Income-Driven Repayment Plans Equal Huge Relief from Student Loan Debt
No one with a federally held student loan has had to make a payment since Joe Biden took office…but that’s about to change.
As of September 1, 2023, all student loans will go back into repayment, with the first payments due beginning in October.
The 6–3 vote on June 30, 2023, where the Supreme Court ruled that Biden did not have the authority to forgive billions of dollars of student loan debt, was a huge blow for borrowers. Many counted on some assistance to get out of under looming student debt with high monthly payments. However, there are still options for graduates with student loan debt.
1. Income-driving Repayment Plans (IDR)
There are four types of income-driven repayment plans: revised pay-as-you-earn repayment plan (REPAYE plan), pay-as-you-earn repayment plan (PAYE plan), income-based repayment plan (IBR plan), and income-contingent repayment plan (ICR plan). With one of these four plans, your payment amount is calculated based on a percentage of your discretionary income.
IDR plans have maximum repayment periods of 20 or 25 years. For example, the maximum repayment period for a PAYE plan is 20 years, so after 20 years of repayment, regardless of whether your loan is paid off or not, the remaining balance of your student loan debt is forgiven.
2. Public Service Loan Forgiveness (PSLF)
The PSLF program benefits employees of government or not-for-profit organizations. The program provides loan forgiveness after 120 qualifying monthly payments under an accepted plan. To qualify for the PSLF program, you must be employed full-time by a U.S. federal, state, or tribal government or qualifying non-profit. U.S. military service counts. You also are required to have a direct loan under an IDR plan or 10-year standard repayment plan.
3. One-time IRD Account Adjustment
According to the Federal Student Aid website, 3.6 million direct loan program borrowers will receive three years of credit toward loan forgiveness. Many borrowers will find their loans forgiven automatically. For loan forgiveness, borrowers need to reach the necessary forgiveness threshold of 240 or 300 months’ worth of qualifying payments (20 or 25 years). But in the past, there were several reasons some months would not count. That’s not the case. In this one-time adjustment, significantly more months will be counted toward reaching the requisite 240- or 300-month payment count.
People with more than one student loan can benefit the most from the one-time adjustment. Here’s why. Let’s say you have an undergraduate loan from 1994 and a graduate loan from 2015. If BOTH loans are held by the Department of Education, the 20- or 25-year clock begins with the oldest loan. This equates to huge savings for some borrowers.
Other provisions of the one-time IDR account adjustment include reimbursement of payments made over the 20- or 25-year payment threshold. There are requirements that need to be met, so contact your loan service provider and Federal Student Aid.
If your loan is not held with the Department of Education or if it is not a Direct Loan, find out whether consolidation is right for you. Consolidation effectively transfers your student loans from outside loan servicers to Department of Education loan servicers. While many student loan servicers have IDR and PSLF programs, only Department of Education service providers are required to follow student loan regulations in terms of one-time IDR account adjustments and forgiveness of student loan debt. Loan consolidation also effectively transfers any student loan into a Direct Loan, which is another requirement for these programs. Consolidation will NOT make sense for every borrow. In some situations, you will actually pay more by consolidating your loan, so weigh this decision carefully.
There’s also another provision that really helps borrowers. In the past, consolidation restarted the clock in terms of meeting the requisite 20- and 25-year repayment requirements for student loan forgiveness. In the past, if you consolidated on August 1, 2023, any payment history before that date would be wiped out. But that is not the case as long as the consolidation process is completed before the end of 2023. This doesn’t mean you should rush out to consolidate your loan today. But it does mean you should contact your loan servicer and Federal Student Aid to find out if consolidation is the right decision for you.
Here’s a real-life example: Let’s say you have two student loans, one from undergrad and one from grad school.
- Undergraduate loan for $20,000 from 1994; repayment began in 1996. The loan is held with Navient (formally Sallie Mae), which is not a Dept of Ed loan servicer. The balance on that loan is $5,000.
- Graduate school loan for $40,000 from 2019; repayment began during the pandemic but was placed in automatic forbearance without making any payments. The loan is with a Dept of Ed servicer. The balance is $40,000.
In this case, if you consolidate the undergraduate loan, you will effectively convert it to a direct loan with a Dept of Ed servicer. This will show a payment history for BOTH loans beginning in 1996 — the year you began paying your oldest loan. If you’re required to be in repayment for 25 years before loan forgiveness, you would have reached the 25-year repayment requirement in 2021 (2021–1996 = 25 years). The balances remaining from both loans will automatically be forgiven. In this example, that’s $45,000 (interest is also forgiven, which is not included in this example for simplification purposes). In some cases, you may be entitled to a refund of payments made after the 20- or 25-year repayment period. In this example, payments made after 2021 may be refunded to you. Federal Student Aid can help determine if you’re eligible for a refund.
To find out what programs you qualify for, contact Federal Student Aid or visit their website. Just don’t dillydally too long.