrowers to report their spouse's income, even if they file taxes jointly.

You'll be automatically enrolled in the SAVE plan if you are currently on the REPAYE program. If you wish to apply for an IDR, visit the Federal Student Aid website.

The SAVE plan is expected to bring additional relief to eligible borrowers in 2024. These changes include smaller monthly payments, a faster track for loan forgiveness, deferment and forbearance support, and automatic enrollment.

Other IDR Options

If you don't qualify for the SAVE plan but want to relax the repayment terms for your student loans, first contact your lender to discuss a new plan. Besides the SAVE plan, other existing IDR options for federal student loans include:

Pay as you earn (PAYE). A PAYE plan decreases the monthly payment to 10% of your discretionary income and extends the term to 20 years.

Income-based payment plan. This type of plan decreases the monthly payment to 10% or 15% of discretionary income, depending on when you took out the loans, and extends the term up to 25 years.

Income-contingent repayment plan. This decreases the monthly payment to the lesser of 20% of discretionary income or what you would pay on a repayment plan with a fixed payment over 12 years. It also extends the term to 25 years.

Graduated payment plan. With this plan, payments start small and increase every two years over 10 years. If loans are consolidated, they can last as long as 30 years.

Consolidation loan payment plan. By consolidating federal loans, you may be eligible to extend the repayment plan as much as 30 years.

These programs don't apply to private student loans. If you're having trouble making payments on private student loans, discuss repayment options with your lender.

Other Student Loan Forgiveness Programs

Additional programs for federal student loan borrowers include:

Perkins loan cancellation and discharge. The last Perkins loan was issued in 2017. If you have a Perkins loan and work in public service — such as nurse, teacher, or full-time firefighter — you may be eligible for partial or full loan forgiveness.

Public service loan forgiveness (PSLF). Some federal loans can be forgiven after 120 monthly loan payments (10 years) under a PSLF program. Eligibility involves employment with certain nonprofit organizations or government agencies while making qualifying monthly payments.

Teacher loan forgiveness. If you teach full-time for five full and consecutive academic years in a low-income elementary or secondary school or educational agency, you may be eligible for up to $17,500 in loan forgiveness.

In addition, the following programs are designed to provide some relief for federal student loans when specific extenuating circumstances affect the ability to attend school or repay the loans.

Borrower defense to repayment. These programs are designed to help if a school intentionally misled the borrower or engaged in misconduct.

Closed school discharge. This applies if the school you attended closed while you were enrolled or shortly after you withdrew.

Discharge due to death. All federal loans may be discharged if the student loan borrower or student for whom the loan was taken out dies. A family member or other representative must submit proof of death, such as a death certificate, to the loan provider.

Discharge in bankruptcy. Under some situations, student loans may be discharged during bankruptcy proceedings. The borrower must file for a Chapter 7 bankruptcy, file what's known as "adversary proceedings," and demonstrate that repaying the loans will impose an undue hardship on the borrower or the borrower's family.

False certification discharge. A person who received a Direct or FFEL loan and whose school falsely certified that individual's eligibility for the loan may qualify for this discharge.

Total and permanent disability discharge. Borrowers may qualify for a loan discharge, whether a Direct, FFEL or Perkins loan, or TEACH grant if they become totally and permanently disabled. Three specific organizations can help qualify the person for this type of discharge: 1) the U.S. Department of Veterans Affairs, 2) the Social Security Administration, and 3) a licensed physician.

Unpaid refund discharge. Borrowers may qualify for unpaid refund discharge for Direct and FFEL loans if they withdrew from school and the institution didn't return the required funds to the loan provider. Before applying for a discharge, however, you must try to resolve the problem directly with the school.

For More Information

Student loan forgiveness is a hot topic. The Supreme Court struck down President Biden's original federal loan forgiveness program, and it remains to be seen whether his new SAVE plan will be challenged in court. In the meantime, borrowers have several alternatives to consider for alleviating the burden of student loan debt. Contact your financial advisors to discuss your options and apply for relief, if you're eligible.

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