Student Loan Planning under the Biden Administration's SAVE Plan
Introduction: Welcome! In this blog post, we delve into exciting developments in the world of student loans, courtesy of the Biden Administration. Last year, they introduced an all-encompassing student loan relief package aimed at alleviating the strain caused by mounting student debt. Two core components included a proposed one-time cancellation of up to $10,000 of Federal student debt per borrower and a brand-new Income-Driven Repayment (IDR) plan with borrower-friendly terms. However, this summer, the U.S. Supreme Court ruled against the loan forgiveness part of the plan. But fret not! The Biden administration is pushing forward with the SAVE Plan, the new IDR plan. In this post, we will walk you through the SAVE Plan's features, how it affects student loan planning for both new and existing borrowers, and actionable tips in light of the upcoming end of the current student loan payment pause.
Breaking Down the SAVE Plan: The SAVE Plan replaces the existing REPAYE plan in the IDR plan lineup, offering a remarkable reduction in monthly student loan payments for countless borrowers. For undergrad loans, the required payment drops from 10% of discretionary income (for those on IBR, PAYE, or REPAYE plans) to just 5%. Additionally, the calculation for discretionary income is adjusted to lower the burden for most borrowers. Undergrad loan borrowers can expect their payments to be more than halved compared to other plans. Graduate loan borrowers will also enjoy a significant reduction in their payments, although not as substantial as undergrad borrowers.
Addressing Past Repayment Plan Issues: The SAVE Plan introduces crucial fixes to address issues that previously plagued other repayment plan options. For married couples filing taxes separately, the spouse's income can now be excluded from the monthly loan payment calculation. This is a huge relief for borrowers whose spouses earn higher incomes. Furthermore, any loan interest not covered by the monthly payment will be entirely subsidized. This ensures that loans won't negatively amortize, safeguarding borrowers on the SAVE Plan from increased loan balances over time.
Expanded Options for Loan Forgiveness: Exciting news for those seeking loan forgiveness! The SAVE Plan introduces expanded opportunities. Borrowers whose original loans totaled $12,000 or less could be eligible for forgiveness after just 10 years of consistent monthly payments. This is a significant improvement compared to other IDR options, which typically require 20-25 years. Moreover, borrowers will receive forgiveness credit for months where they couldn't make payments due to deferment or forbearance. Even payments made on consolidated loans no longer reset the forgiveness clock, a tremendous benefit.
Preparing for the Future: As we celebrate these new changes, it's vital to prepare for the upcoming end of the current student loan payment pause on August 31, 2023. Fear not, though! There are still ample planning opportunities for borrowers. Please feel welcome to reach out to our team where we'll help you explore which of the remaining IDR options suits your needs, the optimal timing for income recertification, and the advantages of filing taxes separately to exclude spousal income.
Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
