The last three years have been quite a whirlwind in the student loan world. First, payments and interest on federal student loans have been suspended since March 2020. In addition, there have been major changes to existing federal loan programs like the Public Student Loan Forgiveness (PSLF) program. And on the private student loan side, refinances being few and far between, especially with rising interest rates over the last year.
Because of all the adjustments, I thought it would be helpful to summarize where we stand in January of 2023 and what to watch for in the coming year.
Perhaps the biggest story right now is the Biden-Harris administration's proposal to forgive up to $20,000 of student loan debt per borrower. This proposal is targeted at low and middle-income borrowers and could potentially apply to some residents or starting attendings in the medical professional world.
The proposal has met some roadblocks in the legal system. It's currently been struck down by Federal courts, and the case is scheduled to be heard by the Supreme Court with oral argument starting February 28.
Some of the outcomes of that case will determine what the year ahead looks like in the student loan world.
At this time, the administrative forbearance or the forbearance of payments and interest on Federal student loans is somewhat tied to the timeline and outcome of the forgiveness proposals legal case.
In November of last year, the Biden-Harris administration announced the latest extension, hoping to alleviate uncertainty for borrowers until the Supreme Court reviews lower-court rulings blocking Biden's student debt relief program. Both the Executive Branch and Department of Education have suggested that if the legality of the debt relief program hasn't been resolved by June 30, 2023, payments will be set to resume 60 days after that - so late August of 2023, regardless of the outcome of the case.
However, it's my professional opinion and the opinion of many student loan experts around the country that the decision of the Supreme Court on the forgiveness proposal does matter and will affect the future of federal student loan policy.
Right now, though, as it stands, student loans are set to resume sometime in the summer or fall of 2023.
A note on resuming payments
The Department of Education has signaled that they will notify all borrowers before repayments resume. Nevertheless, it is critical to note that many borrowers will need to opt back into their auto payments to have the payments start again and drafted on time when the forbearance ends. Your federal student loan servicer should be reaching out to you to confirm the auto payments and the auto drafts. Be on the lookout for that communication as payments resume, perhaps this summer or fall.
There are several other developments of which to watch. A part of the Biden-Harris proposal for debt relief included changes to existing income-driven repayment (IDR) plans to make it easier for borrowers to continue repaying their student loans when the time comes.
The details of this change have been outlined over the last few weeks, and we have been hearing that it will be an adjustment to one of the existing Income-Driven Repayment (IDR) plans to which borrowers currently have access.
You may be familiar with the Revised Pay As You Earn or REPAYE plan. It's one of several different income-driven repayment plans available to borrowers with Federal student loans. And the key takeaway is that REPAYE will now likely result in the lowest monthly payment calculation of any of the income-driven repayment plans.
REPAYE and its counterpart Pay As You Earn (PAYE) used to result in similar monthly payments because 10% of a borrower's discretionary income was the amount they expected to pay. The proposed changes to the REPAYE program lowers that threshold of 10% of discretionary income to 5% of the borrower's discretionary income. In addition, the discretionary income formula has also been tweaked to lower the amount of income that is included in that discretionary income amount. So, 5% of an even lower amount of income should result in significantly lower payments for many borrowers.
This impact is yet to be seen because repayments on federal student loans are still suspended. But when repayments with resume, it will be imperative for borrowers on the PAYE Plan or who have not opted into the REPAYE Plan to reconsider which IDR plan is best for them. In the past, PAYE has been a popular plan amongst high-income earners because of its payment cap. However, it may be worthwhile to switch, or at least consider switching, to the REPAYE Plan with the proposed changes.
Another federal student loan announcement to pay attention to is the one-time IDR adjustment that will happen in the summer of 2023. This one-time IDR adjustment is similar to the limited PSLF waiver, which expired in October 2022.
This adjustment will allow borrowers who were in periods of deferment or administrative forbearance, were perhaps making the wrong types of payments on their loans or even had the wrong kind of loans to have those periods count towards IDR forgiveness plans. Not only IDR forgiveness but also Public Service Loan Forgiveness. If you missed that limited PSLF waiver last year and would like to learn more about that, pay attention to the IDR adjustment that should be happening this summer.
Visit the Federal Student Aid website to learn more. You can also reach out to SDT if you have questions on that and the impacts to you specifically.
Finally, I want to remind everyone to have some patience. It seems like we have all been practicing patience in the student loan world for the last few years. There have been a lot of policy adjustments and changes, and there are reportedly funding issues within the office of Federal Student Aid. In addition, the Department of Education is potentially facing cuts in the latest proposed budget.
Servicers and their representatives are dealing with changing repayment plans and repayment options, extensions of the administrative forbearance, and also servicer changes. They are dealing with all that, along with a wave of new PSLF applications and the upcoming IDR adjustment. Not surprisingly, many are experiencing backlogs and delayed processing times.
Although patience is necessary, at the same time, make sure to advocate for yourself. It is critical that you follow up on the paperwork that you have submitted. Don't be afraid to call your servicer to find out the answers you need and deserve.
If you don't have an advocate or don't know how or where to start, feel free to contact our team at Spaugh Dameron Tenny. We are more than happy to take a look at your situation and try to answer any questions that you have, and help ensure that you're on the right track for your specific student loan situation.
Be sure to check back in as updates happen throughout 2023.
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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.
