Episode Transcript
Brenton: [00:00:00] In our last episode of the Escape Student Loan Debt podcast, we covered the details and changes to the save plan, saving on a valuable education. In this episode, we talk about how those changes can dictate whether or not it's the right plan for you. 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. I hope you guys are having a good as possible October, even though this is the month that student loan payments restart. If you are part of our community, you know that we are coming off the final session of the student loans back.
What now? A course that we've been offering over the last couple of weeks, we had a really, really good group of sessions, and if it's something that you're interested in, we released a preview of one of those sessions a few weeks ago.
We will definitely make sure that we have those recordings made available to you in a course format with [00:01:00] additional resources and downloads and things to help you get reestablished with your student loan payment strategy. Now today, what are we here for? In the last episode, we talked about the details of the saving on a valuable education plan.
The details as it pertains to forgiveness and things of that nature. I don't want to rehash all of that because we talked about it in the previous episode, but the reason that we're going to talk about some of the things today and rehash some of those topics is because there are parts of this plan that can help determine whether or not it's the right plan for you or whether or not you need to make a change. The timeliness of that change is really important because with the change to the save plan, there are now four plans under the income driven repayment plan umbrella.
There's the Income Contingent Repayment Plan, the Save Plan, the Income Based Repayment Plan, which there's actually two versions of this, as we'll discuss after the break. And for right now, there is the Pay As You Earn Plan. I say right now because the Pay As You Earn Plan is [00:02:00] going to be phased out over the course of the next several months.
As a matter of fact, after July of 2024, you will no longer be able to sign up for that plan. It will be closed off to new borrowers. If you're currently eligible for that plan, you need to make the decision to switch to it by July of next year. Otherwise, you won't have access to it either.
So there's a large group of borrowers who are eligible for pay as you earn right now, but they have that limited period of time until July of next year to make a decision on whether they should go to that plan or switch to that plan or stay on that plan or whether they should forego that opportunity permanently and be stuck choosing between.
The Income Based Repayment Plan, the Save Plan, or Income Contingent Repayment.
So let's talk about the details of pay as you earn so you can understand what goes into that decision. The first thing is eligibility. You cannot just hop on the pay as you earn plan regardless of when you took out your first loan.
As an example, to be eligible for pay as you earn, you have to be what's considered a new borrower as of October 1st, [00:03:00] 2007. That means your first student loan came after that date, or if you had student loans prior to October 2007, you had paid them off before that date came.
In addition to that, you had to have taken out another student loan after October 1st, 2011.
Assuming you're eligible. Here are some of the details of that plan. Underpay, as you earn, you pay 10% of your discretionary income towards your student loans each year.
Let's compare that to the save plan. We talked about in our most recent episode how for undergraduate loans only, you pay 5 percent of your discretionary income. For graduate loans only, you pay 10 percent of your discretionary income. And if you have a blend of the two, you pay a percentage that's based on the weighted average of your loans at the time that you took them out.
So right off the bat, you can see that potentially once these changes to the save plan are implemented, which they're being implemented over the course of the next year, then there will be plenty of scenarios where on the save plan, you could have a payment that is at [00:04:00] least half of what you would pay on the pay as you earn plan.
Why? Because not only is pay 10 percent of your discretionary income, whereas with the save plan, you could pay 5 percent of the discretionary income, but the way they calculate discretionary income is Also different. You will recall that when they calculate this amount, they allow you to take away to deduct from your income, a certain percentage of the federal poverty level before they calculate your payment under the save plan.
That percentage of the federal poverty level is 225 percent of the federal poverty level. Based on the number of people in your household, all of that gets to come off your income before they calculate your five or 10%. With the pay as you earn plan, you can deduct a smaller amount. It's 150% of the federal poverty level instead of 225%.
So in most cases, the payment underpay as you earn plan is going to be a little bit higher than what you would find under Save plan. So as we're talking about why you would choose one or the other, you might say, well, why would I [00:05:00] choose pay if my payments higher, but just bear with me for a little while longer.
What are some other features of Pay As You Earn? Well, one feature is that it has a payment cap, unlike the SAVE plan. With the SAVE plan, it doesn't matter how much you earn, doesn't matter how fast you would pay your loans off. If you earn a million dollars and you're supposed to pay 5 percent or 10 percent of that towards your loans each year, you have to pay it, even if it would pay off your loans in the first month or two. With the Pay As You Earn plan, it works a little differently. It has a payment cap, which says that every single year they're going to compare your payment to the 10 year standard loan repayment, and they're going to ask you to pay whichever is the smaller number.
The Pay As You Earn plan also has the ability to exclude your spouse's income from the payment calculation, as is the case with now all of the other income driven repayment plans.
But the next area where it does pale in comparison to the save plan has to do with the interest subsidy. As a reminder, an interest subsidy is when you're making payments on your student loans, but that payment isn't big [00:06:00] enough to cover the interest that's growing on your student loans.
And as a result, the government decides to pay some of that unpaid interest for you. I
Now the SAVE plan, this was just a monumental change because they announced that they are going to give a 100 percent interest subsidy of all unpaid interest. This is relevant in two scenarios. The first scenario is if you're trying to eventually get to the place where you pay off your student loans in full, spending a few years on a save plan, and knowing that that interest is not going to grow on your loan balance is really helpful because you know that when you're ready to start making actual strides, you're not going to oh, more than what you initially borrowed. It's also relevant if you're trying to have loan forgiveness and the government decides not to extend their current policy of not taxing the forgiven student loans in the year that they are forgiven. If they decide in the year 2026, they're not going to extend this and you have 500, 000 worth of student loans forgiven.
And there will be people who have 500, 000 worth of student loans forgiven. You would have to pay income taxes [00:07:00] on that money As if you earned it, and that could be just a financially devastating thing for people who find themselves in this scenario.
The save plans interest subsidy make sure that again, that student loan balance doesn't increase, which means that in the event of forgiveness, you would have a smaller amount forgiven and a smaller amount taxable to you as income as compared to some of the other income driven repayment plans.
That is not the case, however, for the pay as you earn plan. With the pay as you earn plan, instead of covering 100 percent of all student loans, unpaid interest, they cover 50 percent of the unpaid interest on subsidized loans only for three years only. So again, you might be listening to this and wondering, why would I choose this payment plan as compared to the save plan?
What are the benefits? The major benefit to the Pay As You Earn plan as compared to the SAVE plan comes for those who have graduate school loans. And the reason for that is with the SAVE plan, if you have graduate school loans, you have to pay your [00:08:00] student loans on that plan for 25 years until your student loans are forgiven.
With the pay plan, whether you have graduate or undergraduate loans, it is 20 years, five less years that you have to worry about student loan payments and their impact on your budget.
And I can tell you in spite of the lower payment, in spite of the reduced interest subsidy, there are scenarios where it might benefit you to have a higher student loan payment, but know that you're paying it for five years less as compared to having the savings on a monthly basis for the save plan, but knowing that you have to pay for five years longer as a result of having graduate school loans.
As an example, let's say that we have a family of four and they have an adjusted gross income from their previous year's tax return of 100, 000. Adjusted gross income is the number that the student loan servicers are going to use to calculate your discretionary income
and then you pay a certain percentage of your discretionary income towards your student loans on a monthly and yearly basis. So if you have a family of four and their [00:09:00] adjusted gross income was 100, 000, under the save plan, their payment each month is going to be 270 a month. That's a pretty good deal.
You're earning 100, 000 as a family. You're paying less than 300 a month towards your student loans. But if we assume that they have graduate school loans in this mix, then they're going to have to pay that amount or whatever their income dictates for 25 years until any remaining balances are forgiven.
Let's compare that to pay as you earn, pay as you earn, same family income, 100, 000 for a family of four. Remember that they're paying the same 10 percent in this scenario, but they're using a lower percentage of the federal poverty level.
It's 150 percent that they get to deduct from their income, versus 225 percent under the SAVE plan. As a result, their payment, instead of 270 a month, rises... To $458 a month, a difference of a little less than $200. Now I would ask you to pull out your calculator and do this [00:10:00] calculation to see what you pay more for over time. With this version of the scenario, if you're the family of four and you pay for 25 years at 270 a month, you do pay for 5 years longer, but you pay 81, 000 to your loans. At 458 a month, you pay for 5 years less.
But over the course of that higher payment for 20 years, you pay 109, 000. So in this scenario, it makes more sense to pay on the save plan because under the save plan, even though you pay for five years longer, there's still a savings. But there are cases that we're coming across with pay as you earn, where you do pay more on a monthly basis, but those five fewer years are saving people tens of thousands of dollars over the course of their repayment.
I'm trying to show you an example where it's not just assuming the five years less automatically means savings, but there are those scenarios and it shows you the importance of why you actually have to calculate what you would pay under these plans. Not just each month, but over the course of the entire [00:11:00] repayment to understand which one is the right thing for you.
Now after the break, we'll tell you how if you weren't able to make that decision by July of 2024 and you miss out on the pay plan altogether, how there is one more option that you have on the table in case the save plan isn't right for you.
[00:12:00]
Brenton: Welcome back from the break. Before the break, I told you how there is still a scenario where if you decide that the pay as you earn plan may have been the right plan for you, but you make that decision after the window is closed, how all options are not lost.
So that option that I'm referencing is the new IBR plan. Income based repayment is one of the four income driven repayment plans, but based on the date that you took out your student loans, you could be eligible for the old IBR or the new IBR and the plans have different terms. To be eligible for new IBR, you have to be a new borrower. These are different dates. You have to be a new borrower as of July 1st, 2014.
The new version of income based repayment is almost identical to what you find under the Pay As You Earn plan. It's 10 percent of discretionary income with the same calculation for [00:13:00] that payment. It has a payment cap and it has the ability to exclude spouses income.
It has the exact same interest subsidy of half of your unpaid interest on subsidized loans only for three years. And it has a 20 year repayment, whether you have graduate school or undergraduate loans, there are some minor differences.
And we won't get into because they're not relevant for the average borrower to know if they're going to stay on that plan for the entirety of their repayment. But functionally, in terms of what you see on a day to day, month to month basis, these plans are the same.
So there are people out there who are in this decision making process, but a couple of things could occur. Number one, maybe they just can't make the decision in time before July of 2024 and the window closes. There are also people out there who are still paying their payment based off of what they were earning in 2018 or 2019.
And if you look at the anniversary for their income driven repayment plan, it may be that their payment doesn't have to recalculate until later next year or early 2025, months after they would [00:14:00] have to make the decision to switch to the pay plan. But if they switch to the pay plan now, they have to recalculate their income.
You can't just switch. You have to switch, tell them what you're making so they can calculate your payment under that new plan. so we're meeting with people where we are identifying that the pay plan terms are the right thing for them, but their payment is so low compared to what it would be based on their current income, that if they switched now, they would be foregoing 6 months, 9 months, a year of being able to pay a couple hundred dollars a month as compared to recalculating their payment now and paying a thousand dollars a month or more. So in those scenarios they are saying I know the pay plan is the right thing but rather than switching now I will wait.
I realize I'm not going to be able to sign up for that plan, but the new version of income based repayment is so similar that I can wait until I have to recalculate my income. And at that time I can switch to this version of the income driven repayment plans. That's a lot to digest is why we're doing this over multiple [00:15:00] episodes instead of throwing this all at you at once, but I hope that this was helpful.
We're going to continue over the next several episodes talking about how to choose your payment plans, things you should know as student loan payments resume. If you have not already joined our email list at escape student loan debt. com, we've got some cool things coming up over the next several months and I look forward to seeing you on our new episode in two weeks. Talk to you then.
