On June 30, 2023, the Supreme Court overturned President Biden’s cancellation of $10,000 of student loan debt for borrowers who met certain income limits. For the estimated 43 million Americans with federal loans, this was a bitter pill to swallow, particularly as loan payments are scheduled to resume this fall for the first time since March 2020. However, if this impacts you, all is not lost.

In addition to a potential credit for over three years of repayment toward Income-Driven-Repayment (IDR) plans and Public Service Loan Forgiveness (PSLF), here are some other major changes set to take effect in 2023. In general, they are very heavily weighted to borrowers’ favor.

What Happens Next

Interest will begin accruing on federal student loans effective September 1, 2023 with the first payment due in October.

If you are on an income-based payment plan, you will initially make payments based on the income on file in 2020. For most of our clients, this will be beneficial. For example, if you are a new physician, it is much better to pay 10% of your discretionary income as a resident than 10% of your discretionary income as an attending physician. On the other hand, if your income has dropped since the start of the pandemic, you can recertify your income sooner.

Pay attention to your date of income recertification. Borrowers are being granted a minimum of six months to recertify after the pause. If your recertification date is scheduled between now and six months after the end of the repayment pause, it will be pushed out by one year.

Remember that anytime you consolidate your federal loans, you are required to recertify your income for the new loan. If you have not yet consolidated your federal loans, this might seem like a good reason to hold off. Read on, however, and you will see that there are some upcoming benefits to consolidation that could make the decision more complicated.

Here is more information on Income-Driven Repayment Plans

One-Time IDR Account Adjustment

If you are on track for Public Service Loan Forgiveness, you may have heard of the limited PSLF waiver, which expired in October 2022. This allowed borrowers to get credit for past periods of repayment that otherwise wouldn’t have counted, bringing them closer to the magic number of 120 payments needed to qualify for forgiveness.

If you missed this opportunity, don’t despair. A new IDR Account Adjustment has been announced that could substantially increase the qualifying time you have for federal loan forgiveness. This includes time spent in forbearance, deferment unrelated to school, and economic hardship. Most importantly, if you made payments on one or more loans prior to consolidation, the entire consolidation loan receives credit for the loan with the longest history of qualifying payments.

You must consolidate your loans by the end of the year to take advantage of the benefits of the one-time Account Adjustment.

The new SAVE/REPAYE plan:

If you are in the Revised Pay As Your EARN (REPAYE) plan, this is set to be overhauled in the next twelve months. The resulting SAVE plan is considerably more generous to borrowers. If you are in REPAYE already, you will be automatically transferred over to the new plan.

In summary, the major changes compared to the prior REPAYE plan are that it increases the income exemption from 150% to 225% of the Federal Poverty Line. Also, the amount of required repayment for undergraduate loans will go down from 10% to 5% of discretionary income (this is scheduled to take effect in 2024). You can also file your taxes separately from your spouse to exclude their income (this was available through the original Pay As You Earn (PAYE) plan but had been eliminated from REPAYE).

For parent PLUS loan borrowers:

Parent PLUS loans are one of our least favorite types of student loans. This is because of the detrimental impact they can have on a retirement plan and the limited options available for managing them. The good news is that if you can work for another ten or more years for a qualified employer, you may be eligible for PSLF. The bad news is that the only IDR plan for which these loans are eligible is Income Contingent Repayment (ICR). This is an older IDR plan with much less favorable terms than REPAYE. You must also consolidate your Parent PLUS loans for this to work.

More good news: a loophole

There is a loophole called double consolidation that expands your options further. In essence, it works as follows: you consolidate each of your parent PLUS loans into its own direct consolidation loan. These are eligible for ICR but none of the other IDR plans. However, if you then consolidate all of these together, a new consolidation loan is created that no longer is linked to the original Parent PLUS loans. Under these terms, the new consolidation loan is eligible for REPAYE and its dramatically lower payment schedule.

It’s important to note that loophole is scheduled to be closed by the summer of 2025. As a result, if you have Parent PLUS loans and think you could benefit from an IDR plan, this is something you may want to investigate in the near future.

You can find more information about parent PLUS loans here.

Final Words

The federal student loan system is convoluted. For readers who are unfamiliar with federal student loan programs, it may be difficult to decipher much of what is written above. Even as an advisor, it is a challenging area to stay on top of, due to its complexity and the frequency with which the rules shift dramatically. We are always happy to help you understand how your loans work and the repayment options at a more basic level. If your situation is more complicated, and you need to make a key decision that could impact your payments and forgiveness eligibility, it is could be worth consulting with a student loan specialist to review your options.

If, as your read this, you felt your blood pressure rising because you refinanced or paid off your loans, I would like to acknowledge and validate this feeling. Federal student loans have become a polarizing topic both culturally and politically. As advisors, our role is to help clients make the best of their individual situation. In financial planning, so much of your success is tied to your mindset. If you are struggling with student loan debt, regardless of the terms, the most important first step is to find clarity. Once you understand how much your student loans cost and how long they will remain with you, it becomes easier to look forward to a time in the future when they are no longer a responsibility. The peace of mind this provides is priceless.

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