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Student Loan Payment Restart

September 11, 2023

The moratorium on federal student loan payments will end at the end of August. Therefore, many student loan borrowers will need to create a strategy to stay current on their student loan payments while applying the myriad of new rules and operational changes that will also be taking effect.

To start, many student loan borrowers will need to determine which loan servicer they need to be interacting with. During the pandemic-related student loan payment and interest suspension many student loan servicers left the business causing a big shake-up in the industry. It is estimated that 40% of borrowers had their student loans transferred to a new servicer over the past several years. Therefore, the servicer that a borrower was used to interacting with may no longer be the company that they should be interacting with today to make sure they are meeting their obligations.

Next, while the executive order that was intended to forgive all or a portion of federal student loan balances was struck down by the Supreme Court, there is another student loan relief package: the Saving on a Valuable Education (SAVE) plan, that will benefit some borrowers. The SAVE Plan is an extension of the income-based repayment plans that were enacted during the Obama administration.

The new income-based repayment plan under the SAVE Plan will increase the income level that will allow a borrower to qualify for a minimum payment of $0 from 150% of the federal poverty level to 225%. In addition, those with income over the threshold that will require them to restart student loan payments, the payment will be based on 5% of their income over the threshold rather than 10%. This will cut the required payment in half for those who were on an income-based repayment plan before the pandemic, assuming their income level is comparable to what it was before student loan payments were suspended.

The SAVE Plan also addresses several of the pitfalls that were a part of previous income-based student loan repayment plans. In the past, if a borrower made the minimum payment under an income-based repayment plan and the payment amount did not cover the interest being charged, their student loan balance would increase over time. This could put the borrower in a difficult position down the road if their income increased as their new income-based repayment amount would be based on their new income level and their student loan debt amount could be substantially higher than it was when they left school. Under the SAVE Plan, borrowers on an income-based repayment plan who make their required minimum payments will not be charged any interest in excess of their payment amount so their student loan balance cannot increase over time, although it may not decrease if their payment amount does not exceed the interest charged. This provision makes income-based repayments plans much more attractive for workers who may be in a lower income bracket early in their career but expect their income to increase over time.

Finally, the time period to qualify for student loan forgiveness has been decreased from 20 years to 10 years for borrowers with an original student loan balance of $12,000 or less. This means that borrowers with lower student loan balances will only be required to make the minimum income-based monthly payment for 10 years and any remaining balance on their loans will be forgiven, tax-free. Meanwhile, those with original student loan balances in excess of $12,000 will still be required to pay the minimum income-based repayment plan each month for 20 years to qualify for the same tax-free loan forgiveness. The 10-year rule will still apply to public service student loan forgiveness and the definition of employers that qualify for public service loan forgiveness has been expanded to include additional employers and professions.