Navigating the world of student loans is no small task, especially for recent graduates making the tranistion from college to career.
A significant and all-too-common mistake occurs when borrowers start repayment on the standard repayment plan.
Smart choices today — like opting for SAVE — could have a significant impact moving forward.
The Costly Path of the 10-Year Plan, Forbearances and Deferments
It’s a scenario I see all the time: students receive their first loan bill, make payments for a few months, but soon realize they can’t keep up financially.
Then they compound the problem by jumping into a forbearance or deferment. While these options provide temporary relief from payments, they allow interest to accumulate, ultimately increasing the loan balance as months pass.
At the end of a year or two, these borrowers haven’t made any progress on their debt, they are no closer to student loan forgiveness, and their balance is often much higher than where they started.
This mistake is completely avoidable.
A Better Alternative: The SAVE Program
The strategic choice for managing student loans is to enroll in the SAVE plan as soon as possible. SAVE (Saving on A Valuable Education) adjusts monthly payments based on the borrower’s most recent tax return.
For a recent grad this often means a $0 monthly payment. Even for those graduate whos find work immediatley at graduation, because SAVE is based on the most recent tax return and because earnings during college are typically low, $0 per month payments are common.
Digging Deeper into SAVE: For a deep dive into SAVE rules and a calculator to estimate SAVE payments, check out the SAVE calculator.
Additionally, SAVE includes a generous subsidy that covers all accruing interest, ensuring that the loan balance does not increase over time.
This plan is particularly beneficial for recent graduates who may not have stable, high-paying jobs immediately after school. By preventing the loan balance from growing, SAVE can provide significant long-term savings and financial stability.
The Cost of Picking the Wrong Repayment Plan
Previously, the main disadvantages of not using income-driven repayment plans like SAVE included delayed progress towards loan forgiveness and unnecessary financial strain from unaffordable payments.
Today, the implications are more severe.
With the introduction of the SAVE subsidy, failing to sign up can result in substantially higher loan balances over time due to missed subsidy benefits. Learn how to take advantage of the SAVE subidy to get your finances in order.
Why Do Graduates Make This Mistake?
The default repayment plan for student loans is the 10-year standard plan, which charges the highest monthly payments.
Many loan servicers, overwhelmed by the volume of inquiries, fail to adequately inform borrowers about their options, contributing to poor financial decisions.
Additionally, a general lack of student loan education leaves many without the knowledge needed to make informed decisions about their repayment options.
Preventing Repayment Plan Mistakes
To combat this widespread issue, there is a strong argument for making SAVE the default repayment plan for all graduating students.
However, until such policy changes are implemented, it is critical that students and recent graduates are made aware of this plan and its benefits. Sharing information among friends, family, and through educational institutions can play a crucial role in preventing this costly mistake.
Recovering from Past Mistakes
For those who have already fallen into the trap of standard repayment and/or forbearances, it’s important to note that while past decisions cannot be undone, there are still options available.
The upcoming one-time account adjustment will adjust payment histories, potentially advancing borrowers closer to Income-Driven Repayment (IDR) forgiveness and Public Service Loan Forgiveness (PSLF).
Additionally, Biden’s second big attempt at student loan forgiveness, tentatively called “Forgiveness 2.0,” aims to forgive debt for borrowers whose current loan balances exceed their initial amounts borrowed.
Final Thought
Properly managing student loans requires proactive measures and informed decision-making.
By understanding and utilizing programs like SAVE from the outset, recent graduates can avoid common pitfalls and place themselves on a path to financial stability.
