Episode Transcript
Brenton: [00:00:00] The saving on a valuable education plan is the latest offering in the income driven repayment plan umbrella. It has a lot of changes as it pertains to the way your income is calculated. And in this episode, we go through some of those changes together. Let's get started.
Brenton: Hello, my name is Brenton Harrison of Escape Student Loan Debt and your host for the Escape Student Loan Debt podcast. It has been a busy week in the Escape Student Loan Debt world. We are two live classes in two student loans back. What now? Uh, so if I sound tired. We've done about three hours and some change of live classes on student loans, but I do have an episode for you today on the save plan, the saving on a valuable education plan.
If you have followed us in previous episodes, you know that the save plan is actually just the new name for the [00:01:00] revised pay as you earn plan. Revised pay as you earn plan was one of the plans under the income driven repayment plan umbrella. They had made or floated some changes to that plan, which would mean that the revised pay as you earn plan would have been the revised revised pay as you earn plan.
And they realized that made no sense. And they just changed the name to the saving on a valuable education plan. We have covered a number of these updates in previous episodes. So in this episode, what I'm going to do is before the break, I'm going to tell you some of the changes that are going to be enacted immediately.
Then after the break, I'm going to tell you some of the changes that will not go into place until 2024.
Now we're going to do another part on this episode and in that part we'll get into more of the nitty gritty of like comparing the save plan to the other plans like income based repayment or pay as you earn to decide which one may be right for you. We're not going to get into the dollars and cents of changes on this episode.
We'll do that in the next part. In this one we're going to just talk about [00:02:00] the concept of the changes of these plans, how it can help or hurt you in terms of your student loan strategy. And then second half, we'll talk about what goes into effect in 2024. So first, what has changed? If you're following along with us on screen, we're actually reading from the description, uh, on studentaid.
gov. We'll put the link to this in the show notes. The first major change in terms of how your payments are calculated is that under the save plan, the federal poverty level and the percentage of that federal poverty level that you can use to deduct from your adjusted gross income goes from 150 percent to 225%.
Let's talk about this conceptually. Income driven repayment plans are based on a percentage of something called your discretionary income. The calculation for discretionary income is your adjusted gross income from your previous year's tax return, and they allow you to subtract something called non discretionary income.
It's essentially saying We are [00:03:00] letting you reduce the income that we're going to use to calculate your loan payment. Non discretionary income is, based on your plan, a certain percentage of the federal poverty level. That's what they allow you to deduct. On many plans, that percentage is 150%, as it was on the original version of the revised pay as you earn plan.
The save plan is saying we're going to increase that percentage of the discretionary income that you can deduct from 150 percent to 225%. This could radically lower the payments of people, even if their income has not changed or family size has not changed, because it's increasing the amount that you can take off the table when it comes to calculating your payments.
If you're following along on screen, there's actually a little paragraph here that says, and I quote, that means you will not owe loan payments if you were a single borrower earning 32, 800 or less, or a family of four earning 67, 500 or less.
Borrowers earning more [00:04:00] than these amounts will save at least a thousand dollars per year as compared to current income driven repayment plans. That 1, 000 of savings that they're estimating essentially says that on average you're saving about 83 a month towards your student loans.
The next thing is the interest subsidy. If you recall, an interest subsidy is when the federal government subsidizes or pays some of the unpaid interest on your loans for you. An example would be if I have 10, 000 worth of interest growing on my loans and I'm only paying 5, 000 a year towards them, there's 5, 000 of unpaid interest that if nothing happens is going to be added onto my total loan balance.
We talked about how federal student loan interest works, technically it goes into a separate interest category, but conceptually the total amount that you owe would go up by that 5, 000. A subsidy says, we don't want that to happen, so the government's going to cover some of it for you.
And in most plans, after at least your third year, [00:05:00] The most aggressive subsidy that was available was 50 percent of the unpaid interest. That was as high as it went. With the save plan they are saying, as long as you make a payment, however low that payment may be, even if it's 0, if they say that's what you had to pay, they will cover 100 percent of any remaining interest for both subsidized and Unsubsidized Loans. This is a big deal for two reasons. The first is early in your career, you may be on an income driven repayment plan because it's all you can afford. But at some point in time, you may be in a position where you choose to pay off your loans and pay them down in full. If that's the case, you don't want this ballooning student loan balance when at some point in time, you're going to want to pay that balance off in full.
You want that balance to be as low as possible when that time comes. The SAVE plan, giving you this 100 percent interest subsidy, makes sure that when you graduate, as long as you're paying what they ask you to pay, you will not see your loan balance increase. It will either [00:06:00] decrease or stay right where it is.
The second reason this is a big deal is if they decide to not pay extend the moratorium on how they treat forgiven student loans under income driven repayment plans. We've also talked about this. Until the year 2026, any income driven repayment plan forgiveness is not taxable as income. But if they do not extend that, then any loans you have forgiven on these plans would be taxable as income starting in the year 2026.
If that is the case, this 100 percent interest subsidy is also helpful. Because it limits how much that student loan balance will increase, which limits how much would be forgiven, which limits how much tax you would owe in the event of that forgiveness.
Next up, we have the exclusion of spousal income. We have talked briefly on this podcast about the fact that there are some plans and revised pay as you earn was not one of them, where if you filed your taxes separately from your spouse, you could exclude their income [00:07:00] from the calculation of your loan payments.
The revised pay as you earn plan used to not allow you to exclude your spouse's income regardless of how you filed.
If you filed together, if you filed separately, they would include that spouse's income in the calculation. The save plan is changing that and it's saying that if you file separately, we will allow you to exclude your spouse's income with a caveat. On all of those plans, and this is changing for all of those plans, not just the save plan on all those plans prior to this change, if you filed separately with your spouse, you could exclude their income from the calculation, but you could still include them as a person when it comes to the number of people in your household for the federal poverty level. It was like this loophole that people would use. To benefit in terms of being able to take more income off the table, but also not including their spouse's income would take even more income off the table.
They're doing away with that. They're saying on all those plans, including the save plan, you can exclude your spouse's income if you file separately, but you also would then [00:08:00] remove them from the household in terms of the number of people. So if you're married and have two children, if you file separately from your spouse, you don't have to use their income, but you've now gone from a family of four in terms of the federal poverty level to a family of three.
Two more changes to not just this plan, but any income driven repayment plan that are convenient if you know the old way of doing things is first how you access your income in the first place. It used to be that you would have to leave the studentaid. gov site, go to the IRS website, grant them access to your tax return, go back to studentaid.
gov. When you're trying to update your income now, all you have to do is give them the disclosure that allows them to automatically access your income from the IRS, which will save you a lot of time.
Another thing that is available immediately is starting July 1st, 2023, any unpaid interest on your loans will not capitalize if you leave an income driven repayment plan. We've talked about capitalized interest. In federal [00:09:00] student loans. They keep the principle of your loan and the interest in separate categories.
It is helpful because it reduces the amount of interest that could be growing on your loans by separating the two. It used to be that when you left an income driven repayment plan, either for good or to go to another plan, that those two categories would combine. The interest would be capitalized on the loan balance and now interest would accrue on the total number instead of just the loan principal.
They are ending that with one caveat, starting in July 1st, so that's already passed. If you leave any of the plans, they are not going to capitalize your interest. The only exception is the income based repayment plan. If you leave the IBR plan, that interest will capitalize and it's because that is required by the statute of that plan.
There are other changes to this plan, but those changes are due to go into effect in the year 2024. So after the break, we'll tell you what those changes are.
[00:10:00]
Brenton: So what are the changes that go into effect in 2024? Well, the first is a simple one: auto recertification. If you sign up for one of these plans, [00:11:00] starting in July of 2024, you don't have to go through the process of like recertifying your income and doing all this and doing all that.
If you've given them the authority to access that tax information, like we talked about before the break, they'll just go and automatically pull your most recently filed tax return, which will make sure that you never miss the ability or the opportunity to recertify. There are some other changes that go to effect in 2024.
One of those is the reduction in the percentage of your discretionary income that you pay towards those loans. We talked about this in previous episodes. If you have graduate loans only, you pay 10 percent of your income on the save plan. If you have undergraduate loans only, you only pay 5 percent of discretionary income towards your student loans, which is a huge reduction as compared to the original plan that will go into effect starting in July of 2024. Now, what if you have both? If you have both, you will pay a weighted [00:12:00] average between five and 10 percent based on your loan balances.
That's going to take more to go into. Just know that if you have graduate and undergraduate loans, you're going to pay between 5 and 10%, but based on how big the loans are that you took out, it will gravitate towards one of those numbers.
Basically meaning, let's say that I took out huge loans in graduate school, which requires 10%, and I took out tiny loans in undergraduate, which is 5%. The weighted average is going to bring my payment basically up really, really close to 10%. If it's reversed, then it'll go closer to 5%. It's a balance of the two.
Another element of these plans that's gotten a lot of press and in my opinion is really trying to make it so that people don't have to pay back loans if they use them for community college Is borrowers with original loan balances of 12, 000 or less will receive loan forgiveness after 10 years of payments instead of them having to pay 20 or 25.
Now, if you owed more than [00:13:00] 12, 000 for every 1, 000 that you owe above 12, 000, it adds a year to your repayment.
So if I owe 14, 000 instead of paying for 10 years, I have to pay for 12 years because that's 2, 000 above the 12, 000 I need. Other huge changes that may not seem that huge is consolidation. If you consolidated your loans prior to these changes, you would lose any credit towards forgiveness you would accumulated prior to consolidation. They're now going to allow you to keep that credit towards forgiveness on the consolidated loan. And you will get that credit based on a weighted average and that also has to do with the original principal balance of the loan. I think this is so complicated that even they wouldn't know how to explain it to you, but just know that you don't lose all your credit towards forgiveness when you consolidate and the rules as to how they apply those credits will be made more clear, I'm assuming, the closer we get to July of next year.
And then the last two: borrowers can make additional catch [00:14:00] up payments to get credit for other periods of deferment and forbearance. What this means is let's say that you put your student loans in forbearance because you couldn't make payments and you were working for a nonprofit and all of a sudden you realize, you know, I really wish I could have had those two or three years worth of payments because I'd be a lot closer to the 10 years I need to have my student loans forgiven under public service loan forgiveness.
They're saying you can go back and you can make. Catch up payments for those years and you can receive credit towards those payment programs or forgiveness programs and put you back in good standing. That's also a huge deal. We'll know more about how that will work in functionality and reality the closer we get to July.
And then lastly, borrowers who are 75 days late will be. automatically enrolled in an income driven repayment plan if they've agreed to allow the Department of Education to securely access their tax information. So if you sign that tax disclosure, they're saying once you're 75 days late on a payment, they will automatically put you in an IDR [00:15:00] plan and they are doing this to avoid you being in delinquency or default with your student loans.
This is a part of the charge that they're taking on. To make sure that federal student loans don't ruin other parts of people's finances. So they're making sure that they make that process streamlined for you. Now that's a lot. I know it was a lot, but I'm confident that in part two we'll be able to, uh, distill some of this information in a way that's really, really digestible and compare it to other plans so you can know what's best for you.
And I will see you in that episode in a couple of weeks. Talk to you then.
