[00:00:00] Speaker A: In this episode, we talk about yet another extension of the income driven repayment plan waiver, and how, even though that's a good thing, it does set up for a dangerous summer when it comes to the things you need to pay attention to with federal student loans. Let's get started.
Are your student loan payments or loan balances a major obstacle in your financial life? Then tune in and let's escape student loan debt hello. My name is Brinson Harrison of Escape student loan debt and your host for the Escape student loan debt podcast. I hope that wherever you are, May is treating you well. If you're like us, it's a bit of a crazy month in this household with travel and work and our son finishing school. So there's all types of field days and special jerseys they get to wear. So it's been hectic. But we are keeping things together as best we can. And when it comes to the escape student loan debt podcast, I will tell you that when we started this podcast, we decided to do bi weekly. Because even though student loans are vast, if you're going to release something and plan to do it consistently, you want to make sure you don't run out of content. And there are some periods where, even though there's a lot that's been going on with student loans in the past few years, there are periods where, hey, there's a two week period where now we got to figure out some content because there is not something specific that has happened in the student loan space. So that's what I had planned for this week. I was going to do an episode on something completely different, but I was able to now push it out a couple of weeks because yesterday the Department of Education released news that they are extending the income driven repayment plan waiver yet again. Now, we have talked about this waiver a lot, so I will recap very briefly what it is and how it works and why it's important. But for the most part, if you're listening to this podcast for the first time and are not aware of the waiver, what we'll do is we'll link in the show notes to episodes that we've done in the past that will give you far more detail. But income driven repayment plans, as a quick recap, are federal repayment plans where instead of you paying an amount that's needed to pay off your loans in full within a given period of time, your loan servicer and the government ask you to pay a percentage of something called your discretionary income instead. So you may need to pay $1,000 a month to pay off that loan within 20 years. But under an income driven repayment plan, if the adequate percentage of your discretionary income means that you're paying $100 a month, then $100 a month is what you pay. Flip side to that is, if you're paying $100 a month and you're not paying enough to lower the balance or pay it off in a given period with these plans, depending upon which IDR plan you're on after now 1020 or 25 years, any remaining balances can be forgiven in full with certain stipulations that we've also talked about in the podcast. The waiver itself is a temporary program that looks retroactively into the past. It is not something that works moving forward. It's only about past payments or payments that you didn't make that wouldn't have counted towards the amount that you need towards forgiveness in the past, that they will now count for a limited period. That could be periods of deferment or forbearance that exceed a certain length of time. They're not giving you credit for those months or some of those months, even though a payment was never made. It could be a payment towards the wrong type of payment plan. It's not an income driven repayment plan. It typically wouldn't count towards your credits for this temporary period they're giving you that credit. It could be a late payment. It could be a payment that's for less than the amount that's listed on the statement. All these different types of things that are roped into this waiver are things that will now be included. Now, yesterday the department announced that yet again they are extending this waiver. I can't even count how many times they've done this, but the most recent deadline was supposed to be April 30. So you had to have any ineligible loans that you wanted eligible for the waiver consolidated into an eligible loan by April 30 of 2024. What that typically means is that you have to have either a direct loan or you have to have what's called a federally owned FFEL loan to be eligible. So there's all these other different types of loans, like a Perkins loan or a commercially held FFEL loan that were not eligible. You had to consolidate those into one of those two eligible loan types by April 30 in order to be eligible for this waiver. I have also shared that even if you have a federally owned FFEL loan, which is technically eligible for various reasons, I would still recommend that you consolidate that into a direct loan because there are other waivers at play in other programs that only work with direct loans, but that's neither here nor there. We'll put those in the show notes before we get to the second half, where we talk about why this represents kind of a danger or a Sophie's choice for some borrowers, depending on some things that they're trying to do and other federal repayment dates. When we see some of the things that people are missing with the waiver itself, there are really two main areas where we see people getting tripped up and not understanding the true value of the waiver itself. There's the obvious people out there where it's like, oh, I didn't have the right payment plan, now I can have it. Those people realize that they need to consolidate and make it eligible. But the two areas where we're seeing people get tripped up first are people who think that they already are eligible based on loans that they see, and they're not paying attention to the loans that are kind of at the bottom of the pile. What do I mean by that? Every single time that you take out a student loan, it's a different loan. It's not like one block of loans that you just take out eight times, it's a different loan and a new loan number, new loan type every single time you take it out. So if you went to school for four years, you have eight different federal student loans. Now, it may be that you took out eight of the same type of loan, eight direct loans, eight commercially held FFEL loans, eight federally owned FFEL loans. But what many people don't realize when they're looking at their loan statement is you have to look at every single loan to make sure it's eligible for this waiver. If you see one or two that are not a federally held FFEL loan or a direct loan, that loan is not going to be eligible for all of the credits that the other ones will receive. And we are digging into the loan balances and loan types of people with whom we work and seeing people, oh, I already consolidated. I took care of this. And we're like, well, you consolidated eight of your ten loans, but this 9th and this 10th loan are commercially held FFEL loans, or they're Perkins loans, and these are not eligible. So in this case, you could very easily have those eight loans forgiven and still be looking at two student loans and maybe two of the bigger loans that you have who are sitting there and you're trying to figure out, why weren't these wiped away. It's because they are ineligible. And you missed the deadline to consolidate. So if you took out loans over an extended period of time and you think that they're all direct loans, but you're not sure, or even if you have already consolidated, just to make sure you're double, triple sure, I would log on to your student loan servicer. I would click the dropdown that shows the type for every loan that you've taken out to make sure that there's not some Perkins loan or some ffel loan that is not in that bunch, because it may be something that if you don't do it before time, you've missed your opportunity. Unless they extended again, which could very easily happen. As we've seen to this point, the second group that we're seeing, who's not really understanding the power, are people who already have direct loans, who are not listening to me when I talk about how they are crediting consolidated loans while this waiver is in existence. And this is especially important for people who have loans that are gay in terms of how far apart you went to those levels of schooling. You see this all the time with people who go to school for undergrad, and then they take five or six years off, and then they go to school for an MBA, or they go to school for undergrad, they take a couple years off and start paying. Then they go to their masters, they take a couple years off and start paying, and they go to school for their PhD. So you could have two or three sets of loans that all have varying lengths of repayment history, all under one account. Well, it used to be that when you consolidated all of those loans, you would lose whatever credit you had towards income driven repayment plan forgiveness when you consolidated, and you'd be starting over at zero with the new loan. The way that it works after the waiver will be different. But while the waiver exists, here is how it works. Let's say that I have loans that I have 18 years worth of payment history. I started paying on those as soon as I finished undergrad. And then I have some loans from a master's program that I've only been paying on for seven years. Well, depending on my IDR plan, those loans that have 18 years of payment history are anywhere from two to seven years away from being wiped away. But I have the second block. That's nowhere close to that. Right. Well, if you consolidate during the waiver, they're going to look at the oldest loans in the bunch that have 18 years of credit history, and they're going to give the entire new consolidated loan 18 years of payment history. Even if the loans in that second block have less credit, even if they are the biggest in the bunch, it will all get 18 years. And we are seeing people have just unheard of totals of student loans forgiven because they have some old loans in the bunch that they took out 25 26 years ago, and it may be almost paid off or it may be ten to 15% of their total student loan balance. But because the new loan gets all of that credit, it allows them to have the entire balance wiped away, even though 85% to 90% of those loans have far less credit. So this is something where, again, if you're being cocky and you are not looking at it because you know that you have direct loans, you still need to kind of take me seriously and at least look and see when did I start paying this loan versus when I start paying that loan? Because it may still benefit you to consolidate and lump them together even though they were technically already eligible and do so before June 30. After the break, I will tell you how something that happens the very next day after the end of this waiver is something that kind of complicates what your summer could look like when it comes to your federal student loans. This is the escape Student Loan Debt.
[00:10:08] Speaker B: Podcast, a show for established professionals whose student loan payments or loan balances are impacting their marriage, their business, their credit, or their dream of achieving home ownership.
[00:10:19] Speaker A: We'll be right back.
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[00:10:58] Speaker B: Dot welcome back.
[00:11:01] Speaker A: Welcome back. Before the break, we talked about the benefits of this extension of the income driven repayment plan waiver. Now let me tell you about something that happens the very next day, July 1, that is tripping up some people with whom we work. That kind of puts them in the place where they have to make a serious decision based on the state of their budget, the state of the rest of their finances. June 30 is the end of the income driven repayment plan waiver. But the very next day, July 1, is the first day where you won't be able to sign up for the pay as you earn plans. So technically, I guess it's the same deadline. June 30 is both the day by which you have to consolidate an ineligible loan for the income general repayment plan waiver. It's also the day by which you need to sign up for the pay as you earn plan in order to be eligible. That is a tough decision, and I'll tell you why. There are people who are on the save plan or the income based repayment plan, and if those people have graduate school loans, those plans require you to pay on them for 25 years until forgiveness. The pay as you earn plan is a plan that may be attractive to many people with graduate school loans because if you have graduate school loans under the pay plan, you can have them forgiven after 20 years. So it saves you five years when it comes to the amount of payments you make before they're forgiven. So that's really attractive to some borrowers who pay a lot on their student loans to pay for 20 instead of 25. The problem is there are plenty of people who are on the save plan and who are on the income based repayment plan who are currently making student loan payments based on income that they were earning prior to the pandemic. You'd have to go back and listen to our old episodes. But suffice to say, based on how they have reinstituted student loan payments, there are plenty of people who are still paying based on income amounts that they file with their loan servicer in 2018 or 2019, which is the year before the pandemic when the payments were paused. So there are people out there that we work with who make multiple six figures who are technically making student loan payments based on somebody who makes $50,000. And if they were to stay with those payments based on some other deadlines that exist with their student loan servicer, they may be able to do so for another four months, at minimum, in some cases over a year, based on the timeline of when their student loan servicer asks them to update their income. Well, the problem with both consolidating an ineligible loan and with signing up for the pay as you earn plan, if you're not already signed up for those plans, is that when you do that and you either change your loan type in terms of taking one loan and consolidating it with new loans, or you change your student loan payment plan. Your student loan servicer, if it's an income driven repayment plan, they have to ask what you make so they can calculate what your payment may be. So if a person who's making $200,000 now is making student loan payments based off of when they made $50,000 prior to the pandemic, and they need to consolidate their loan or they need to sign up for the pay plan. They can do that, and it may benefit them in the long term by giving them more credit towards forgiveness, so on and so forth. But they're going to be required to update their income with that loan servicer, and they could see their payment jump overnight depending on how long it takes your loan servicer to calculate your payment. And if you wait until you get too close to the deadline and you need to consolidate for the IDR waiver in order to be eligible, or you're doing it to make sure that you get the credit for consolidation, based on what we talked about before the break, you need to make sure that you understand that you have to sign up for the pay plan if that's the plan in which you're interested during the consolidation process. So this is when we talk about the danger, the importance of going through that application. And before you take steps with your federal student loans, having a knowledge of all the variables, because in the majority of cases that I come across, the save plan offers you the lowest student loan payment. And in that consolidation application, there's a section where it asks you to estimate your income and your loan balance and your family size. And based on that, it shows you an estimated payment under all of the income driven repayment plans. And because the saved plan is the lowest, most people, because they're not thinking and they're just saying, well, this is the lowest one, I want to pay the least amount. They click save and they go on about their day. But if you wait until the deadline and you click save, it takes a while for that consolidation application to go into effect. It could take six to eight weeks. And if that six to eight weeks is not lined up appropriately, you will not have the ability to go back after the fact and sign up for the pay plan. So if you're one of those people who's planning to consolidate their loans, then you need to make sure that you have checked into whether or not the pay plan is right for you. You need to do the consolidation application as soon as possible, and you need to make sure that you sign up for the pay plan during that consolidation application, because if you wait, you likely won't have the opportunity. And if you're the type of person who is going to sign up for the pay plan but is not currently on that plan and has an income that has increased significantly since 2018 or 2019. You need to also understand that you are sacrificing the ability to coast for another four months, possibly twelve months or more at that lower payment in exchange for shaving five years off of the payment history. And in some cases, that's a very extreme decision. So in the next several episodes, we'll kind of talk about when is it worth it? Hey, is it worth it to shave five years off the payment history? When it means that I'm going from paying dollar 200 a month on my student loans to 13 or 15 or $1,800 a month, which is what we're coming across. In some cases, we want you to have all your ducks in a row before you take action. But when you have those ducks in a row, you need to take action as soon as possible. So in a couple of weeks, you'll hear from us again, and we will go farther down this path to make sure we give you all the information you need to have your student loans forgiven, reduced, reorganized, or expedited. I'll see you then.
From escape student loan debt this was the escape Student Loan Debt podcast, a show for established professionals whose student loan payments or loan balances are impacting their marriage, their business, their credit, or their dream of achieving homeownership.
