By Dr. Jim Dahle, WCI Founder
Do you remember what you were doing on Friday, March 13, 2020? I do.
It was day 3 of WCICON20, two days after the NBA had shut down. It's also the day President Donald Trump announced a national emergency related to COVID. As part of that emergency declaration, he set the interest rate on federal student loans to 0% and paused payments.
This was the start of the "Student Loan Holiday," and it has been extended and extended and extended by both the Trump and Joe Biden administrations. It's been a wild ride for the last 3 1/2 years for those with federal student loans trying to keep up with the changes and trying to optimize their financial situation. Now, the holiday is ending, and it's time to make sure your student loan plan adapts to the change. In this overview post, we're going to go over the most important changes to student loan management that have occurred over the last few years.
The Student Loan Holiday Ends
The Student Loan Holiday started on March 13, 2020. For the most part, it ends on September 1, 2023. On that date, interest on federal student loans will start accruing once again at whatever interest rate you had before. Your first payment, however, will likely come due at some point in October. Since interest will be accumulating, your deadline to really optimize the situation is September 1, not October. For example, if you've been waiting to refinance your loans or just pay them off, you'll want to do that by the end of August.
Another large effect of the student loan holiday has been that, since nobody is making payments, the Department of Education hasn't bothered with updating the income on which the Income Driven Repayment (IDR) plans like ICR, IBR, PAYE, REPAYE, and SAVE are based. That means some people's payments are based on what their income was way back in 2019. You might have been a resident or fellow or even a student back then. You can update your income, but you don't HAVE to update your income until the government makes you do so. Those payments won't change until your income has to be updated again, and that might not be for a number of months. That payment not only affects your cash flow but also your potential interest rate subsidy if on REPAYE or the new SAVE program.
While I generally think you should manage your student loans based primarily on the overall cost of education (i.e. the interest rate) and not just the cash flow considerations, there are situations where the cash flow becomes the most important thing.
More information here:
Should I Pay Off My Student Loans?
Biden Forgiveness Program Struck Down by Supreme Court
Many doctors got really excited about a forgiveness program implemented by the Biden administration without the approval of Congress. It would have forgiven up to $10,000 in student loans ($20,000 if you ever received a Pell Grant) for those with an income below a certain threshold. It really didn't move the needle for most doctors (who tend to owe $100,000-$500,000 in student loans) and the honest truth is that waiving interest for three years may have been worth 10X what the forgiveness program would have provided to an indebted doctor. Nevertheless, lots of people were pretty excited about it. But the Biden administration was sued for going around Congress about such a large chunk of spending, and the court case went all the way to the Supreme Court. In June 2023, the Supreme Court issued its ruling, and the forgiveness program was ruled illegal. It's gone, and it's not coming back.
Easier PSLF Qualification
Another significant change in student loan management over the last couple of years is that PSLF has become easier to qualify for. This has been particularly hard to keep up with, and it seems like it has been changing every couple of months. Perhaps the best thing that has come out of this is that the student loan servicing companies got their act together and learned to count to 120. You may not recall, but this was a huge problem in 2017-2019. People had 120 payments, which is what PSLF requires, and the companies only thought they had 76 or 89. That meant people had to fight or even hire attorneys to get them to count payments. Some administrative changes are also helping payments to count—like getting rid of the "paid ahead status" when one makes lump sum payments—and consolidation no longer erases your previous payment history.
Another big change was the "limited waiver," which expired on Halloween 2022. Basically, if you had non-direct (FFEL, Perkins loans, Grad Plus loans made to the student, etc.) loans that did not previously qualify for PSLF, the waiver allowed you to do so (but only if you consolidated your loans before October 31, 2022).
Late payments and partial payments were also allowed to count. It used to be if you missed your payment by one day or by one penny (apparently it was pretty common), it didn't count toward your 120 payments. Now, PSLF is more lenient. Every month on active duty counts too, even if your loans were in deferment or forbearance. There are a number of other forbearance and deferral situations (most are military-related but there are also economic hardship situations) that also count as making PSLF-eligible payments.
The PSLF program has also come into the digital age, and all paperwork is now done electronically. No more required wet ink signatures and forms. You young bucks don't know how good you have it.
The 30-hour rule was also put into place. It used to be that to qualify for PSLF you had to be "full time" however your employer defined that. Now, the government defines it as working at least 30 hours at a nonprofit (whether the employer considers that full time or not).
More information here:
How to Ensure Student Loan Forgiveness Through the PSLF Program
Moral Hazard from Government Intervention
One change I have noticed over the last few years is what is referred to by economists as "moral hazard." Remember this is an economic term, NOT an ethical one. Moral hazard is a typically unintended consequence as a result of a change in the consequences of an economic decision. For example, medical students now ask me all the time if they should take out as much as possible in federal student loans—even if they don't need the money to pay for their education—because they expect to get the loans forgiven via PSLF. This is moral hazard. (It's also fraudulent, as you certify that you'll only use the money for education—but remember that money is fungible and there is a lot of gray here.)
However, another form of moral hazard that I have noticed is a hesitance to "take responsibility" for one's student loans. People who refinanced their student loans in February 2020 were made to feel (and look) like schmucks. Sure, they got a 2% interest rate. But a month later, all the "irresponsible people who just stuck their heads in the sand" got a 0% interest rate. And no payments! And an easier route to forgiveness! And now a new, better IDR! And they almost got a gift of $10,000-$20,000! So, people are less likely than they were before to refinance. They're also less likely to try to pay off their student loans quickly. Fewer extra payments. Fewer lump sum payments. The government has made so many changes favorable to borrowers that nobody wants to miss out on the next one because they acted responsibly. The logical thing to do is to make your decisions based on current laws and regulations, but after getting burned enough times, people sometimes do not act logically. And maybe they're right not to do so.
New IDR Program
Fresh off the disappointment of having their new forgiveness program deleted by the Supreme Court, the Biden administration has started yet another IDR. As is the trend from ICR –> IBR –> PAYE –> REPAYE, this new program (named Saving on A Valuable Education or SAVE) is even better for borrowers than previous programs. One nice thing about SAVE is that it will help reduce the number of programs out there. SAVE will replace REPAYE completely, and the other programs will be phased out for new borrowers. Simplification is a good thing. Some aspects of SAVE are now going into effect while others will be delayed until July 2024.
Perhaps the most significant aspect of SAVE is that it calculates discretionary income differently. Instead of your income minus 150% of the poverty line, it will be your income minus 225% of the poverty line. If you live in the lower 48 and are married with two kids, you could have an Adjusted Gross Income (AGI) of as much as $67,000 and still have a discretionary income of $0 (and, thus, payments of $0).
Another huge change is that the percentage of discretionary income you must pay has fallen again. It was 20% for ICR, 15% for IBR, and 10% for PAYE and REPAYE. Now, it's 10% for graduate loans but only 5% for undergraduate loans. Even if that family of four in the lower 48 had an AGI of $200,000, the monthly payment would only be $552 if their loans were all from undergraduate. Given that the monthly interest on a 6%, $200,000 loan is $1,000, that's pretty notable that the required payment for someone making $200,000 barely covers half the interest. Note that the 5% doesn't go into place until July 2024.
This brings me to another aspect of SAVE. Instead of just waiving half the unpaid interest (a new feature with REPAYE when it came out), it waives all of it. That $552 payment on that $200,000 loan will all go to interest, but the loan balance will not go up. That's the case for that family making $67,000, too. Their loan balance will never rise. No more owing more when you finish residency than when you began.
Clearly, these three features will make SAVE the most generous IDR ever. But wait, there's more.
Remember that cool aspect of PAYE (but not REPAYE) that allowed people to file their taxes Married Filing Separately (MFS) when they had a high student loan burden and were married to a high earner? That's been reintroduced for SAVE.
What about IDR forgiveness? Well, I was going to write that there is no advantage of ICR, IBR, PAYE, or REPAYE over SAVE and that SAVE would be the "best" program for everyone. That's not entirely true. If you're a doctor with medical school loans and decide you want to go for taxable IDR forgiveness, PAYE is still better than SAVE—just like it was better than REPAYE—because you can get forgiveness after 20 years instead of 25 for your graduate loans. SAVE has the same rules as REPAYE (20 years for undergraduate, 25 for graduate). However, there is a new rule where those who borrow less than $12,000 actually get forgiveness after just 10 years (with a weird provision that every $1,000 above $12,000 adds another year until you get to 20-25 years). That's not as good as PSLF because the forgiveness is taxable, but it should help "clean up the rolls" like the now deleted $10,000/$20,000 Biden forgiveness program would have. That 10-year forgiveness aspect doesn't go into place until July 2024 either.
Doctors interested in IDR forgiveness, which should be a larger number now than it used to be, will have a difficult calculation to make to determine whether to use SAVE or PAYE. There will be an income threshold at which PAYE becomes better than SAVE.
Certifying income has also become easier. You can allow the Department of Education to just automatically check your taxes, and after July 2024, if you miss a couple of payments (75 days late), it will automatically do so and enroll you in the best IDR for you (probably SAVE). Keep in mind that there are some situations (such as falling income) where using the tax return income to certify could result in higher payments than using another method.
More information here:
How to Pay Off a Big Undergraduate Student Loan Debt
Interest Rate Increases
Another huge change in student loan management over the last couple of years has been the increase in interest rates. This will affect those currently taking out loans (the 2021-2022 medical school direct loan rate was just 5.28%, but that increased to 6.54% for 2022-2023 and to 7.05% for 2023-2024). Add 1% to each of those rates for Direct PLUS loans. It is set for the next school year by adding 3.6% (4.6% for Direct PLUS loans) to the 10-year Treasury yield at the last auction before June 1. The current yield as I write this (on July 27, 2023) is 3.91%, so if there were no change in the next year, the 2024-2025 rate would be 7.51% for direct and 8.51% for Direct Plus.
Those who are carrying federal loans in residency or later have fixed rates, so their interest rate doesn't go up.
However, the general increase in interest rates also affects the student loan refinancing market. That 10-year Treasury yield has gone up about 3% in the last couple of years, and so have the rates for those trying to refinance their student loans. Somebody who could get 2.5% a couple of years ago may only get 5.5% now. If you're sitting on 6% student loans, 5.5% is hard to get very excited about, especially if you think the Department of Education may get even more generous in the future with IDR and forgiveness programs. And it'll be a while before those students with 7%+ student loans come out of the pipeline and are ready to refinance. So, there's going to be a whole lot less refinancing going on for the next few years.
If you're planning to pay back your student loans, though, you should still go through our recommended refinancing company links below and check your rates. But don't expect to knock 3%-4% off your interest rate like you could have a couple of years ago. Still, a reduction of 0.5%-1% is better than a kick in the teeth, and if you're willing to run the interest rate risk yourself with a variable rate loan, you might do even better. The cash back we have negotiated for you for going through our affiliate links should help sweeten the pot, too.
StudentLoanAdvice.com
Another big change in student loan management around here is that we started a student loan advice company a couple of years ago. That's helped us raise the bar in the quality of our student loan content on the blog and podcast, but it also has been very interesting to watch the demand for this company's services go up and down every time the Department of Education or the president himself makes an announcement. What a feast or famine business.
Every time the pause button is hit and the holiday is extended, the phone stopped ringing. Then, as the holiday seemed to be coming to an end, there were people banging down the door to get advice. Obviously, it's a pretty busy time now, but our folks are working overtime to try to help as many of you as we can. If you're in a complicated student loan situation, you should definitely book a consult for a flat rate and make sure your student loan plan is perfect. A few hundred dollars spent now could result in massive savings. In fact, the average person who meets with StudentLoanAdvice.com saves $191,000. That's a pretty good Return On Investment (ROI)!
Book a consult with StudentLoanAdvice.com today!
What You Should Do with Your Student Loans
Private student loan management hasn't changed in the least. You should refinance those loans early and often. Every time you can get a lower interest rate because rates go down or because your credit score or debt-to-income ratio improves, you should refinance them. You get a lower rate and, if you go through our links, a cash-back bonus. This includes brand-new interns with private loans. Some of you come out of Caribbean schools with loans of 10%+. Refinance those!
Federal student loan management is a bit more complicated. A typical single intern should just enroll in SAVE for now. The decision of whether to stick with an IDR or refinance is still a few years away for you.
Tax-free Public Service Loan Forgiveness (PSLF) is still the best option for anyone who qualifies for it (and it is now easier than ever to qualify). However, choosing between PAYE and SAVE can still be pretty complicated, and it's well worth paying for some advice.
Taxable IDR forgiveness is a little bit more of an attractive option than it used to be. Don't forget that if you do go down this lengthy road (if I had done this, I would just now be getting forgiveness from my 1999-2003 medical school loans, and I'm five years past FI) to save up and invest each year for the coming tax bomb. Get formal advice before starting down this road to help you run the numbers (and, for heaven's sake, look around a bit for PSLF-qualifying jobs).
If you are having any kind of hardship or cash flow crunch, you're still almost surely better off in an IDR program like SAVE than you are in forbearance or deferment. While the Department of Education has saved a lot of people who screwed this up in the past, there is no guarantee they will continue to do so.
Living like a resident for 2-5 years after training and directing a massive chunk ($5,000-$15,000 a month) at your student loans still works great to get them paid off quickly. In fact, now that student loan rates are higher, the guaranteed return from paying off your student loans is even more attractive than it used to be. Sure, you might be able to make 5% on your cash these days but that still doesn't beat 6%-8% from paying off medical student loans.
What do you think? Have you changed to SAVE? What interest rates are you seeing when you go to refinance your loans? What are you doing with your federal loans now that the student loan holiday is ending? Do you regret not refinancing a year ago? Comment below!
The post The Student Loan Holiday Is Ending: What You Need to Do Now appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.
Be sure to Refinance Your Student Loans, sign-up for our Online Courses, and listen to the WCI Podcast!
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