How Do I Lower My Student Loan Payments?

 

There are many options for relief from student loan debt, depending on what kind of loans you have, when you took them out, and your current financial situation.

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Biden's Announces "One Year On-Ramp" Program After Supreme Court Rejects Biden's Forgiveness Plan

President Biden's new One-Year One-Ramp" program includes many benefits for student loan borrowers.

After that defeat, The Biden administration announced a new set of programs to remain in effect for 12 months while student loan payments resume. 

What's in the New Programs Announced During the One-Year On-Ramp Period

Here are the repayment plans announced in Biden's one-year onramp for resuming student loan payments:

  • 12-month grace period: Borrowers will have a 12-month grace period after payments resume in October 2023. During this time, they will not be required to make payments, and they will not be reported to credit bureaus if they do not make payments.
  • New income-driven repayment plan: The Department of Education finalized a new income-driven repayment plan, which Biden described as "the most generous repayment program ever." This plan will cap monthly payments at 5% of discretionary income, and it will forgive any remaining balance after 20 years of payments.
  • No interest capitalization: Interest will accrue but not capitalize* on student loans during the 12-month grace period or for the first 6 months after payments resume. This means that borrowers will not have to pay any interest on their loans during this time, and their balances will not grow.

    • While interest will accrue during this period, interest will not capitalize at the end of the on-ramp period. Future monthly bills for borrowers not enrolled in an income-driven repayment plan will be automatically adjusted to reflect the accrued interest during those months.
      (Interest accrual refers to accumulating interest on a loan balance. When interest accrues, the amount of money you owe on your loan increases. Capitalization refers to the process of adding accrued interest to the principal balance of a loan. When interest capitalizes, the amount of money you owe on your loan increases even further. 

      In the context of Biden's one-year onrampfor resuming student loan payments, interest will accrue during the 12-month grace period and for the first 6 months after payments resume. However, interest will not capitalize at the end of these periods. This means that the amount of money you owe on your loan will not increase as a result of accrued interest during these periods.

      For example, if you have a loan balance of $10,000 and interest accrues at a rate of 5% per year, your loan balance would increase to $10,500 after one year. However, if interest does not capitalize, your loan balance would remain at $10,000 after one year.)

These repayment plans are designed to help borrowers struggling to make student loan payments after the payment pause ends. They will provide borrowers with some breathing room to get their finances in order, and they will help borrowers to avoid defaulting on their loans.

It is important to note that these repayment plans are not permanent. After the 12-month grace period ends, borrowers must start making payments again. However, the new income-driven repayment plan and the no-interest accrual policy will provide borrowers with some much-needed relief in the near term.

Old Plan for Loan Forgiveness Rejected

Biden's attempted Student Loan Forgiveness Plan (described below) offered substantial relief to student loan borrowers from low-income families who didn't have a legacy of "family money" to send kids to school.

The program was nixed when a group of Republican plaintiffs claimed to be harmed by the new plan and that President Biden did not have the power to forgive loans in this manner.

The Supreme Court heard oral arguments on the issue in late February. It ruled on June 30, 2023, in Biden v Nebraska, that the President exceeded his administrative, executive authority to enact a forgiveness program of this magnitude without explicit congressional approval.

Details about the new SAVE plan

The new income-driven repayment plan is called the "Simplified Income-Driven Repayment Plan(SAVE). It is a simplified version of the current income-driven repayment plans, designed to be more affordable and accessible for borrowers.

Here are the key features of the SAVE plan:

  • Monthly payments are capped at 5% of discretionary income. Discretionary income is your income after you have subtracted certain expenses, such as taxes, housing costs, and childcare costs.
  • Any remaining balance is forgiven after 20 years of payments. This is the same forgiveness period as the current income-driven repayment plans.
  • There is no application fee. This is unlike the current income-driven repayment plans, which have a $40 application fee.
  • Borrowers can enroll in the SAVE plan online or by calling the Department of Education.

The SAVE plan is a good option for borrowers who are struggling to make student loan payments. It is more affordable than the current income-driven repayment plans, and it has a simpler application process.

When can I apply for the SAVE Plan?

If you are already enrolled in the REPAYE Plan or if you sign up for the REPAYE Plan today, you will automatically be put on the SAVE Plan once it becomes available. The application for the new SAVE Plan will be available this summer. 

How do I apply for the SAVE Plan?

If you apply for an IDR plan now and select the REPAYE Plan, you will automatically be put on the SAVE Plan once it becomes available. You can also select the option for your loan servicer to place you on the lowest monthly payment plan (this will usually be REPAYE).

3 Key Points about Biden's 2023 On-Ramp Plan and Forbearance:

1. Your First Student Loan Bill will be due in October 2023, but there's a one-year grace period with no penalties or interest.

Student loan forbearance, which started under the CARES ACT in March 2020, was extended one last time until September 1, 2023. The first bills will be due in October 2023. But the new rules also have a one-year grace period during which there will be no penalty for missed payments, and no interest will accrue until six months after payments start. 

2. The New “SAVE” program now requires only 5% of income (not 10% anymore)

Before those first bills come due, you should learn about the new income-based repayment options that can limit your student loan payments to only 5% of your income for the rest of your life. As long as you make these payments for 20 years, the rest of your loan is forgiven, regardless of the remaining balance.

The new rules change the existing income-based rules. Current program rules require  10% of income payment on all student loans. That is cut in half by the new rules.

Pre-Existing Programs

Before President Biden's announcement of Student Loan Forgiveness, dozens of existing programs were in place and still exist:

President Obama’s Pay As You Earn program started income-based repayment. It’s an effective way for many student loan borrowers to lower their monthly payments -- but it’s not the only way. There are many options for relief from student loan debt, depending on what kind of loans you have, when you took them out, and your current financial situation. 

Before you start exploring ways to shrink your monthly obligations, know that you should consider reducing or postponing your student loan payments only if the standard repayment plan (10 years for most loans) is truly out of your financial reach.  When you lower or put off payments, you’ll pay more over your loan life. Below, we recommend a calculator that can help you compare how much you’ll have to pay under the different options available to you.

Can You Postpone Your Loans or Cancel Them or Qualify for Loan Forgiveness?

If you’re having trouble making your student loan payments because of severe financial difficulties such as disabling health problems or prolonged unemployment, you may be able to delay payments or cancel your loans altogether. You may also qualify for postponement, cancellation, or forgiveness if you work in certain public service jobs.

For other articles about the programs that may help you postpone or permanently wipe out your loan payments, see:

Ways to Lower Your Monthly Student Loan Payments

Because most borrowers can’t completely cancel or discharge their loans, choosing a good payment plan is both inevitable and important. Here’s an overview of options for reducing monthly federal student loan payments. For more details about each plan or to apply for a plan, contact your loan servicer or visit the U.S. Department of Education website. 

If you have a private student loan, read your loan contract and contact your loan servicer to see whether you have any options for lowering your payments.

Payment Plans Requiring Financial Hardship

Some repayment plans require you to show that your payments under a standard repayment plan would exceed a certain percentage of your income, creating a financial hardship. Generally, you will qualify if your federal student loan debt is higher than your annual discretionary income. (Discretionary income is defined as the difference between your adjusted gross income and 150 to 225% of the federal poverty level.)

The new SAVE plan makes significant changes in the definition of "financial hardship

The SAVE Plan increases the income exemption from 150% to 225% of the poverty line.

The new plan can significantly decrease your monthly payment amount compared to all other income-driven repayment plans.

Your monthly payment amount is based on your discretionary income—defined as the difference between your adjusted gross income (AGI) and 225% of the U.S. Department of Health and Human Services Poverty Guideline amount for your family size.

That means you will not owe loan payments if you are a single borrower earning $32,800 or less or a family of four earning $67,500 or less (amounts are higher in Alaska and Hawaii). Borrowers earning more than these amounts will save at least $1,000 per year, compared to the current income-driven repayment plans.

There are four income-driven repayment plans available to borrowers with federal student loans:

  • Pay As You Earn (PAYE)
  • Revised Pay As You Earn (REPAYE)
  • Income-Contingent Repayment (ICR)
  • Income-Driven Repayment (IDR)

These plans are designed to make student loan payments more affordable for borrowers who have a low income or high debt-to-income ratio. Under these plans, your monthly payment is calculated based on your income and family size.

Here is a brief overview of each plan:

  • PAYE: Your monthly payment is capped at 10% of your discretionary income. Any remaining balance is forgiven after 20 years of payments.
  • REPAYE: Your monthly payment is capped at 10% of your discretionary income. The government pays the entire difference between your monthly payment and the amount of interest that accrues on your loans during the first three years of repayment. After the first three years, the government pays half the difference between your monthly payment and the amount of interest that accrues. Any remaining balance is forgiven after 20 years of payments.
  • ICR: Your monthly payment is capped at 20% of your discretionary income. Any remaining balance is forgiven after 25 years of payments.
  • IDR: This is a catch-all plan for borrowers who do not qualify for the other three plans. Your monthly payment is capped at 20% of your discretionary income. Any remaining balance is forgiven after 25 years of payments.

If you are struggling to make your student loan payments, you may want to consider enrolling in an income-driven repayment plan. These plans can help you make more affordable payments and may even lead to forgiveness of your remaining balance after a certain number of years.

To learn more about income-driven repayment plans, visit the Federal Student Aid website: https://studentaid.gov/manage-loans/repayment/plans/income-driven.

 
 

 

Revised Pay As You Earn Repayment Program (REPAYE). Begun in 2015, the Pay As You Earn program is available for most types of Direct Federal Loans. If you qualify, PAYE caps your monthly payments at 10% of your discretionary income. The balance of your loan will be forgiven after you’ve made regular payments for 20 years. (If you work in public service, this period may drop to 10 years.) You may have to pay income tax on the forgiven amount.

Here are some of the key features of the REPAYE plan:

  • Monthly payments are capped at 10% of discretionary income. Discretionary income is your income after you have subtracted certain expenses, such as taxes, housing costs, and childcare costs.
  • The government pays the entire difference between your monthly payment and the amount of interest that accrues on your loans during the first three years of repayment. After the first three years, the government pays half the difference between your monthly payment and the amount of interest that accrues.
  • Any remaining balance is forgiven after 20 years of payments. This is the same forgiveness period as the PAYE plan.
  • Borrowers can enroll in the REPAYE plan online or by calling the Department of Education.

The REPAYE plan is a good option for borrowers who are struggling to make student loan payments. It is more affordable than the original PAYE plan, and it offers borrowers more flexibility. However, it is important to note that the REPAYE plan does not have the same forgiveness benefits as some of the other income-driven repayment plans. For example, the Income-Contingent Repayment (ICR) plan forgives any remaining balance after 25 years of payments, even if you have not made all of your required payments. The REPAYE plan only forgives any remaining balance after 20 years of on-time payments.

Income-Based Repayment Plan (IBRP). If you took out your loans before July 1, 2014, the IBRP caps your monthly payments at 15% of your discretionary income. The balance of your loan will be forgiven after you’ve made regular payments for 25 years. If you took your first loan on or after July 1, 2014, the IBRP caps your monthly payments at 10% of your discretionary income (which may drop to 5% under new rules in 2023), and the balance of your loan will be forgiven after you’ve made regular payments for 20 years. (If you work in public service, the 25- or 20-year period may drop to 10 years.) You may have to pay income tax on the amount forgiven under the IBRP. To learn whether your loans are eligible for the IBRP, see “Student Loans That Qualify for Income Based Repayment Plans.”

Hardship Repayment Plans for Perkins Loans. Perkins Loans are subject to unique rules. To learn your options for reducing monthly payment amounts on your Perkins Loans, contact the school you were attending when you received the loans. (Note that you can include Perkins Loans in a Direct Consolidation Loan to qualify for one of the income-driven repayment plans discussed above, but there are serious disadvantages to consolidating Perkins Loans with other federal student loans. To learn more, see “Consolidating Student Loans: Pros and Cons.”)

Payment Plans Without an Income Eligibility Requirement

Income Contingent Repayment Plan (ICRP). If you qualify for this plan, your payments are based on your adjusted gross income, family size, and the total balance of your Direct Loans. The payment will probably be higher than payments under the income-based plans described above, but may still be less than what you would owe under a standard repayment plan. And if you’re still making regular payments after 25 years, the balance of your loan will be forgiven. (If you work in public service, this period may drop to 10 years.) You may have to pay income tax on the forgiven amount. To learn whether your loans are eligible for the IBRP, see “Student Loans That Qualify for Income Based Repayment Plans.” 

Income Sensitive Repayment Plan (ISRP). If you have older federal student loans --such as Subsidized or Unsubsidized Stafford Loans, FFEL Plus Loans, or an FFEL Consolidation Loan – you may qualify for an ISRP. Under this type of plan, you select a monthly payment amount that is between 4% and 25% of your monthly gross income. The payment must be equal to or greater than the interest that accrues on your loan each month. You can use ISRP for up to five years, and then your payments will increase -- sometimes dramatically. You may be better off considering an extended repayment plan, which will allow you to avoid ballooning payments toward the end of the loan’s term.

Graduated Repayment Plan. Almost all federal student loans qualify for graduated repayment. Under a graduated plan, you keep the standard 10-year repayment term, but your payments step up over time.

Plans for Borrowers With Multiple Loans

Extended Repayment Plan. Most federal student loans are eligible for extended repayment. If you have more than $30,000 in outstanding loans from either the Direct or FFEL Loan program, you can lower your monthly payments for those loans by stretching the repayment term up to 25 years.

Loan Consolidation. It is sometimes possible to lower monthly student loan payments by combining federal loans into a single Direct Consolidation Loan. If your consolidation loan payment is still too high, you may be able to bring it down with PAYE, discussed above. There are almost always disadvantages to loan consolidation, so be sure you understand the process before proceeding.

Compare Your Options and Calculate What You’ll Owe

The Federal Student Aid Repayment Estimator allows you to compare monthly and overall payment amounts easily. You can sign in to base the calculations on actual information about your loans or use the calculator without signing in by providing estimates about loan types, balances, and income. 

What Biden's New Forgiveness Plan Offers

Before the Supreme Court nixed the program Biden's announcement on August 24, 2022 launched a new era in ways to lower your student loan payments.

 Student Loan borrowers in Colorado will soon be able to take advantage of the many new one-time student loan forgiveness options under the new Student Loan Debt relief plan announced by President Biden on August 24, 2022.

The official government portal for applying for this federal loan forgiveness was launched on October 11, 2022 and can be found here

For many borrowers (who received Pell Grants to attend college) will see $10,000 to $20,000 automatically eliminated from their student loan balance.

That’s means if you owed $6,500 on a federal student loan, you now owe nothing!

The new law has three major elements that are a true game-changer for student borrowers. 

  1. It extends forbearance (pause) (in which payments and interest are suspended), until December 31, 2022. Forbearance started with the CARES Act in March of 2020. It pauses payments and interest on Federal Student Loans
  2. it offers loan forgiveness of up to $20,000 (THIS IS WHAT WAS REJECTED BY THE SUPREME COURT
  3. It offered new income-based-repayment options which limit your payments to no more than 5% of your income for 20 years. If you make those payments, the balance of the loan is written off. 

There are several good summaries of the law from sources like NPR,

The Student Loan Lawyer has a very clear video explaining the new law (also on Facebook Watch)  by a lawyer who understands the nuances of the words used to describe these loans and how this affects your qualifications.

3 Key Points about Biden's 2022 Plan and Forbearance:

1. Your First Student Loan Bill will be in October 2023

Student loan forbearance, which started under the CARES ACT in March 2020, was extended one last time until September 1. The first bills will be due in October 2023.

2. The New “Income Derived Repayment” (IDR) or “Income Based Repayment” (IDR) now requires only 5% of income (not 10% any more)

Before those first bills come due, you should learn about the new income-based repayment options that can limit your student loan payments to only 5% of your income for the rest of your life. As long as you make these payments for 20 years, the rest of your loan is forgiven, regardless of the remaining balance.

The new rules change the existing income-based rules. Current program rules require  10% of income payment on all student loans. That is cut in half by the new rules.

3. The struck-down law would have eliminated $10,000 to $20,000 in student loan debt (married couples could double). (NOTE: THIS IS THE PART THE SUPREME COURT OVERRULED)

  • For those with debts less than $10,000 to $20,000, this would have eliminated their debt. (About 74 million borrowers meet this description
    • If you got Pell grants, you get $20,000 of relief
      • most of these are poor, first-generation college students  
  • For those with loans more like $80, to $100,000 this may have wiped out the interest that you’ve accumulated over time
  • For those with six-digit loan balances, you’d still have a six digit loan balance, but this would have helped. 

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Jurisdictional relevance: US

Legal Consumer - ColoradoLaw. The content of this article pertains to all US states and counties.