By Latife Neu
Student loan payments are set to resume this month for 40 million Americans. This article will summarize several powerful new programs that can help borrowers make a strategy to deal with their student loans. This article focuses on the tools available to people who have federal student loans held by the Department of Education (DOE). The policies discussed here will be the “SAVE plan,” the “Safe On-Ramp” program, the “IDR Account Adjustment,” and “Fresh Start” for defaulted loans.
Who Can Benefit from these Programs?
These highly favorable programs are set up to be available primarily to borrowers who are indebted through Direct Loans, which are loans made by the DOE to the student borrower (or, in certain cases, to the student’s parent). Direct Loan borrowers entered COVID-era forbearance upon former-President Trump’s announcement in March 2020. These loans have enjoyed a moratorium on payments and interest since that time.
First, Consolidate
About twenty percent of existing federal loan balances fall outside the scope of the beneficial programs detailed in this article. This includes most loans made under the FFEL program (phased out in 2010), and school-held Perkins loans. A key indicator of non-Ed-held loans is if the loans did not enter the COVID forbearance in March, 2020. Borrowers can log on to www.studentaid.gov, or their servicer’s website, to check the type of loan they have.
Borrowers whose federal loans do not qualify for these programs can easily consolidate their loans in order to qualify for lower payments and other favorable programs. New DOE policies have removed previous impediments to consolidation. There is no longer any reason not to consolidate into the Direct Loan system, and most advocates recommend borrowers take this step, if they have not done so already.
New Payment Plan: SAVE
Direct Loan borrowers now have access to a more favorable income-driven repayment (IDR) plan, which has been dubbed the SAVE (“Saving on A Valuable Education”) Plan. IDR plans, which allow the borrower to enter a payment plan determined by the borrower’s income and family size, have been around since the 1990s, requiring payments of between 10 and 20 percent of discretionary income. In its current form, SAVE calls for a payment equal to 10% of discretionary income.
The SAVE plan offers several advantages over the other plans. First, SAVE exempts a larger amount of money from the payment commitment calculation. Second, the program provides that if the borrower’s payment does not cover the accrued interest, the unpaid interest will not be added to the balance. This addresses the common frustration of borrowers who comply with their IDR payment obligation, but see their loan balances grow over time.
In 2024, SAVE will incorporate a new calculation providing that the discretionary income commitment will drop from 10% to 5% for undergraduate loan repayment. Those with a mix of graduate and undergraduate loans will see a payment calculation that reflects a weighted average of the undergraduate / graduate loans that are being paid.
Finally, SAVE will allow the income of the borrower’s spouse to be excluded from the payment calculation when the married couple files taxes separately. Previously, the plan with the lowest payment commitment did not allow the non-borrower spouse’s income to be excluded. SAVE plan information is available here: https://studentaid.gov/announcements-events/save-plan.
“Safe On-Ramp” Program
Though repayment officially starts in October 2023, the Safe On-Ramp program provides that if a borrower doesn’t send payments for the first year, the consequences will be minimal. According to the DOE (see https://studentaid.gov/manage-loans/repayment/prepare-payments-restart), missed payments will not be reported as delinquent to the credit reporting agencies. Though interest will accrue, the program appears to offer a forbearance-like treatment of missed payments, such that an arrearage will not develop over time. The program will remain in place through September 2024.
IDR Account Adjustment
A little-known program is bringing life-changing results for borrowers who left school in the 1990s and 2000s. The IDR Account Adjustment (also called IDR Recount or IDR Audit) seeks to remedy the acknowledged failures of servicing and communication that have occurred over the past three decades. Though income-linked programs have offered lower payments and a path to loan discharge for years, the programs have been confusing and difficult to navigate. Worse, borrowers have been steered into forbearances and deferments by their servicers, when a low-payment or no-payment IDR plan would have been available.
To address these failures, the DOE has begun an affirmative recount of borrower progress toward completion of their IDR commitments. Normally, IDR requires payments to be made under approved IDR programs for either 20 or 25 years, depending on the loan type and payment program. Under the account adjustment, the DOE will attribute IDR credit to time spent under any payment plan, as well as most time in forbearance or deferment. Looked at another way, essentially all of the time since a borrower left school, with the exception of time in default or in an in-school deferment, will now be attributed toward the IDR finish line. In my practice, I have recently witnessed a significant number of struggling borrowers in their 50s and 60s suddenly receive word that their loans will be forgiven.
The recount will occur automatically for borrowers who have Direct Loans. For those who have FFEL loans, it is necessary to consolidate to the Direct Loan system before the end of 2023, to get the benefit of this program. More information on the IDR Account Adjustment is available here: https://studentaid.gov/announcements-events/idr-account-adjustment.
“Fresh Start” for Defaulted Loans
Borrowers who exit from the COVID forbearance with their loans in default can easily restore their loans to good standing, avoid future collections, and enjoy favorable credit reporting. A defaulted borrower can request Fresh Start online, by phone, or by mail. Following the request, the DOE will transfer the defaulted loans to a regular servicer, designate the loans as “in repayment,” and direct the credit reporting agencies to remove the record of default from the individual’s credit report.
Although the DOE will not be undertaking collection activity against borrowers in default in the near future, remaining in default on federal student loans is ill-advised. Once collections resume, federal loan borrowers may be subject to administrative wage garnishment, tax refund offset, and offset of Social Security benefits. There is no statute of limitations on federal student loans. More information on the Fresh Start program is available at: https://studentaid.gov/announcements-events/default-fresh-start.
Conclusion
Although the resumption of payments on federal student loans is a source of distress for many borrowers, the exceptional programs detailed above provide tools new tools for managing federal student loans.
Latife Neu practices Student Loan law and Bankruptcy law from her office in Ballard. She can be reached at latife@neulegal.com; www.neulegal.com.
