The Supreme Court might have nixed student loan forgiveness in late June, but on the same day the Biden administration showed it had anticipated the SCOTUS move and already had a new plan in the wings to help borrowers.

The Department of Education quickly announced a new plan on June 30 that advisors say will help soften the bite of student loan repayments, which restart in October after a long pause that started during the Covid-19 interregnum.

The effects will be far-reaching for some clients, even requiring them to rethink their tax filing status.

The rules overhaul the EOD’s previous income-based repayment plan program, called REPAYE, which caps monthly payments on debt at 10% of discretionary income and forgives loans after 20 years of repayments (or 25 years for graduate loans).

The new program is called SAVE (which stands for the "Saving on a Valuable Education Plan.") This program augments the old one in a number of ways: First, it protects more of people’s monthly income from being captured in their student loan repayment calculations. Next, it quashes the buildup of interest. And finally, it allows borrowers to keep their spouses’ incomes out of the calculations. These parts of the plan are set to start this summer (before the payment restart), and altogether they can drastically lower a borrower’s monthly bill. Borrowers who had already signed up for REPAYE will automatically be moved to the new plan.  

Eventually, “the monthly student loan payments under SAVE will be cut in half for undergraduate debt and slightly for graduate debt,” said Mark Kantrowitz, publisher and vice president of research at the Saving for College website.

“The overall goal is they’re going to hopefully have the majority of borrowers on one plan that’s going to result in the lowest monthly payment,” said Jake Northrup, a Rhode Island advisor with Experience Your Wealth, a firm that has carved out a niche helping student debt holders.

Benefits That Start This Summer
The new SAVE plan increases the income exemption for repayments, raising it from 150% of the poverty line to 225%. That means more is subtracted from monthly income calculations for the lower monthly payment.

“This means a single borrower who earns less than $32,805 a year ($67,500 for a family of four) will not have to make payments,” said the DOE’s Federal Student Aid Office. “As a result, we estimate that more than one million additional low-income borrowers will qualify for a $0 payment, including 400,000 who are already enrolled on the REPAYE plan, and will see this benefit applied automatically. This will allow them to focus on food, rent and other basic needs instead of loan payments.” Borrowers earning more than that can still save $1,000 a year, the department said.

The new plan also covers borrowers’ unpaid monthly interest so that it won’t grow—as long as they make their scheduled payment.

“As a result, borrowers who pay what they owe on this plan will no longer see their loans grow due to unpaid interest. We estimate that 70% of borrowers who were on [an income-driven repayment] plan before the payment pause would stand to benefit from this change,” the Federal Student Aid Office said.

“Let’s say that you pay $100 toward your loans,” said Northrup. “But the loans are accruing at $300. Now the government is going to pay the full difference between that $300 interest charge and your $100 payment. So as long as you’re making payments, your loan value isn’t going to grow.” He said previously only 50% of the interest was covered. So no matter how long they’d been paying, borrowers’ loan amounts were increasing.

Beth Walker, a wealth advisor and founder of the Center for College Solutions at the Carson Group, said that with the new plan, “They’ve raised the floor on the level at which payments start, and then they’ve lowered the bar in terms of the maximum percentage of what people can pay.”

The new wrinkle with spousal income means people are going to have to rethink their filing status.

“It may influence how people do their taxes,” Walker said. “So married filing jointly may go to married filing separately in an effort to now qualify for a much lower monthly payment and eventual loan forgiveness.”

Do The Math
However, borrowers will have to do the math. The spousal inclusion is enticing, but it’s not the only factor they’ll use. Northrup said that in certain cases, borrowers will want to continue to use another method, the Pay As You Earn (or PAYE) plan, which, even though it requires higher monthly payments, might forgive the loans sooner, in perhaps 20 years instead of 25. The spousal income exemption just means some plans might need a rethink: To change or not to change is now a question.

“Before, under REPAYE,” said Northrup, “even if you filed separately you had to include the spouse’s income. So there were a lot of situations where we had a client on either Pay As You Earn or another plan called Income-Based Repayment, where now we’re having them switch over to this new plan because now we’re able to file taxes separate.”

He added, however, that professionals such as doctors, who see a huge jump in income after they finish school, might continue to benefit from the PAYE program’s overall pay cap, something they wouldn’t get under SAVE. That’s a big deal for someone whose income jumps from $75,000 to $300,000 in a year, he said. But the PAYE program will go away next year, and people would have to consider now whether to seize on it.

More Goodies Next Year
The SAVE plan will offer more goodies come July 2024. For instance, those who had original loans of $12,000 or less will see them forgiven in 10 years, not 20. And the monthly payment on undergrad loans will be slashed from 10% to 5%.

“Borrowers who have undergraduate and graduate loans will pay a weighted average of between 5% and 10% of their income based upon the original principal balances of their loans,” said the Department of Education. “For example, a single undergraduate borrower making $50,000 a year would see their payments fall a further $72 a month, bringing their total reduction on the SAVE plan to $163 a month.”

There’s another problem with student loans: Borrowers must show the government what they’re making to get on these income-based repayment plans. Since the Covid forbearance, there’s been a lot of confusion about when borrowers should recertify their income, and Northrup said that loan servicing companies, of which he’s often critical, add to the confusion. (The Department of Ed pushed out the recertification to six months after the payment pause ends.)

“We have seen a few mistakes of loan servicers telling clients that they needed to certify their income this year,” said Northrup. “But according to the guidance at the Department of Ed, no one needs to certify their income until 2024. Why does that matter? Because a lot of our clients ended up filing their taxes as joint in 2022 instead of separate.” In one client's case, he said, the loan servicer was going to base the certified income off that 2022 tax filing, which would have caused the client’s taxes to skyrocket.

Slow Walk
People are often psychologically geared to want to scrape debt off their books. But the rush to pay off student debt too soon can often be a mistake, Walker reminds her clients, since a lot of that debt might be forgiven if the borrowers are simply patient and find the right income-based repayment plan. With the lower payments under the SAVE plan, that overall load might be lightened considerably.

“I have people who are like, ‘I just want to get the monkey off my back,’” she said. “I want to race to the finish line. And I would say, ‘You want to slow-walk this.’ No. 1: You want to be on an income-driven repayment plan. No. 2: You want to do the least amount of payments for the longest period of time to start with.”