The last few years have been a very weird time in the financial aid world. At the start of the Covid-19 pandemic, the federal government put a pause on federal student loans. All loans in the Federal Direct loan program stopped accruing interest. And no payments were required on these loans for borrowers who were in repayment status. At the time when this started, we all expected the pandemic to be short-lived and everything would go back to normal in short order. But we all know that the pandemic (and the student loan pause) continued for quite a while. Covid-19 has become an endemic and we’ve accepted that it is something we will just have to deal with going forward. And the student loan pause extended many times. But it has finally come to an end.
Starting September 1st, federal student loans began accruing interest again, for the first time since March 2020. For borrowers who are in school (or in their six-month grace period following leaving school), this means that the loan servicer has started keeping track of the interest that is accruing each month, and when the loan goes into repayment that accrued interest will be added to the principal balance of the loan (this is called capitalization). For borrowers who are already in repayment, this means that October is not only going to bring fall foliage, pumpkin spice latte, and spooky decorations. October is going to bring a student loan payment. For many this will be their first student loan payment ever. For many more, this will be their first payment in several years. This is going to take a little getting used to!
Thankfully, along with this new era of interest accrual and required payment, this fall also brings us a new income-driven repayment plan (IDR). IDRs base the amount of monthly payments on the amount the borrower is earning, instead of on the amount that was borrowed. The Saving on a Valuable Education (SAVE) plan is replacing Revised Pay as You Earn (REPAYE), and it is without question the most favorable of the assorted income-driven payment options. This plan boasts the following benefits:
- The portion of the borrower’s income protected from being included in the calculation of the monthly payment is 225% of the federal poverty guideline, as opposed to the 150% offered by most other IDR plans. This will yield the borrower a much lower monthly payment.
- If the borrower’s monthly payment is not large enough to cover the accruing interest, the excess interest will be forgiven rather than being tacked onto the principal of the loan. There will be no negative amortization! Even if you only ever pay interest on the loan, the total balance due will never grow larger. This is a game changer. Gone are the days where a student borrows $40,000 for their education and then after years of payments find themselves owing $152,000. The balance will never get bigger than where you started in repayment.
- Married borrowers will have a way to remove their spouse’s income from the calculation of the monthly payment. Borrowers will no longer have to make a choice between having the lowest monthly payment or legally wedding their soulmate. If a borrower is married and wants to exclude their spouse’s income from the calculation, they simply need to file their federal income tax as married filing separately.
There are more changes to follow starting next summer, but the three listed above are already in place, and will have the greatest impact on law school alumni. You can find a detailed description of the SAVE plan here, and a great description of how SAVE differs from the old REPAYE here.
Getting ready for student loan repayment after a three-and-a-half-year break will likely feel daunting. You can find some guidelines here and here. And your friendly neighborhood financial aid advisor is also here to provide help if you need it.
Big changes are arriving right now. But with a little focus and a little help from available resources, this will be manageable.