The Administrative Forbearance of Federal Student Loans is set to expire on December 31, 2022 (as of August 2022). In January 2023, for the first time in almost three years, payments will be due and interest accumulation will resume. Below you will find some key information to help you prepare for the changes.
If you're like most borrowers, your student loans payments were automatically drafted from your bank account before the Administrative Forbearance began in March 2020. In order to continue with auto-debit when payments resume in January 2023, you should confirm your auto-draft details with your servicer.
If you opted out of the Administrative Forbearance and continued to make payments or signed up for auto-debit after March 13, 2020, your auto-debit payments should resume without any additional action.
Income-driven repayment (IDR) plans are popular among physicians and dentists with federal student loans. Especially for those borrowers who are pursuing some loan forgiveness. As a reminder, the time under the Administrative Forbearance did count toward forgiveness programs like IDR Forgiveness and Public Service Loan Forgiveness (PSLF) even if you elected not to make payments.
If you were on an income-driven repayment plan before payments were suspended, your monthly payment amount will resume at the same amount as before the Administrative Forbearance. That is unless you've recertified your IDR plan since March of 2020. In which case, your monthly payments were recalculated based on your new income documentation, and that new payment amount will begin in January 2023.
The Department of Education instructed servicers not to require borrowers to recertify their IDR Plans during the Administrative Forbearance. One of the only reasons a borrower may have wanted to have their monthly payment recalculated was if they experienced a decrease in their income during the pandemic, which was actually common among medical professionals with production-based compensation.
Many borrowers may not need to recertify their income-driven repayment plan until 2023 or even 2024. This means that the payment amount that resumes in September may be your payment amount for many months to come. Your servicer should reach out to remind you when it is time to submit your income documentation for the yearly IDR recalculation.
If you have elected on one of the "Traditional" Repayment Plans such as the Standard, Graduated, or Extended Repayment Plans, your monthly payment will be recalculated when payments resume. The charges will be based on the principal and interest balance and the number of months remaining in your repayment period.
If you did not make any payments during the Administrative Forbearance, your monthly fee should resume at the same amount come February. Although, your "payoff" date will be delayed. This is because the Administrative Forbearance was excluded from the duration of the repayment plan. For example, if you elected the 10-Year Standard Repayment Plan beginning in October 2017, your loans would have been scheduled to be paid off in October 2027. For the sake of ease, let's say the Administrative Forbearance lasted two years, so now instead of October 2027, your loans will be scheduled to be paid off in October 2029.
If you did elect to make payments during the Administrative Forbearance, your Traditional Repayment Plan's monthly payment should be recalculated at a lower amount than you were paying prior to March 2020 since you will have a lower outstanding balance when payments are re-amortized in January 2023.
Many borrowers have become accustomed to living without a student loan payment. For some, this was a difference of thousands of dollars each month. Hopefully, you have been taking advantage!
Whether you have been using the extra cash flow to pay off other debts or adding to your savings and investment accounts, it may be necessary to adjust your cash flow strategy to re-accommodate your student loan payments in January 2023. Coming from a CFP® who encourages optimizing cash flow whenever possible, it might be a good time to see if your monthly budget can support some positive changes. For example, suppose your student loan payment was $2,000/month before the suspension of payments. In turn, you added an extra $2,000/month to your investment account during the Administrative Forbearance. Then, perhaps you try only decreasing your investment savings by $1,500/month once the student loan payments resume. After a couple of months, if this is not doable, it should be simple enough to reduce your savings by the additional $500/month.
On the other hand, if you did not find a way to capture the suspended student loan payment, that monthly amount may have found its way into your everyday lifestyle expenses. Especially with the rampant inflation recently, it may be extra challenging to resume your student loan payment in September and may call for a refreshed look at the monthly budget.
At least three servicers announced that they would no longer be servicing federal student loan accounts during the Administrative Forbearance. The two departing servicers who got the most attention were FedLoan Servicing and Navient. Borrowers pursuing Public Service Loan Forgiveness were paying close attention to FedLoan Servicing's announcement in July 2021 (or PHEAA – Pennsylvania Higher Education Assistance Agency) since they were the servicer appointed by the Department of Education to oversee the PSLF program.
FedLoan Servicing's contract was set to expire on December 14, 2021. However, with all of the administrative challenges facing them, such as the PSLF expansion/waiver and resuming payments and interest as well as needing to transfer over 7 million accounts, their contract was extended to December 2022. The expectation is by that time, all borrowers serviced by FedLoan will be transferred to a new servicer and that the Department of Education will appoint a new servicer to be in charge of the PSLF program.
Congress passed the Negotiated Rulemaking Act of 1990 to encourage federal agencies to develop proposals for changes to regulations in collaboration with public input – mostly from affected parties. In June of 2021, the Department of Education began a negotiated rulemaking procedure to develop new standards and regulations around many different aspects of the federal student loan system. In 2015, REPAYE, the latest IDR Plan was created via negotiated rulemaking. This time around, possible changes seem more widespread, spanning topics such as discharging balances for closed or fraudulent schools/programs to eligibility requirements for Public Service Loan Forgiveness.
Although the details are still being debated and might be a long way from being finalized, there are almost certainly going to be significant changes to provisions that affect the way doctors and dentists strategize around repaying their federal student loans. For example, could there be a new income-driven repayment plan? In addition, can the Public Service Loan Forgiveness program become an option for providers working in private practice? With all the recent and rumored changes, it seems that the federal government is waking up to the fact that our student loan system needs some overhauling.
Rest assured that the team of professionals at Spaugh Dameron Tenny will continue to monitor the changes occurring in the student loan space. In addition, if you'd like to schedule a time to review your strategy with one of our advisors, we are happy to be a resource.
CRN202412-1331426
Will Koster is a financial planner with Spaugh Dameron Tenny. The experience of losing his father as a teenager helped Will find his calling in financial planning. He has a passion for working with dentists and physicians, helping them navigate their unique wealth creation journeys. In addition, Will has become the in-house expert on student loans after completing the Certified Student Loan Professional® training.
