There are only a few short months before student loan payments resume, but no need to panic. Borrowers have a lot of options to minimize the impact on their budgets.
The Supreme Court on Friday struck down President Joe Biden’s student debt forgiveness plan, which would have canceled $10,000 in federal student loans, including Parent Plus loans, for those earning less than $125,000 or households with less than $250,000 in income. Pell Grant recipients, who typically demonstrate more financial need, would get an additional $10,000 in debt forgiven.
The same day, the Department of Education finalized “the most affordable repayment plan ever created,” the White House said, giving borrowers new options to reduce their monthly payments. Here, we’ll explain the new repayment plan as well as provide you with some other options to prepare.
What’s “the most affordable repayment plan ever created”?
The Saving on a Valuable Education (SAVE) plan is an income-driven repayment (IDR) plan the White House says will be available to borrowers this summer, before payments resume.
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Here are some key details:
- Borrowers will only have to pay 5%, down from 10%, of their discretionary income for undergraduate loans each month. 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.
(Discretionary income is the extra income you have after paying for basic necessities, like taxes, everyday expenses and household bills. For student loan purposes, discretionary income is usually calculated as the difference between your annual income and 150% of the poverty guidelines for your family size and state.)
- Raise the amount of income that’s considered non-discretionary income, which means your discretionary income that can go toward repaying student loans is smaller. This guarantees that “no borrower earning under 225% of the federal poverty level—about the annual equivalent of a $15 minimum wage for a single borrower—will have to make a monthly payment under this plan,” the White House said. Borrowers not eligible for a $0 payment will save at least $1,000 a year, the administration said.
- Forgive loan balances after 10 years of payments, instead of 20 years, for borrowers with original loan balances of $12,000 or less. The Department of Education estimates this will allow nearly all community college borrowers to be debt-free within 10 years.
- Stop unpaid monthly interest from accruing so borrowers who pay what they owe won’t see their loans grow. The Department of Education estimates 70% of borrowers who were on IDR plan before the payment pause could benefit from this.
What else can I do to prepare to start repaying?
- Put into a savings account the money you would need each month for your student loan repayment, so it’s earning a little interest until it has to be used. Some online savings accounts are offering around 5% interest.
- Check your employee benefits. For example, Aetna matches employees’ U.S.-based student loan payments up to $2,000 a year for a lifetime maximum of up to $10,000 for qualifying loans; PwC offers associates and senior associates up to $1,200 a year toward student debt; and Google matches up to $2,500 a year.
- Cut expenses and pick up a side hustle. Betsy Mayotte, president of the Institute of Student Loan Advisors, a nonprofit based in Plymouth, Massachusetts, said individuals should reevaluate their expenditures and practice budgeting and forming a new routine around monthly student loan payments.
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- Check if you’re eligible to lower your payments with a new plan. You can speak to your servicer or use the online Loan Simulator for options.
- Know what your payments will look like and whether you’ll be able to afford them. If not, and if you don’t qualify for forgiveness, it may make sense to refinance at a lower interest rate if possible before payments restart, Randy Lupi, financial professional with Equitable Advisors, said. Just note, though, that once loans are refinanced with a private company, they will no longer be eligible for any federal forgiveness programs, he said.
- Check your eligibility for other government loan forgiveness programs. “For example, individuals in the non-profit field likely qualify for Public Service Loan Forgiveness, which does not have a cap on the amount of forgiveness and should take this time to make sure they are properly enrolled,” Lupi said.
- Talk to an adviser. Anyone with student loans can speak with a mentor or financial adviser to educate themselves about their options. The Federal Student Aid website can help direct you to counselors, as well as organizations like the Student Borrower Protection Center and the Institute of Student Loan Advisors.
- Consider paying your loan down before repayments start. Because the student loan repayment pause includes a 0% interest rate, 100% of payments made during the pause go toward your principal, said Eric Schuppenhauer, head of national banking and lending at Citizens Bank. If you trim your loan amount, you may be able to cut the length of the loan and save money in the long run.
- Enroll in autopay with your servicer. This “will ensure you don’t miss any payments and help you avoid late fees or penalties.” said investment advisor Kelly Gilbert of EFG Financial in Grand Rapids, Mich. Servicers also take a quarter of a percent off your interest rate.
- Contribute to retirement accounts to lower payments. “If you participate in an IDR plan, contributing to a retirement account can lower your adjusted gross income, which would ultimately lower your monthly student loan payments,” Gilbert said.
- Look for other forgiveness programs. Forty-seven states and Washington, D.C., have their own state-based student loan forgiveness plans. Most are tailored to a single industry or profession (think doctors, teachers, police officers and farmers) or people who agree to work in places with a dire need for their services. Some may require the employee to work in a job for a certain period of time for their debt to be waived. You can find a list of those states’ programs here.
What should I NOT do?
- Avoid using credit cards for payment. “Your credit card likely has a higher interest rate than your student loan debt,” Gilbert said. “Paying your loans with a credit card will just cost you more money. It could also put you even further into debt that you cannot handle.”
- Never pay for help with your federal student aid. Scammers may contact you saying they will help you get loan discharge, forgiveness, cancellation, or debt relief for a fee, warns the Department of Education. “You never have to pay for help with your federal student aid,” it said. “Make sure you work only with the U.S. Department of Education, the office of Federal Student Aid, and our loan servicers, and never reveal your personal information or account password to anyone.”
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at [email protected] and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
