[00:00:00] Speaker A: In this emergency episode of the podcast, we tell you about a huge update as it pertains to your student loans, and also about two programs where if you want to participate, you only have until Sunday at 11:59 p.m. to take action. 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 Brenton Harrison. I hope you all are having a good week. Depending on the platform in which you listen to us, you are likely familiar with us from the new Money New Problems podcast. Or as you are aware, we have a podcast that's unrelated to our workers financial advisors called the Escape Student Loan Debt Podcast. We operate those two podcasts separately, but there have been periods where something happens that's important to both audiences, and in those instances we decide to post the same episode on both platforms. That is the case this week as there was a huge update when it comes to federal student loans, particularly the save plan, the saving on a valuable education plan. I wanted to make sure that both audiences were aware of those updates, how it impacted you if you are a federal student loan borrower and also connected to two important programs whose eligibility expires at 1159 on Sunday, basically saying that July 1 is the day by which, if you haven't taken action, you have lost your opportunity to do so. So what are these updates? If you keep up with student loan news, you may already be aware of this. But if you do not, and you depend on us to do that, then this week there were two courts in Missouri and Kansas who blocked different parts of the save plan. So I want to walk through the elements of the save plan in general in terms of how it was intended to be structured, tell you the change that was about to take place on July 1, and tell you what they blocked from going into action. The save on a valuable education plan replaced the revised pay as you earn plan, and both of them are just different versions of an income driven repayment plan. We've gone over this a thousand times, but just in case this is your first episode, income driven repayment plans are plans for federal student loan borrowers where instead of paying what's needed to pay off your loan in full within a given period of time, they ask you to pay a percentage of something called your discretionary income each year, 5%, 10%, 15% towards your student loans, and as long as you pay that percentage for a set period of time, which has been as short as ten years, but could also be as long as 25 years. At the end of that period, if you have any remaining balances on your student loans, that balance is forgiven in full. Now, within that income driven repayment plan umbrella, there's the income contingent repayment plan. There's the pay as you earn plan. There's the old and new versions of what's called the income based repayment plan. And there was the revised pay as you earn plan, which was replaced by the save plan. And they had been implementing this save plan in terms of the elements incrementally. They started by saying, hey, everybody can sign up for this, but next July we're going to lower the payments for some people, so on and so forth. So let's talk about the structure of the Save plan first. How long do I have to be on the save plan before any remaining balances are forgiven? The answer to that is, it depends. If you have undergraduate loans only, then you have to pay on the save plan for 20 years. And after 20 years, if you have any remaining balances, it would be forgiven. If you had undergraduate loans, then you had to pay for 25 years. So even if you had a mix of the two undergraduate and graduate, if there's graduate in the bunch, you have to pay towards those grad loans for 25 years before any remaining balances are forgiven. There was also a small wrinkle which is actually relevant to this update for people who borrowed less than $12,000 in federal student loans. I've shared in past episodes that based on the structure of the save plan, that I think that this element is designed to make sure that people who went to community college and are not making a high salary after community college can have their student loans forgiven without having to make a payment. But the wrinkle of this plan is if you borrowed less than $12,000, then you only had to pay on your loans for ten years until they were forgiven. But for each $1,000 above 12,000, it added a year to your payment. So, for example, it's ten years if you borrow 12,000 or less. But if you owed 14,000, that's 2000 more. It adds two years to your repayment. So you'd have to pay for twelve years in that instance. The next element of the save plan to be aware of is how they calculate discretionary income. Discretionary income has a number of different elements to it. It takes your adjusted gross income, and it subtracts from that adjusted gross income a certain percentage of a number called the federal poverty level. You don't need to know the federal poverty level. You just need to know that your student loan servicer is going to use a percentage of that to lower your discretionary income. And the bigger the percentage they use to lower it, the lower your student loan payment will be. Under the revised pay as you earn plan, that percentage was 150%. Under the save plan, it was 225%. So in most cases, it will lower the payment if you compare the revised pay as you earn plan for a family of four that had an adjusted gross income of 150,000 to what they would pay under the save plan. Under revised pay as you earn, they would pay $860 as a household towards their student loans because they can take away more of that federal poverty level. Under the save plan, it would lower that payment under this plan to about $665, which is the case that we see with most high income earners. It's about a $200 a month difference above certain thresholds of income. The next thing you need to know is, what percentage of your discretionary income did you have to pay towards those loans? This is also one of those. It depends. Under revised pay as you earn, it was 10% of your discretionary income. Under the save plan, they structured it in a very unique way. If you only had undergrad loans, you would pay 5% of your discretionary income. So instead of that $665 payment we mentioned, it would actually lower it to $332, as compared to someone on revised pay as you earn, who was paying $860. So if you had only undergraduate loans, it was a huge difference, and the save plan would almost certainly be one of the two plans from which you would choose. We'll tell you the second plan in a second. If you had loans only, then your payment was going to be 10% of your discretionary income. And if you had a combination of the two, and it's too complicated to get through in this podcast, but essentially what they would do is they would take a weighted average of your student loan balances, the original balance that you took out. And if it were a bunch of undergraduate loans, then the weighted average would mean that your payment would be close to 5% of your discretionary income. But if you have a bunch of higher balanced grad school loans, it would drag that weighted average closer to 10% in terms of what you pay on a monthly basis. Now, what do these lawsuits impact? As I said, the lawsuits were in Missouri and Kansas. And if you recall, Missouri was the state that's actually responsible for us not having the first round of federal student loan forgiveness so they're back at it again. But judges in both of those states partially ruled in favor of the challengers in these lawsuits, and here are the elements of the save plan that they essentially put on hold. The first thing that they put on hold is forgiveness for people who are going to have their loans forgiven in ten years based on that $12,000 requirement. They did not impact the forgiveness that comes through the save plan after 20 or 25 years. So you are safe. If you owed above $12,000, which most people do, then you weren't going to get that ten year forgiveness anyways. If you were aiming for the 20 or 25 year option that is safe. They left in place the percentage of federal poverty level that is deducted from your adjusted gross income when calculating your payment. But what they did put on pause is what was actually going to go into effect next month. And that is next month was the month where that decrease from 10% of discretionary income to 5%, or the weighted average for people who either have only undergrad loans or some combination of the two that was due to go into effect on July 1. As a matter of fact, if you're on the save plan already and have undergraduate school loans, you might have already gotten a letter from your loan servicer saying that your loans would be in four from July 1 to August 1. And the reason for that was because your servicer was trying to calculate the decrease in your payments so that it would be enacted on August 1. So there are a whole bunch of people who got that letter expecting forbearance. You will likely still have the forbearance in July, but on August 1, your payment will not have changed. It will remain at 10% of your discretionary income for the foreseeable future. So if you're in that camp that maybe you did happen to borrow less than $12,000, or you're in the camp where you had undergrad loans only, or a significant portion of your student loan debt came from undergrad debt, then these are really big updates because not only are you not going to have your loans forgiven in ten years, but you also, for the camp that owed above that, you're not going to see some large reduction in your federal student loan payment come July 1, which technically for most people would have been August 1 after the break. I'm going to tell you if this means means that you need to like, run for the hills or run to another income driven repayment plan whether you can stay put. But I'm also going to connect this update to two huge programs whose eligibility runs out on June 30. To make sure that you all understand what you are getting yourself into if you've decided to make yourself eligible, or what you are losing out on by not taking action between now and Sunday. That's coming up after the break. This is the Escape Student Loan Debt.
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[00:11:17] Speaker A: Welcome back. Now it's time to connect some of these updates to the Save plan to the two programs I referenced before the break are closing their doors on June 30, which happens to be this Sunday. We have talked ad nauseam on this podcast, at least the escape student loan debt podcast about the income driven repayment plan waiver, where they're going back into history. It's not a forward looking program. They're going back into your repayment history for your student loans. And even if you were not on an income driven repayment plan, even if you were on a plan but made partial payments, late payments, didn't have the right type of loans. They're saying if you made a payment at all, any amount, and even some periods where you didn't make payments, they're going to credit it as if you did. When it comes to the 20 or 25 years of payments required to have your loans forgiven under the different IDR plans. Now, the qualifications for that program is that you have to either have loans that are called direct loans or you have to have Stafford loans that are owned by the federal government. Because, believe it or not, you can have federal loans that are actually backed by the federal government but owned by a private entity. I have shared that. To me, the best way to make sure that you are eligible is to just consolidate your loans to make sure that they're all a direct loan. So if you have some Stafford loan out there between now and Sunday, rather than trying to figure out if it's a federally owned Stafford loan or a privately owned Stafford loan. I would prefer you to take the ten minutes to just consolidate the loan on studentaid dot gov and we'll put the link to that application in the show notes. That's really important for people who are also looking at these save updates. Because when you consolidate a student loan or all of your student loans, it requires you to, at least on the front end, pick a student loan payment plan. And the second program that closes its doors on June 30 is one of the income driven repayment plans, which is the pay as you earn plan. The pay as you earn plan is something that you're only eligible for if you either took out your first loan or you had paid off all previous loans by October 1, 2007, and you also had to have a student loan balance after October 1, 2011. So not everybody is eligible for the pay as you earn plan. And if you compare the pay as you earn plan to the save plan, there's some slight variations. One of the variations is that the pay as you earn plantain allows you to subtract 150% of your federal poverty level from the adjusted gross income when they calculate your payments. So when you compare that to the save plan, which allows you to deduct 225%, you typically are going to pay about dollar 200 a month more on the pay as you earn plan above certain income thresholds. Which I would say is when you're in like the six figures of income territory, it's a couple hundred dollars a month difference in most cases. So if you're wondering, like, why would I do that? Why would I pay a couple hundred dollars more? Is because the other major difference as it pertains to the pay as you earn plan versus the save plan, is that pay as you earn. Even with undergrad and grad loans, you pay for 20 years until forgiveness. Whereas with the save plan, if you have a graduate school loan, you have to pay for five years longer, and a lot of that has to do. It's not just straight math. Some of it is truly just how you feel about your student loan debt. Would you rather pay a lower payment now, but have to pay on that loan for five years longer? Would you rather pay a couple hundred dollars a month more now, but have that loan forgiven five years earlier? I would say with most people that were coming across, they prefer to have their student loans off their back five years earlier. And if that's the case, you literally only have until the end of June 30 to sign up for that plan. Because after that point in time, you will not be able to sign up for the pay as you earn plantain. It is already closed to new borrowers, but they are taking away the ability for even existing borrowers to sign up by the end of this coming Sunday. So if you're looking at all of these changes to the save plan, do I think that you should automatically go from save to pay as you earn simply because of all of these lawsuits? No, not necessarily. If you've gone through a thorough process of picking which payment plan is right for you and you decided on the save plan that I don't see anything in these lawsuits that would make me run for the hills and say, oh, I should just go on the pay as you earn plan no matter what because I'm worried about these lawsuits. However, if you think that there's a possibility that the pay as you earn plan may be the right thing for you, you literally only have until Sunday to decide. And the positive part is you can go back to the save plan if you change your mind down the line. What you can't do is go back to the pay plan after Sunday. So if you think that there's a possibility that, hey, at least as my finances are set up right now, I'm thinking that the 20 year option may be better than the 25 plus. All these lawsuits are making me feel a little shaky. Maybe it is something that you try to sign up for between now and Sunday and after these lawsuits have been settled, which they will likely go all the way up to the Supreme Court, but it will likely also be a number of months before they rule. Then you could say, I'm going to sign up for that pay plan so I don't miss out in case it's something that I want to pursue long term, but in the event I want to go back to save, I have the ability to do so. So I'm going to put some links in the show notes to some of the episodes we've done, comparing these two specific plans to each other. As I mentioned, I'm also going to put the application for the direct consolidation application on Studentaid Dot Gov. This is an emergency episode, even though we're releasing it on the same day that we always release it. But it is because if you decide to make changes, you are kind of under the gun to do so, and it may be something where you need to put aside some time on your weekend in order to make these steps in time so that you are not left wanting. On Monday, July 1 talk to you next week 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 impacted their marriage, their business, their credit, or their dream of achieving homeownership.
