Early on the morning of Friday, June 30, 2023, the Supreme Court of the United States released its ruling on the Biden Administration's Student Debt Relief Program (Biden vs. Nebraska, et al). The Supreme Court's majority ruled that the Biden Administration did not have the authority under the HEROES Act to forgive the debt.
With this ruling, student loan borrowers must prepare to begin repayment of their loans later this fall. The Department of Education has noted that student loan interest will begin accruing on borrowers' principal on September 1, 2023, and that subsequent monthly loan payments will begin one month later on October 1, 2023.
The Biden Administration's Response
In its rebuttal, the Biden Administration has pledged to open "other pathways" to debt relief. Read the entire statement here.
One of these options is a new income-driven repayment plan - the Saving on a Valuable Education (SAVE) plan. This is essentially a revamping of the existing REPAYE plan with more advantageous income limits and interest accrual; indeed, those borrowers who are currently enrolled in the REPAYE plan will be automatically enrolled in the SAVE plan. To quote the DoE fact sheet:
"Specifically, the plan will:
- For undergraduate loans, cut in half the amount that borrowers have to pay each month from 10% to 5% of discretionary income.
- Raise the amount of income that is considered non-discretionary income and therefore is protected from repayment, guaranteeing that no borrower earning under 225% of the federal poverty level—about the annual equivalent of a $15 minimum wage for a single borrower—will have to make a monthly payment under this plan.
- Forgive loan balances after 10 years of payments, instead of 20 years, for borrowers with original loan balances of $12,000 or less. The Department estimates that this reform will allow nearly all community college borrowers to be debt-free within 10 years.
- Not charge borrowers with unpaid monthly interest, so that unlike other existing income-driven repayment plans, no borrower's loan balance will grow as long as they make their monthly payments—even when that monthly payment is $0 because their income is low."
What does all this mean?
Under the new SAVE plan, payments for most borrowers will be lower, since the income floor has been raised from 150% of federal poverty limit to 225%. Said another way, your monthly loan payment is based on a smaller slice of your income pie. That slice is cut even smaller for undergraduate loans, whose payments are now based on 5% (rather than 10%) of discretionary income under the plan. Graduate loan payments will remain based on 10% of discretionary income. It also appears that interest will not accrue for borrowers whose incomes (and, therefore, payments) are low enough such that they do not cover the interest the loan accrues, a phenomenon called negative amortization. This may be hugely beneficial to long-run borrowers who have their loans forgiven at the end of their repayment term, as those borrowers will owe federal income tax on the amount forgiven.
We at Trail Ridge Wealth Management remain committed to assisting our clients in making the best education decisions for themselves and their families. As always, we will continue to keep our eye on the ever-evolving landscape of student loans and college funding. Please feel encouraged to reach out to us any time with questions or concerns.