The student loan landscape has changed considerably since borrowers were last required to make payments in 2020.
These changes go far beyond a new repayment plan and the Supreme Court striking down debt cancellation.
Borrowers must understand these changes for a couple of reasons. First, they could benefit through lower payments or earlier forgiveness. Second, in researching their repayment options, they may come across outdated information in conflict with what they read elsewhere.
Those who understand what has changed will be able to save money and avoid following outdated advice from their friends, loan servicers, or the internet.
The Big Change: The SAVE Repayment Plan
The new SAVE plan is a massive change from the options available to borrowers in 2020.
Under SAVE, borrowers can get lower monthly IDR payments and potentially qualify for forgiveness earlier.
Some of the provisions of SAVE will be immediately available when payments resume. Others will become available on July 1, 2024.
If you are new to SAVE, check out my article on the SAVE timeline and how it impacts other IDR plans. Additionally, you can preview SAVE payments using the SAVE calculator.
IDR Payment Count Update
By early 2024, the Department of Education will update borrower progress toward IDR forgiveness.
This is to correct issues where servicers steered borrowers into a deferment, forbearance, or balance-based plan when an IDR plan would have been a better decision.
There are a couple of important takeaways here. First, you may be much closer to IDR forgiveness than you previously thought.
Second, you may have read that repayment plans like the extended or graduated repayment plan will count toward IDR forgiveness. This is true. However, it is essential to understand that this only applies to previous periods on these otherwise ineligible repayment plans. If you sign up for the extended repayment plan in the future, you won’t make any progress toward IDR forgiveness.
Sherpa Tip: For most borrowers, the benefit of the IDR count update happens automatically.
However, if you have FFEL or Perkins loans, you must consolidate them before the December 31, 2023, deadline to benefit.
Consolidation Becomes Less Risky
Historically, consolidating federal student loans came with an element of risk. When you consolidated, a new loan was created, which meant restarting the “forgiveness clock.”
That isn’t the case today. As noted in the previous section, consolidating before the December 31 deadline means borrowers keep all their IDR or PSLF progress. Best of all, if you have mixed progress, the consolidated loan will have the tally of the highest loan that was included. For example, if you have a $10,000 loan with 50 IDR payments and a $10,000 loan with 70 IDR payments, the new consolidated loan gets credit for all 70 payments.
If you miss the December 31 deadline, consolidation won’t mean a complete restart of payment progress. As part of the new rules that go into effect with the SAVE repayment plan, borrowers that consolidate their loans keep the weighted average of their existing forgiveness progress. Returning to our last example, the consolidated loan would have 60 IDR payments.
The Remaining Consolidation Risk: Consolidation is less risky, but it is not without risk. Borrowers who have Parent PLUS loans for their children and student loans from their own education will still want to exercise caution.
Combining these debts in one consolidation loan will mean limited repayment plan eligibility.
REPAYE for Married Couples
Some rule changes were relatively minor, easy to miss, but really important for borrowers. One such example is the change to income rules for married couples on REPAYE.
In the past, borrowers could file their taxes separately to exclude spousal income from IDR analysis. However, they could only do this for specific repayment plans. Notably, on REPAYE, this option was not available. Spousal income was counted in IDR calculations whether or not you filed taxes separately. Thus, REPAYE was a bad choice for many married borrowers.
Fortunately, the rules have changed. SAVE allows married borrowers to file taxes separately to exclude spousal income, and REPAYE has been modified to allow spouses to file separately.
Being married still causes issues for federal student loan borrowers, but the ridiculous REPAYE rule is no longer in effect.
Borrower Interest Subsidy Changes
Historically, one of the “risks” of income-driven repayment plans was that the borrower balance could grow with each passing year.
If the IDR payment was $100, but the loan generated $250 in interest each month, the borrower’s balance would increase by $150 each month. The confusing interest capitalization rules made things even more complicated.
When REPAYE was first created, it had a provision to address this issue. Borrowers with interest charges higher than their monthly payment received a stipend covering half the excess interest. Going back to our previous example, the borrower’s balance would increase by $75 each month instead of the full $150.
Under SAVE, borrowers will get a stipend for 100% of the excess interest. In our example, the borrower pays $100 each month, and the loan balance doesn’t grow at all. Additionally, borrowers currently on REPAYE will get this benefit while they await the transition to SAVE.
PSLF Employment Requirements
Not all of the changes are for the better.
For a brief period, the Limited Waiver on PSLF was in effect. During this time, the Department of Education reviewed PSLF applicant records and updated payment counts helping some borrowers reach the necessary 120 certified payments.
During the Limited Waiver, borrowers were not required to be currently employed by a PSLF employer to earn forgiveness.
Unfortunately, that special exception has ended.
If you are pursuing PSLF, in addition to the 120 certified payment requirement, you must work for an eligible employer at the time of your application and approval. Don’t leave your PSLF job until after your debt is forgiven. An early move could mean missing out on loan forgiveness.
Student Loan Forgiveness Taxes
You may have heard that there is a tax on federal student loan forgiveness. You may have heard that there isn’t a tax on loan forgiveness.
Both statements are wrong.
The potential tax on forgiveness is a bit more complicated than that.
PSLF doesn’t get taxed by the IRS. IDR forgiveness usually gets taxed by the IRS, but from now until January 1, 2026, it doesn’t get taxed.
State taxes complicate things even further. Some states will tax forgiveness; others won’t.
If you are nearing forgiveness or concerned about a potentially large tax bill, talking to a local tax expert is probably the best bet. A tax professional can help determine whether or not you will get taxed and help you find ways to avoid and/or minimize the tax.
My hope is that the federal tax gets permanently erased before we get to 2026, but that will depend on Congress taking action. If forgiveness is off in the distance for you, consider using my strategy to prepare yourself just in case you get a big tax bill.
The Fresh Start Program
Many borrowers were in default on their federal student loan payments at the time of the payment and interest pause.
To help these borrowers, the negative credit reporting and collection calls stopped.
Now borrowers have the option of the fresh start program to get signed up for an IDR plan and get their loans back on track.
In the past, borrowers could either rehabilitate or consolidate their loans to address a default. Because these options could only be used once, many borrowers ended up in difficult situations.
Fresh Start allows borrowers to restart repayment without the mistakes of the past hanging over their heads.
Annual Income Certification
One of the biggest headaches with IDR has been the annual income certification. Inconsistent processing times from loan servicers occasionally resulted in borrowers missing out on months of IDR payments because the servicer was still calculating the monthly bill.
Borrowers not only had to remember to recertify their income each year, but they had to time it right.
Recent legislation now allows borrowers to authorize automatic income verification based on their most recent tax return. These changes haven’t been fully implement on the IDR applications yet. However, once they are in place, borrowers can allow automatic income verification. This will mean one less thing to remember each year.
When the automated income verification is in place, borrowers will receive a letter from their servicer shortly before their previous income verification expires. The letter will include the new monthly payment for the next year. At that point, borrowers can update their information as necessary. For example, if their family size has grown or their income drops, their payment can be recalculated.
Checking Dates and Facts on Student Loan Information
If you are researching options for your federal student loans, it is critical to understand that there have been significant changes over the past few years.
Pay special attention to the date of any articles or resources you read. In many cases, older resources may have information that is no longer accurate.
On a more positive note, the reason for the confusion is that many new rules have been created to correct past issues. There is still plenty of room for improvement, but repayment options for federal borrowers have never been better.
Stay Up to Date: Student loan rules are constantly changing, and temporary programs create deadlines that can’t be missed. To help manage this issue, I’ve created a monthly newsletter to keep borrowers up to date on the latest changes and upcoming deadlines.
Click here to sign up. You’ll receive at most one email per month, and I’ll do my best to make sure you don’t overlook any critical developments.
If I’m in PAYE can I file taxes separately to exclude my husbands income?
You can do that. You might also want to look into SAVE as the monthly payments would be lower.