The Big Announcement – Student Loan Forgiveness
By David Gourley, CSLP® (Photo Credit Below: The White House - sourced from whitehouse.gov)
Many of us have been waiting for months now for news to break on student loan forgiveness and on Wednesday, it finally came through! However, now you may be left wondering – how does this apply to me as a teacher?
Well sit tight, because in this piece, we're going to break that down what's known based on the information we have available so far.
Let’s start with the basics from Wednesday’s announcement:
- Every borrower with income less than $125,000 (or $250,000 as a married couple) is eligible to have up to $10,000 in federal student loans forgiven, and if you received a Pell Grant, up to $20,000 in federal student loans forgiven. “Borrowers will be assessed based on the income they reported for 2021 or 2020”. – The New York Times (8/24/2022)
- The repayment pause has been continued until December 31, 2022. This is very likely the last repayment pause, so start making your plan on how you will make payments come January 1st.
- There will be a new repayment plan for income-driven repayment plans. This is added to the current plans of Income-Contingent Repayment (ICR), Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE).
- The new repayment plan is currently set to only include undergraduate loans and will help qualified borrowers drastically reduce their monthly student loan payment. It was also stated that this new repayment plan will not include interest accrual as long as you are making your monthly payments. So, your debt won’t grow, only decrease, while you are in repayment. (This is expected to include borrowers whose payment is zero under the income-driven repayment plans, “because their income is low – so that balances will not balloon.” – The New York Times (08/24/2022).
One more point before we dive into the nitty-gritty… it’s important to understand that while this announcement came from the White House, it still isn’t set in stone. There is the potential for lawsuits to block this action and for this loan forgiveness to actually not go through. While I believe it will eventually get finalized, it may take much longer than we might hope.
Even if these plans withstand a potential legal onslaught, the rollout will not be immediate or automatic, as quoted in the New York Times, ”The timing for the debt relief is uncertain; the Department of Education said it would set up an application process by the end of the year.”
How Could this Affect You?
So, to finally get to the big question that I’ve been asked many times already – How could this affect me?
It really depends on your loan size. If you have $10,000-$20,000 in outstanding loans, this will drastically lower, if not completely eliminate your federal student loan debt. If you have a large outstanding balance, this will be helpful, but your planning for how to re-establish your monthly payments will be a priority.
Evaluating which repayment plan you are currently using and how that impacts your long-term plans could mean the difference between years of additional payments and thousands in interest, even with a reduced student loan balance. You may end up being able to switch repayment plans and payoff your remaining balance, or utilize another forgiveness program, in a shorter timeframe if you play your cards right.
One part of this announcement that excites us for teachers is the impact of the new repayment plan. Under the existing income-driven repayment plans, your payment was derived from a formula using either 10%, 15%, or 20% of your “discretionary” income. The new repayment plan will offer a payment based on only 5% of that same income measure, meaning lower potential payments starting in 2023.
Also, under the existing repayment plans, everything was based off of 150% of the federal poverty guidelines for your family size. The new repayment plan is likely to be based off of 225% of the federal poverty guidelines for your family size, making it more generous in actually lowering your monthly payment.
BUT, a big kicker that we noticed is the new payment plan will only apply to undergraduate loans. We will have to wait to see exactly how all of this will play out, but we have met very few teachers who ONLY have undergraduate loans. If this includes you, a more complex strategy will be needed to help optimize your payment amount.
For teachers who are pursuing Public Service Loan Forgiveness (PSLF), our opinion is that this announcement will likely have very little impact on you. The payment for PSLF is based only on your income and your family size, not your debt load. The reason this is important to note is that it doesn’t matter if you have $40,000 in student loans or $400,000. A decrease of $10,000 will look good when you log-in to your loan servicer (hopefully MOHELA), but it will not automatically and substantially lower your monthly payments, or speed up the time that you have before full forgiveness takes place.
It's incredibly important to stay up-to-date on all things in the student loan world, but the problem with big announcements like this is that there is a lot of buzz on day one and then it takes months for all of the logistics to be put into place and loan balance to begin coming off the books. When the PSLF Limited Waiver was announced in October of 2021, it took until almost February 2022 for its provisions to be understood based the complexities that were brought to light after the initial announcement. So, while this is a big announcement and I’m sure there will be many long-standing changes that come from it, it’s equally important to understand that it will take time to figure out how exactly these changes will impact everyone.
One thing that we can control right now is making sure that you have taken advantage of the PSLF Limited Waiver, which is still set to expire on October 31st, 2022. If you haven’t already made plans for this, please make sure to get a consultation booked ASAP. If you are a teacher with student loans and haven’t fully explored the Limited Waiver yet, we definitely need to talk. -
As we learn more about this new wrinkle in the student loan picture, we’ll be sure to continue to provide updates.
As always, you Teach, we’ll Plan, you Retire!
David Gourley, CSLP® is a Financial Planner with Teach Plan Retire, an independent financial planning firm specializing in finance for teachers. He served for eight years as a high school mathematics teacher before transitioning into the financial services industry. He joined Teach Plan Retire in 2022 and his passion for serving as a fiduciary for teachers and a student loan planning expert runs deep, as his wife and several other family members have served as educators for years. He's a proud member of the Financial Planning Association of Greater Kansas City.