About a month ago, I wrote about how to check if you’re still eligible for student loan forgiveness, even though the $10/$20K plan was ruled unconstitutional by a judge in Texas. In that blog post, I mentioned that a member of my Financial Freedom for Creatives Club had received a letter that stated her student loans were going to get forgiven because she qualified under her income-based repayment plan. Well, here’s an update…
Yes, miracles can happen. $160,000 in student loan debt has been forgiven! For the first time, this member-student of mine is completely debt-free!
If you’re part of that income-based repayment program, you should’ve received a letter by now to let you know if your loans will be forgiven. You can also go back to that blog post for more details about that program.
Just know that December 31, 2023 is the last day to consolidate for IDR (Income Driven Reduction) Adjustment (which is the program the member above was able to get forgiveness through).
When you consolidate non-qualifying loans into a Direct Consolidation Loan, you can claim the one-time, temporary IDR Account Adjustment. Claiming this adjustment helps eligible borrowers get credit for past non-qualifying payments.
Borrowers who consolidate their non-qualifying loans by this time can accelerate their track toward loan forgiveness. Generally, if after the adjustment is applied, you made more qualifying payments than needed for loan forgiveness, you’ll have the amount refunded.
So, if you are or were enrolled in an IDR plan, are part of a Public Service Loan Forgiveness (PSLF), or aren’t on an IDR plan yet, but want to enroll in one and have government-held Direct or FFEL Loans, you still have time to do it. However, don’t wait until the last minute to consolidate your non-qualifying loans. Contact your federal student loan servicer ASAP to get the process started. If your non-qualifying loan is in default, you can still access this adjustment by getting your loan out of default (for instance, through Fresh Start ).
In the meantime, starting this Friday, September 1st in the U.S., student loan interest starts accruing and October 1st is the official start of repayment.
...which means you'll have to adjust your spending plan to add this expense back.
However, there’s another thing I want you to apply for, if you haven’t already, and that’s the government's SAVE (Saving on a Valuable Education) plan.
Because depending on your income, you may not owe anything!
President Biden said he created SAVE:
“so no one with an undergraduate loan has to pay more than 5 percent of their discretionary income.”
Here’s a chart that shows if you’re single and make under $32,805 a year, you won’t have to make ANY payments!
Check the right hand column to see what your income needs to be in order to NOT have to make any monthly payments and to eventually qualify for forgiveness.
If your income is too high, and you’re required to make payments and have only undergraduate student loans, the monthly payments will be cut in half — from 10% of discretionary income to 5%. How long you may have to make payments depends on your loan balance.
- If your original undergraduate loan balance is $12,000 or less, you’ll need to make payments for 10 years – and after that, any remaining balance will be forgiven.
- If your original undergraduate loan balance is more than $12,000, the payment period is capped at 20 years (the term goes up one year for every $1,000 above $12,000) — and any remaining balance will be forgiven.
Now, if you have both undergrad and graduate loans, your monthly payments will be a weighted average of 5% and 10% of your discretionary income, and how long you’ll need to make those payments is still uncertain.
And if you only have graduate school loans, your monthly payments will be 10% of your discretionary income, and after 25 years of payments, any remaining balance will be forgiven.
Also you know what else is great about this SAVE program? If the required payment based on your income doesn’t cover all of the interest that accrues every month, the uncovered amount will NOT be added to your balance. In other words, as long as you keep making your payments, your balance will not keep growing! This is huge because so many times I keep hearing from clients and members that they only owed like $30,000 initially but because of those interest payments, they now owe over $100K!
How to Enroll in the SAVE Plan
Borrowers who are already enrolled in the REPAYE program will be automatically enrolled in the SAVE Plan. During the transition, the DOE says it will use the two plan names, SAVE and REPAYE, interchangeably. Those who are not currently in the REPAYE program can apply now, and they will be switched to SAVE automatically.
Who Is Eligible for the SAVE Plan?
The SAVE Plan is available to U.S. federal student borrowers with Direct student loans. This includes:
• Direct Subsidized Loans
• Direct Unsubsidized Loans
• Direct PLUS Loans made to graduate or professional students
• Direct Consolidation Loans that did not repay any PLUS loans made to parents
Additionally, you’re eligible for the SAVE Plan if you consolidated a loan from the Federal Family Education Loan (FFEL) Program, including Subsidized and Unsubsidized Federal Stafford Loans, FFEL Plus Loans for graduate or professional study, FFEL Consolidated Loans that did not repay parents’ PLUS loans, and Federal Perkins Loans.
The SAVE Plan is NOT available for private student loans or parent PLUS loans. Also, you must be in good standing with your student loan payments. Borrowers in default who provide income information that shows they would have had a $0 payment at the time of default will be automatically moved to good standing, allowing them to access the SAVE plan.
What to do when payments resume
Although the SAVE plan isn’t going into full effect until July 2024, if you fall into the income categories in the chart above, you will NOT owe any monthly payments, starting in October. Then, next July, if you have only undergraduate student loan debts, your monthly payments will be cut in half. Pro Tip: Keep making those payments starting in October, so that the interest won’t keep growing, in the meantime.
Of course, the Biden administration knows that most people won’t be prepared to pay back their loans starting in October, so the Department of Education is putting together a 12-month “on-ramp” to repayment, running from October 1, 2023 to September 30, 2024, so that anyone who can’t afford it and misses their payments are not put into default and affecting their credit scores.
If you don’t qualify for the “no payment plan,” that means your income is more than 225% above the U.S. federal poverty line, so before the 50% payment discount goes into effect next July, I would suggest that you pay the full amount that you owe now, if you can.
I would also advocate saving this month (August) and next month (September) the full amount, so that you’re essentially ahead of those payments by two months.
If that still feels like a tight squeeze, see what you can reduce in your monthly spending. Let’s say your student loan payment is going to be $165, what could you cut to reduce spending by that much? (Cable, if you still have it, is around that much money. So may be those housekeeper’s visits. If it’s that much, and you’re used to having the housekeeper come every week or every two weeks, try cutting it down to just 1 or 2x per month. There’s also eating out or delivery. That adds up! By cutting that by $165, there’s your student loan payment savings.)
Finally, if you need a way to keep track of your spending and also rewrite some money beliefs, I’ve created a Conscious Cash Companion.
With Love & Gratitude,