Last week, the Supreme Court struck down the Biden Administration’s plan to forgive up to $20,000 in federal student loan debt for every borrower. Unfortunately, based on what was reported during opening arguments, this outcome was expected. President Joe Biden immediately announced his intention to find a new path to forgiveness using a different law. But this time, there is no moratorium on student loan payments. They resume October 1 no matter what, so if you hold federal student loans, you have until then to fit them back into your budget. There’s never been a better time than this summer to make a plan for student loan repayment. And you might as well address the rest of your financial situation at the same time!
Can You Pursue One of the Remaining Paths to Forgiveness?
The first thing to do is check. There are special programs for certain types of employment. But there are also universal paths available. When enrolled in certain alternative repayment plans, any remaining balance after 10 to 25 years (depending on the loan and plan) is forgiven. And none of this was impacted by the recent court ruling.
However, this strategy only works if you can qualify for something lower than the standard monthly payment. Otherwise, you won’t end up paying less in total over the payment term. To do this you need to evaluate all the alternative repayment options.
The New SAVE Plan Can Lower Your Student Loan Payments Further
The Biden Administration has proposed a new, much more attractive alternative repayment option called SAVE (Saving on a Valuable Education). It also was not covered by the court ruling and will proceed, with some provisions coming into effect July of next year. Under the SAVE plan:
- Your payment would be set based on 5% of your discretionary income (down from 10% in the REPAYE plan)
- The income exempt from this calculation increases to 225% of the federal poverty limit (up from 150%). This limit adjusts for family size (your dependents increase your income exemption).
- And unpaid interest will not accrue while you’re in the plan and making the required payments (a hugely beneficial feature for planning purposes!).
The SAVE plan greatly expands who can benefit from an income-dependent repayment plan. And at certain income levels (depending on the size of your loans), SAVE will lower your monthly student loan payments compared to the formerly most generous repayment option. This hopefully leaves more to be forgiven later on or, at the very least, provides additional help if you’re a struggling borrower. In fact, for those with incomes that stay below the exemption over the payment term, the SAVE plan is effectively total loan forgiveness as your payment would be zero (which is even better than the direct loan forgiveness that was struck down!).
What Can I, as Your Wealth Manager, Do For You?
- I’d evaluate all your alternative repayment options, either to pursue forgiveness or to lower your bills if you’re in a cash crunch.
- I’d also check whether you qualify or should pursue any forgiveness programs (Teacher Loan Forgiveness, PSLF, etc.).
- If needed, before payments restart I’d conduct a post-mortem analysis of your last 12 months of spending. Then I’d work with you to comb through your budget to find somewhere you can cut back—and stick to it.
- And finally, I’d make recommendations and support you in taking action. This could be selecting the right repayment option, sticking with the standard payment, refinancing, or even paying off the debt in a lump sum if you’re in the position to do so and it’s appropriate for your situation.
In any event, I would evaluate all your options and help you build a plan to eliminate your student loans one way or another. But you need to take the first step:
Eric R. Figueroa, CFP®
I am a Folsom, CA, fee-only wealth manager serving the Greater Sacramento area, California Gold Country, and the nation virtually. I offer financial planning and investment management, specializing in impact investing and personalized values-based investing.
All content presented in this article is for informational purposes only. Materials presented should not be interpreted as a solicitation or offer to buy or sell a security or the rendering of personalized investment advice, which can only be provided through one-on-one communication with a financial advisor. The content reflects the opinions of Hesperian Wealth LLC (HW), except where cited, which are subject to change at any time without notice. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the information cannot be guaranteed. All information or ideas provided should be discussed in detail with a financial, tax, or legal advisor prior to implementation.