The Supreme Court Rules on Student Loan Forgiveness and Other Important Federal Loan Updates

It’s been quite the busy couple of weeks in the world of student loans! In August, 2022, a $10,000-20,000 forgiveness of federal student loans for qualified borrowers was first announced. The loan forgiveness was challenged in court and made its way up to the Supreme Court.

After months of anticipation, the Supreme Court finally made its ruling! In this article, I’ll provide an update on:

• The Supreme Court ruling
• The subsequent actions taken by the Biden administration
• The introduction of the SAVE plan as a new income-driven repayment option
• Considerations for next steps with your federal loans

The Supreme Court Makes Its Decision

We’ve been waiting on this for a while. Not only because of what it means for cancellation, but also for all the other student loan updates that would likely follow it. 

The Supreme Court rendered its verdict just before the July 4th holiday weekend (as bad news often is), indicating that the administration and the Department of Education lack the authority to forgive student debt without an act of Congress. 

While this was sure to help many optometrists and even students, hopefully you haven’t relied too heavily on this cancellation. If you’ve been holding on to a small amount of federal loans in anticipation of this, you can safely pay it off. 

A New Hope for Loan Forgiveness? 

Following the Supreme Court’s ruling, no time was wasted announcing another effort for loan forgiveness through the Higher Education Act. If challenged, it’s not clear how this would be more successful than the path already taken. But it’s something to keep an eye on.

It may simply be a move to show the Administration is “doing what it can”, or to take attention off the new income-driven repayment plan. Speaking of…

Introducing the SAVE Plan

Another student loan update we’ve been waiting on was the new income-driven repayment plan first announced in 2022. We’ve seen proposed regulations showing the initial details of the plan. It was a modification of the current Revised Pay As You Earn Plan (REPAYE).

Immediately after the ruling, the Department of Education finalized the new plan, rebranding it as the  SAVE Plan! This revamped IDR plan comes with several key features that optometrists should take note of:

a) Enhanced Payment Calculation: The SAVE plan uses a more favorable payment calculation in two important ways. 

To calculate your payment, it subtracts 225% of the poverty line amount for your family size from your annual income to figure your “discretionary income” – previously it was 150%. 

Then it multiplies your discretionary income by a weighted average of 10% for graduate loans and 5% for undergraduate loans. For example, if 80% of your loans are grad loans, and 20% are undergrad, you would multiply your discretionary income by 9%. Previously it was 10% or 15%. 

b) Elimination of Unpaid Interest Accrual: Though there are slight subsidies for unpaid interest in other plans, the SAVE plan waives all unpaid interest. This ensures there’s not accumulating interest when payment amounts are less than the interest charged. 

It can be useful for ODs needing lower payments when income is lower. For example, an OD just graduating with low, partial year of income. Low payments without accruing interest can help increase cash flow and allow for savings toward practice ownership, a new home, or simply to build up cash or investments. 

This also lowers the financial hit and risk of starting out in an income-driven repayment plan and then switching gears to aggressively paying down the debt. 

c) Ability to File Taxes Separately:

For those going toward a type of federal loan forgiveness using income-driven repayment plans, filing taxes married filing separate was a way to improve the math in the right scenarios. It allows you to exclude your spouses’ income from the student loan calculation. 

This can be especially helpful when your spouse is the higher earner. It’s especially interesting when you live in a community property state. Those states will split income evenly on the tax return, giving you the option of using the tax return figure as your income or paystubs as alternative documentation of income. 

However, REPAYE did not allow you to do this. Both spouse’s incomes were required to be included for the calculation. This is officially changed! If you’re enrolled in the SAVE plan, you have the option to file your taxes separately and exclude your spouse’s income from the payment calculation. It’s important to note, if you file taxes separately, you can no longer include your spouse in the family size when subtracting the poverty line amount from your income. No double dipping, I suppose.

Future Plan Change Limitations: It seems this plan is becoming the “one IDR plan to rule them all”. You’ll soon have limited or no access to certain existing repayment plans such as Pay As You Earn (PAYE) and the New Income Based Repayment (IBR) plan. 

After July 1, 2024, you will no longer have the option to enter into PAYE, unless you were already on the plan. This can create an important decision if you’re aiming for loan forgiveness within 20 years rather than 25 in exchange for a slightly higher monthly payment. It’s also something to keep in mind if you’re going for Public Service Loan Forgiveness (PSLF) and expect your income to increase quite a bit. PAYE caps your payments at what your standard 10-year would have been when you started, while SAVE/REPAYE does not. 

After making five years of payments in the SAVE plan, you will no longer be able to switch to the New IBR plan. This will keep you from transferring to the New IBR plan in the 19th year to get forgiveness in the 20th year. 

Officially, all parts of the SAVE plan will go live in July 2024. But certain important aspects of it go into effect July 30th of this year – elimination of unpaid interest accrual, the use of 225% of the poverty line, and the ability to file taxes separately. 

If you’re already in REPAYE, the changes will happen automatically.

Don’t Want to Make Payments Yet? (Almost) No Problem 

While payments will be technically due, there’s a 12-month “ramp up” period between October 1, 2023 and September 30, 2024. During this period, missed payments won’t be considered delinquent, reported to credit bureaus, placed in default, or referred to debt collection agencies. 

However, months with no payments will still accrue interest and won’t count toward forgiveness. It could be something to use strategically if you expect your payments to be much lower in the future. 

Other Important Considerations

In light of these updates, there are a few key points that borrowers should keep in mind:

Interest unfreezing: Interest will start accruing again in September, signaling the end of the temporary interest freeze period.

Payments starting: Payments are set to start on October 1st, so plan to have those payments in your monthly cash flow. It’s a good time to revisit your payment strategy and whether it’s the right one for the long-haul. There are several factors to keep in mind for the decision – there’s no one right answer for everyone. Three payment strategies to consider are:

• Pay down to $0 – planning to pay down the loans in their entirety. You may do this in the federal loan system, or, when it makes sense and you’re comfortable losing the federal loan protections, you may refinance to a private lender to lower your interest rate. This approach makes sense when you have a federal loan balance close to or below your income or simply prefer to tackle the debt and have it off your balance sheet.
• Go for Forgiveness – planning to take advantage of PSLF or long-term forgiveness using income-driven repayment plans. You should start considering the math toward forgiveness when your federal loans are 1.5x or more than your annual income. There are careful planning considerations and opportunities when you are married, have kids, and your spouse works or has federal loans.
• Blended Approach – a third approach is a mix of the two. Using an income-driven plan during specific opportunities, then aggressively paying down the debt when it makes sense. An example is a new grad using the new SAVE plan to keep payments much lower in the first two years of your career, saving a lot of cash, preparing financially for practice ownership, then paying down aggressively when it makes sense. The lack of accruing unpaid interest under the new SAVE plan makes this even more interesting.

Income recertification: For borrowers on IDR plans, income recertification isn’t required until six months after the payment pause ends. If you were expected to recertify your income before then (say, July 2023), then your recertification date gets pushed back 12 months. 

IDR Account Adjustment: If you’ve been making payments for a while under IDR plans, take a look at whether the IDR Waiver or One-Time Account Adjustment can help you get closer to forgiveness. There are many stumbling blocks that can prevent you from getting credit toward PSLF or long-term forgiveness. This account adjustment provides pretty broad credit to fix the issues with those programs. Take a look, or talk with a financial advisor specializing in student loans, to see if you need to consolidate or take action before the end of the year. 

And that’s a wrap! It’s busy time with student loans. Hopefully, you’re able to prepare for the payments to restart and are able to plan your loans around your life and career goals. Reach out if you have any questions, and take advantage of the free financial health assessments I’m offering to members of the ODs on Facebook community. 

Have a great, prosperous July and 2nd half of the year!