Should You Abandon The SAVE Plan?

In this episode, we talk about the ongoing forbearance for the safe student loan payment program and cover scenarios when you should consider switching to a different IDR plan. Let's get started. Are your student loan payments or loan balances a major obstacle in your financial life? Then tune in and let's escape student loan debt. Hello, my name is Brenton Harrison of Escape Student Loan Debt and your host for the Escape Student Loan Debt podcast. In this episode, we want to talk about the ongoing forbearance that we've seen for the safe student loan program. And we've talked about the fact that this is something that, in my opinion, is not going to be resolved in the next month or two, I can easily seeing this stretch into a midway of 2025, or even later before we have some type of resolution, and as a result, you have people who are on the safe plan signed up hoping to either lower their payment, or maybe they were just on the revised pay as you earn plan already, and were automatically thrown on the safe plan, and it's put them in a situation where they are now not receiving credit for things like income driven repayment plan forgiveness or public service loan forgiveness. Because unlike other forms of administrative forbearance, this period as pertains to save is not eligible for credit under either of those programs. So what I thought we would do is talk about some of the options that you have, if you're in that administrative forbearance and you're feeling a little antsy, maybe you are very close to having your student loans forgiven under income driven repayment or under public service loan forgiveness. And you're wondering whether you should just ride it out and save the money that comes with not having to make that student loan payment, or whether you should make other moves, like in the most extreme of scenarios, refinancing to a private entity and just paying it off, or as it pertains to this episode, simply switching to another income driven repayment plan. But let's start with evaluating the other income driven repayment plans to which you could switch in the first place. And believe it or not, there is a document that we can use to guide us in this evaluation, and it just so happens to be the escape student loan debt guide to income driven repayment plans that we released a few weeks ago. If you do not already have this guide, you can get your version by going to escapestudentloandebt.com slash guide. That's escapestudentloandebt.com slash guide. But you can see in this, we can actually go and look at the different income driven repayment plans and cover everything from their eligibility to their protected income that shows how your payment is going to be calculated, the percentage of your discretionary income that is going to be used for that calculation, and how long you have to pay on these plans before your student loans are forgiven. Now, on this guide, you'll notice on the left hand side that all of the plans are listed, even though there is one of these plans that I would tell you to never sign up for if you have another option, that being the income contingent repayment plan, and the other plan being the pay as you earn plan that you can no longer sign up for. And this one's a little tricky because the pay as you earn plan is technically closed to new borrowers. We've talked about this in recent episodes. This plan was closed to new borrowers as of July 1st, but because of some of the court back and forth, there was like a brief period in July and August where you were still able to apply for pay as you earn if you send in a paper application, that window is now closed. So the pay as you earn plan is formally closed to new borrowers. So even though all are listed, because you might already be on the pay as you earn plan, if you're on save and you're trying to switch, you wouldn't choose income contingent repayment plan because it's too punitive, which leaves you with the old version of income based repayment and the new version of income based repayment, realistically, if you're going to switch IDR plans, these are your only two options if you're leaving safe. So let's go through the eligibility of these plans and show you how after the break, when we give you some scenarios, the option that you have available to you could make the decision of whether it's worth making the switch or whether you simply need to stay put regardless of how long this forbearance lasts. And when it comes to eligibility for old income based repayment, because it is the worst of the two versions, there really isn't something to like qualify for. If you have a direct loan or an FFEL loan, you're eligible. The timeline of which you have the loans is less relevant. IBR is the only income driven repayment plan that allows you to make payments when you have FFEL loans, which you shouldn't still have them. You should have been consolidated by now, but technically you can pay back those loans that are either direct or FFEL on these plans and for eligibility for old IBR, you just need to be a borrower before July 1st, 2014. Now, when it comes to how much of your income they will take off the table before they calculate your payment, they will take away in terms of protected income, 150% of the federal poverty level on either version, old IBR or new IBR. But when it comes to the discretionary income that's left under the old IBR, the payment is 15% of your discretionary income for 25 years of payment. If you pay it off before 25 years, obviously you pay it off, but if you still have a remaining balance after 25 years, any of that remaining balance will be forgiven regardless of the amount. Now, when it comes to new IBR, the dates are very relevant because this is the more attractive version of the plan. This is the plan that is almost exactly the same as the pay as you earn plan. We'll cover why it's not exactly the same after the break, but with new IBR plan, that date of July 1st, 2014 is very relevant because with new IBR, you can still pay direct or FFEL loans, but you're only eligible for this version. If you are a new borrower on or after July 1st, 2014 and new borrower doesn't necessarily mean that you first took out a loan on or after July 1st, 2014. It really just means that you can't have had a student loan balance as of July 1st, 2014. So let me give you an example. Let's say you're a person who took out loans for school in 2009 to get your undergraduate degree. Maybe you took out a small amount and in the interim years, you decided to pay off that loan in full. And maybe in 2016, which is after July 1st, 2014, you decided to go back to graduate school. Well, as long as you had paid off that loan that you took out by July 1st, 2014, you are still considered a new borrower when it comes to new IBR because you did not have an existing student loan balance as of July 1st, 2014. So it's not just those who are young. Obviously, if you didn't even start school until after 2014, you're relatively young. It could also be an older borrower who had paid off a prior loan before this date. Now, the calculation of discretionary income on new IBR, as we said, is the exact same. They remove 150% of your federal poverty level, but instead of you paying 15% of your discretionary income towards your loans, it is 10%, and instead of paying for 25 years until forgiveness, it is 20 years, and yes, if you're hearing that, those are the exact same terms as the pay as you earn plan. So while the pay as you earn plan is closed, new IBR represents an option where the payment calculation is exactly the same, and the length of time for which you have to pay your loans is exactly the same as well, but even though it's exactly the same, remember that the purpose of this episode is not to compare new or old IBR to pay as you earn, it's to compare these options to the save plan to figure out if they're worth switching from save onto these options. So let's look at an example before the break, and then after the break, we'll talk about some different versions of this scenario where a person might consider switching versus staying on save. If you're looking at the bottom of this guide, you will recall that there is a calculator that allows you to put in the variables that will show you your payments under the different payment plans. We have our adjusted gross income. Let's assume that in this example, we have a family of four who has $150,000 adjusted gross income. We're going to assume that they have a student loan balance of $250,000. As I said, it's a family of four, and let's assume that their loan interest rate is 6.5%. Looking at that calculator, you will see that as we put in the variables, each option pops up and will change accordingly for the different income general repayment plans. So if this family with these variables, $150,000 adjusted gross income, family of four, $250,000 student debt, were to have the 10-year standard plan, then as a family, either one person with the debt would pay all of this, or if both people had debt, it would be some percentage allocation of this number. The 10-year standard plan would cost $2,838 a month to pay off this debt in 10 years, that's $250,000 of debt. The old income-based repayment plan would be $1,290 a month. That would be the total household payment. The pay-as-you-earn or the new income-based repayment plan would be $860 a month. And the save plan for grad only, that's the only one we're going to consider because the 5% option for undergrad only has been struck down by the courts to this point in time. But the option for grad only 10% of discretionary income as calculated under save would be $665. So you can see right away some scenarios where it would be a little more attractive to switch off of save to another plan, but after the break, we'll dig even deeper into these scenarios so you can decide for yourself when it would or would not be worth the switch. You're listening to the Escape Student Loan Debt Podcast. Subscribe now at EscapeStudentLoanDebt.com. Welcome back. Welcome back for the break. And we're going to go right back to the scenario we were talking about before the break, where we have a family of four, $150,000 adjusted gross income, and cover some scenarios where maybe they would or would not switch from save to another option. Let's first start with the assumption that option one is they are only eligible for old income-based repayment, where they have to pay for 25 years. The payment is more punitive. If you're looking on screen, it's the difference between them paying $665 a month versus $1,290 a month. In this scenario, if this family was far removed from having their student loans forgiven under either income-generated repayment plans or public service loan forgiveness, then I absolutely would not make the switch. I would not be putting myself in a scenario where just because I couldn't wait six to nine months, possibly a year, that I rushed and pulled the trigger and signed up for a different payment plan, and here's why. The one thing that we haven't discussed about income-based repayment as compared to the other income-generated repayment plans is with income-based repayment, if you leave the plan, either because you no longer qualify from an income perspective, or you switch to another income-generated repayment plan, the interest on your student loans will capitalize, and capitalized interest is a concept that we've talked about in the podcast in the past. It is essentially what happens when you have a separate interest that had been growing apart from your principal student loan balance, and it is added on to your principal. You see on screen an example where if you had $100,000 that you owed at 5%, the way that federal student loans work is you have your $100,000, 5% is charged based on that $100,000, but it's put in a separate bucket. So you can see on your screen in year one, if you had $100,000 at 5% interest, it would be $5,000 interest. The second year, they're still calculating your 5% off of the $100,000, which means another $5,000 of interest. If capitalization were to occur, however, the $10,000 in interest that's sitting apart from your principal would be added on to the principal. So now when they calculate that 5% each year, it's off of $110,000. And instead of $5,000 interest accruing, it's $5,500. And this may not seem like that big of a deal, but it is a big deal. If we're in a scenario where the current status of what happens when federal student loans are forgiven is changed as of right now until 2026, if you have federal student loans forgiven, then those forgiven loans are not treated as taxable income. But if that is not extended starting in the year 2026, if you have federal student loans forgiven for any other reason than disability, death, or public service loan forgiveness, it will be treated as taxable income in the year of forgiveness. So the problem with switching from SAVE, where as it stands right now, any unpaid interest not covered by your loan payments would be covered by the federal government, which keeps your student loan balance from growing. Switching to a plan like IBR, which already has a higher payment would likely mean that if the courts let some version of SAVE through, you're going to want to switch back, right? You're not going to want to go from low payment to high payment and not switch back to the low payment if the option's available, but the problem with that is if you do so, you are guaranteeing yourself that that interest will capitalize. And unfortunately, the IBR plan is the only remaining plan under this umbrella where interest still capitalizes when you leave that plan for another income driven repayment plan. That's why my advice would be if this family is in a scenario where they are not anywhere close to having their student loans forgiven, close being a year or two away, I would not run the risk of switching from SAVE to the old IBR plan because of the interest capitalization statute. Next, let's go through the scenario of someone who is eligible for new income based repayment. And this was quite a difference between old and new. You'll recall that under the SAVE plan, the family will pay $665 a month. Under new IBR, it was $860 a month. So much smaller difference, about $200 a month. Now the interest capitalization statute still stands if this couple were to try to switch back and forth from new IBR to SAVE, but I would say even if they're a bit further removed and they do not qualify for public service loan forgiveness, then this might be a switch that they consider. Maybe they're in a scenario where this is a lower income earning year, at least in terms of what they project for the next few years of their life. And they're not trying to lose this year of credit towards income driven repayment. They're not eligible for public service loan forgiveness. And they're looking and saying, in an ideal world, we'll be paying a couple hundred dollars a month more. No, but this is the world that we're in and it's worth the switch. So we don't lose the opportunity for however long this forbearance lasts to have that payment off of a lower income. I can see that being an option where a family says it's worth the switch, even though it's going to cost us a little more because we'd rather deal with the devil that we know than the devil that we don't know. And the reason I make that specific inference about people who are not eligible for public service loan forgiveness is because we are going to cover if they are eligible in the last scenario. So this is assuming that neither person in this relationship is eligible for public service loan forgiveness. If they have a ways to go, or they're close with income driven repayment plan forgiveness, switching to new IBR would be an option that would be worth considering as long as you are comfortable with the fact that it's going to cost you a little more money. The last scenario that we're going to cover is a couple where either one or both of them are eligible for public service loan forgiveness. And in this scenario, you'd have to be really, really close and really, really tired of looking at your student loans for me to recommend you making the switch. And here's why. In one of our most recent episodes, we talked about public service loan forgiveness buyback programs, and it gives you the opportunity to go back in time for periods where you had eligible employment under public service loan forgiveness, but for whatever reason, we're not making a payment and you can get back credit for public service loan forgiveness by making payments for what you would have had to pay under the absolute lowest income driven repayment plan available at that time. And as of right now, the lowest student loan payment plan option available under IDR plans is the save plan. So even though this period of administrative forbearance doesn't count towards public service loan forgiveness, if you work for an eligible employer right now, you know that in the future, you will have the option of buying these credits back. So to me, when I look at the possibility of not having to make a payment right now, if you have other constraints in your budget, if you have other financial goals, maybe you just want to say, Hey, if I know I'm going to eventually have to make these payments, why don't I put them in a high yield savings account or put them in a CD so I can earn interest on them. And then whenever this period comes where I need to buy it back, I'll at least have earned a little money on my money. There's all different versions of managing those payments and putting them in a savings account or somewhere else or paying down other debt. So when the time comes to buy back those credits that you're in a better position to do so. But the reason I say that there is like this small pocket of people who just decide to make the switch anyways, is because you may just be so sick of looking at your student loans and maybe you're within a year in terms of how many credits you have to have towards public service loan forgiveness. It's worth it to say, I don't care if it costs me a couple hundred dollars more a month, I'm going to make the switch, pay my couple hundred dollars so I can get eligible for public service loan forgiveness and get out of Dodge. And in that scenario, whichever of you, or if both of you are eligible for public service loan forgiveness, this is the decision that you have to make. Would I rather just wait it out and take advantage of not having a payment right now, knowing that I have the option of buying back that credit in the future, or do I really just want to get finished with this as quickly as possible and I can understand either scenario as a matter of fact, if it were me, I probably would be the type of person who was so sick of looking at that student loan statement that it would be worth a couple extra hundred dollars a month more for me to just have it done and have it through. But whatever's right for you is right for you. Finance is not as simple as the math. There's a lot of emotion behind it. And when it comes to student loans, you can get really, really emotional. So I know that was a lot to cover. It's one of those episodes where we had to get into the nitty gritty and the math of it all, which can be a little overwhelming at times. But I hope that if you're in one of these scenarios that you can follow where I'm going with this. If you don't have the guide that we referenced in this episode, again, you can go to escape student loan debt dot com slash guide to access it. And we will be back in your ear in two weeks with more ways to have your student loans forgiven, reduced, reorganized or expedited season. From escape student loan debt. This was the escape student loan debt podcast, a show for established professionals whose student loan payments or loan balances are impacting their marriage, their business, their credit, or their dream of achieving homeownership.