Episode Transcript
[00:00:00] Hey y'all, this is going to be a stripped down episode of the podcast that we are posting on both platforms. So you will hear this both on the new money new problems platform and on the escape student loan debt platform, which I must say, for compliance reasons, is a separate business entity from new money new problems. I've shared with you in the past that we try not to do too frequent of an episode on student loans on new money new problems. But when there are these periods where something goes on in the student loan space that is exceedingly relevant to both audiences, we try to make sure that we get that information in front of both audiences. And I'll say before I even get into this update that the update itself is an excellent reason and proof and a sign of why you need to be in the room for the webinar that we're doing next Tuesday, July 30 at 06:00 p.m. central on the state of student loans. Because this is just proof that student loans are a mess right now. But what is that update? If you have been keeping track with the save plan, the saving on a valuable education plan, it is likely if you have federal student loans and you are coming out of COVID and trying to get the lowest payment possible, which is what most people were trying to do, that you signed up for the save plan. We've talked about it a ton on the escape student loan debt platform, less so on new money, new problems. But this plan, in most instances, would lead to the lowest payment of all the income driven repayment plans. Well, last month, or it might have been earlier in July, the weeks are kind of running together. There were two courts that saw lawsuits brought by the state of Missouri in the state of Kansas. They were arguing that the save plan was legally invalid, that the department did not have the right to forgive this much debt, that they didn't have the right to lower payments. It was costing too much money. And based on how much money it was costing, they didn't go through the proper channels to get approval for a program that large. And that first round of lawsuits had an impact because after those first two court rulings, the department was stopped from doing what they were planning to do in July. So I guess it was in July where they were planning to take people who only had undergraduate loans on the save plan and move their payment from 10% of discretionary income down to 5%. And for people who had a blend of undergrad and grad, they were going to make their payment a weighted average that would fall somewhere between five and 10%. That first round of lawsuits saw that paused. It also saw the ability to have your loans forgiven under saved paused, not under all the under income driven repayment plans. So you still have the ability on those other plans to have your loans forgiven after 20 or 25 years. But the save plan, it had the 2025 years, but it also had the ten year option for people who borrowed a certain amount or less in their schooling. The courts put a pause on that. Then it went to an appeals court, and the appeals court did not say that the save plan was legally valid. It said that while the issue was being litigated, that the department could continue with the steps they were planning to take, such as lowering those payments down to 5% or weighted average of the two. And there were several people in that instance, I shouldn't say several. There were tens of thousands of people in that instance who got letters from their loan servicer telling them that while this issue was being settled, they were being placed in an administrative forbearance. Now, administrative forbearance is a crucial term for the rest of this episode, because you need to understand the difference between an administrative forbearance and a forbearance that you requested. If it's a forbearance that you requested, you would typically see interest accruing on those loans while you weren't making payments. And in some way or another, that interest is either going to get forgiven, or if you're paying the loan off in full, you would have had to pay that interest. And even if it was forgiven, the timing of when it would be forgiven is very important. We've talked about more so on escape student loan debt that until the end of the year 2025, any student loans on the federal side that are forgiven have no tax implications. But if it is not extended at the end of 2025, we would go back to the old rules where not public service loan forgiveness, but income driven repayment plan forgiveness, like on save, like on the pay as you earn plan that would be taxable as income in the year of forgiveness. So even when your interest accrues in that instance, it would be relevant because it would factor into how much income it looks like you earned in the year your loans were forgiven. Administrative forbearance that you didn't request is different. Administrative forbearance is essentially your student loan servicer saying, for some reason or another, we have decided that you don't need to make payments right now. And it used to be that interest would accrue in those instances as well. But that changed in two different periods. The first period was in the pandemic in March of 2020, the Department of Education paused all federal student loan payment plans for loans that they actually owned. We've talked about that as well, and they made sure that there was no interest accruing on the debt and also that you were getting credit towards the forgiveness programs such as income driven repayment, public service loan forgiveness. The second time it changed was earlier this year when the Department of Education gave guidance that said, moving forward, if your servicer ever put you in an administrative forbearance, you would still get credit towards income driven repayment and you would get credit towards public service loan forgiveness. And the rationale behind that is there were so many people at the time who were being placed into forbearance because their servicer had screwed something up. The Department of Education said, well, they can't punish you for their mistake, so we're going to give you credit in any instance where you've been placed into administrative forbearance from now on. And that brings us to last week and last week that Kansas based lawsuit, which is still being litigated. It's not that this has been solved. Remember the appeals court, the first appeals court said that they can continue lowering payments while the issue is being litigated. They send it to another appeals court, the 10th Circuit. And the 10th Circuit says while this issue is being litigated, the save plan is done, not saying it's permanently done. They're saying the Department of Education is not allowed to operate this plan as long as the issue is being litigated. That means that not only can they not lower payments, it means that they can't offer forgiveness from that plan. It even means that there's a possibility that you can't sign up for the plan at all. The Department of Education may have to refuse new applicants to the save plan. And you can see that impact already, because if you go to studentaid DOt gov, which I've encouraged any of you who have federal student loans to sign up for so that you can track, no matter who your servicer is, the status of your loans, you are not able right now, as of Thursday evening, to sign up for another income driven repayment plan online. You can still do a paper application. You're not able to consolidate your loans online, which is something that you're typically able to do in five or ten minutes if you work through it very quickly. So they've essentially said, while we're trying to figure out the impact of this lawsuit and how we're going to move forward as the Department of Education, we're just going to restrict people's access to not only sign up for new plans, they also are preventing people on save from applying to other plans, at least online. But here's the worst part. Because of the uncertainty, the department said straight on the Department of Education's website that this period of administrative forbearance will not count towards income driven repayment plan forgiveness or public service loan forgiveness. And that's the worst part because last I saw, there's over 8 million people on the save plan. Many of those people are trying to get public service loan forgiveness. Almost all those people are trying to at least get income driven repayment plan forgiveness. And we have no clue how long it's going to take to resolve these issues. I would say it's going to at least be at the end of the year because it's likely that it will go all the way up to the Supreme Court. So there's this extended period, an unknown length of time, where you could have your payments paused, which is a positive. But even though your payments are paused, you're not getting credit towards the programs that you were hoping would help forgive that debt. This is even more punishing for people who might be taking less money while working for public service or government jobs. And the intention is, as soon as those loans are forgiven, to go into the private sector, because one of the things that ended with the public service loan forgiveness waiver is the ability to get public service loan forgiveness, even if you've already left that place of employment. So basically, if you did your ten years, you could leave, go work somewhere else, and they would go through your application and they would just forgive it based on the ten years that you served. Now we're into the original rules where you have to be at a place of employment that qualifies while you wait and until you receive public service loan forgiveness. So you could work your ten years, and if it takes another six months for them to approve your application, you still have to be employed there. If not there, at least at a place that qualifies until that forgiveness is granted. So by telling people that they can't move to a different payment plan, they don't have to pay, but they still are not giving forgiveness credit. You're essentially putting people in a holding pattern. So I know that the inclination is to make a lot of changes right now. This may change by Tuesday when we do the webinar, but as of right now, you have to just sit and wait for guidance in most instances. Thankfully, we'll have a few days between now and Tuesday where I can continue to read a continue to look at press releases and documents that the education department releases. But I wanted you all to have this information because you may just get a random email or a letter from your loan servicer if you're on that plan, saying that payments are paused, and I don't want you to have a false sense of security thinking that you're still trekking towards forgiveness, when in reality we're in a bit of a pause. So I know this isn't the typical episode where we do the commercial and the intro and the outro and things like that, but it was crucial that I gave you this information. And it is also crucial because this is just one of emotional multitude of different things that are going on in the student loan space right now. Again, highly encourage you to sign up for the webinar next Tuesday, July Central time the state of student loans we'll talk about this. We'll talk about loan service or changes. We'll talk about private loans. All of it will be covered. So I encourage you to be there because this confuses me. So I know that if you're not spending every day in it, it likely confuses you as well. So I hope to see you next week. Bye.
