SAVE and OnRAMP
On Friday, June 30th, a date which will live in infamy (at least with student loan borrowers), the Supreme Court ruled that the Biden administration’s student debt forgiveness program was unconstitutional. No sooner had the ink dried that the administration announced their plan B, a double whammy of the SAVE and On-Ramp programs. These programs were aimed at helping citizens with outstanding student loans to finally pay off their loans or have a path toward student loan forgiveness after a series of payments. The ambitious SAVE program will replace the current REPAYE program and will, by July 1st of 2024, replace the entirety of the IBR series of plans. The On-Ramp program will help families adjust to their recently renewed student loan payments by suspending the reporting of missed payments to the credit bureaus until September 2024. Let’s tackle the On Ramp program in a bit more detail and how it affects your personal financial planning:
This plan will prevent the reporting of any missed student loan payments to credit rating bureaus from 10/1/2023 until the end of September 2024. Because of this, borrowers will have an on-ramp to adjust to their re-started student loan payments without destroying their credit.
While the suspension of reporting missed payments to the credit bureaus may help the more vulnerable borrowers for a short time, the interest will continue to be capitalized. This means that missed payments and interest will continue to accrue on the outstanding loan even if the missed payments have no effect on the borrower’s credit score. – insert transition sentence –
This is the big-ticket item (consolation prize) for borrowers that the Biden administration is hoping eases the pain of the overturned forgiveness program and improves financial planning goals. Currently, there are several loan forgiveness programs collectively known as either Income-Driven Repayment programs (IDRs) or Income-Based Repayment programs (IBRs). The popular REPAYE program is an IDR program that allows the borrower to pay between 10-20% of their discretionary income for 20 years (if undergrad loans only) or 25 years (if graduate loans), and then receive loan forgiveness on the remaining balance at the end of the term. Family size and income are included in the calculation of this repayment plan. Once you choose REPAYE, you must continue the plan and there is the possibility that you could end up with a higher monthly payment than you would under the standard 10-year straight repayment.
The SAVE plan will replace the current REPAYE plan, and current REPAYE borrowers will be rolled over into the SAVE plan. So, what does this mean for those utilizing REPAYE?
Well, a near-universal reduction in monthly payments for starters and potentially a 50% decrease or more in payments – resulting in better personal financial planning for the future. REPAYE calculates your discretionary income as any income above 150% of the poverty line, this equates to any income over $21,870 for a single filer or $45,000 for a family of four. Then you will pay 10-20% of any income over this threshold monthly for 20 to 25 years and any remaining balance is forgiven.
SAVE, on the other hand, will immediately increase the threshold for discretionary income to 225% of the federal poverty line ($32,805 single, and $67,500 for a family of four). In July of 2024, your payment will also drop from 10-20% of discretionary income to just 5% of discretionary income above the new inflated discretionary income hurdle. Unfortunately, outstanding graduate loans will remain at the 10% hurdle of discretionary income but due to a change in that threshold, they will see their payments get reduced, just not as significantly as those for undergraduate loans.
A common question with student loan repayment plans is often whether a borrower could or should file “married filing separately” or “married filing jointly” with their spouse. When you file jointly, your household income will aggregate, thus raising your discretionary income and your monthly loan payment. The old program (REPAYE) required borrowers to include their spouses’ income in their payment calculation regardless of how they filed, however, the new SAVE program will allow borrowers who filed separately to exclude their spousal income, lowering their payments – and enhancing their personal financial planning.
Let’s look at an example:
Emily and Amy are a married couple, Emily earns $50,000 and Amy makes $200,000 a year. Emily still has $80,000 in outstanding student loans from graduate school and is enrolled in the REPAYE program which will be rolled into the new SAVE program.
Were they to file their taxes jointly Emily would have a student loan payment of over $20,500 annually, if she was able to exclude her spouse’s income that annual payment would drop to just $1,719.50 a year, a reduction of $1,569 a month!
We won’t bore you with too many numbers, but most spouses choose to file jointly because they generally will pay less in taxes than if they filed separately. In this example, Emily and Amy will pay an additional $2,400 in taxes if they file separately while saving nearly $19,000 in student loan payments, a trade-off I’m sure they can live with.
While SAVE offers significant savings for many borrowers it may not always be the best option for high-earning clients. IBR or (Income Based Repayment) plans allow you to choose the lesser of the calculated payment or the standard payment on a 10-year repayment schedule while SAVE requires that you use the 5% of discretionary income rule. Higher-earning clients may find that 5% of their discretionary income is above the Federal Poverty Line threshold and is significantly higher than the standard repayment schedule – thus affecting their financial planning goals negatively.
Will Power is a single filer and makes $500,000 annually, 10 years ago she took out $100,000 of loans for her undergraduate degree at 6% and enrolled in the IBR plan to repay them.
Because this plan allows the borrower to pay the lesser of the standard payment or the calculated amount, she will only pay $1,110.21 (The Time Value of Money calculation) versus monthly under the old REPAYE plan. Should she switch to the new SAVE plan, her monthly payment would cost her or $800+ more a month than under the old IBR plan.
This is a very long-winded way to say that while the new SAVE plan is generally going to be the better option, the IBR plans will still have their applications with high-income borrowers – food for thought when discussing your options with your financial advisor.
The last two cool wrinkles we want to mention with respect to the SAVE plan is the 10-year forgiveness schedule for borrowers with less than an initial balance of $12,000. This plan allows for forgiveness for these borrowers after 10 years of payments rather than the typical 20-25 under the previous IDR plans.
Additionally, you are required to recertify income within six months of the loan resumption. Because of this, you can pay off your loans for six months before disclosing a change of circumstances or income to the government if this is advantageous to delay. For instance, if your income has gone up then so too has your discretionary income and thus your monthly payment. However, you can pay six months of payments based on your old income before recertification. If this is disadvantageous, though, you should recertify your payment immediately to take advantage of a lower payment. Once again, something that your financial advisor will be best placed to advise you of.
The new SAVE program will offer a ton of optionality for borrowers to reduce their monthly student loan payments, though it may not be the best choice for every borrower as it will reduce payments for most borrowers. The On-Ramp program will allow borrowers to get used to restarted payments as that section of their budget has likely been absorbed into their current spending.
I know that this may have been a fact-heavy blog, but I sincerely appreciate your sticking with me. If you have any additional questions, I would be happy to help guide you through them and look at the best way to strategize your personal financial planning goals. If you have questions pertaining to your specific situation, please reach out and schedule a time for us to sit down and see how we can be of service and help you to maximize your financial planning.