The recent national debate on student loan forgiveness was just the tip of iceberg when it comes to the federal student loan program. With student loan payments expected to resume after Sept. 1, there are many developments for borrowers and policymakers to consider.
Borrowers will have access to temporary flexibilities to successfully reenter repayment, a new income-driven repayment plan that promises more affordable payments, and multiple pathways for loan forgiveness.
Related: NCSL webinar, “What’s Next For Student Loans?”
The student loan repayment pause that began in March 2020 is set to end in August. Interest will begin accruing on federal student loans on Sept. 1, and payments will be due for most borrowers around Oct. 1. The 42-month pause was extended seven times and likely cost over $200 billion, with an average cost of around $5 billion a month.
The Federal Student Aid office has created a landing page to assist borrowers with reentering repayment. Borrowers are advised to make sure their contact information is up to date with both the federal office and their loan servicer so they can receive timely communication on the due date for their first student loan payment.
The Department of Education has also announced an “on ramp” program that will provide flexibilities until Sept. 30, 2024, as borrowers transition to repayment. While borrowers are advised to make payments, those who miss a payment or make a partial or late payment will not experience negative consequences, such as being reported to credit bureaus. Additionally, any unpaid interest will not capitalize at the end of the on ramp period. No action is necessary for borrowers to take advantage of these flexibilities.
Borrowers who have defaulted on their loans will also have access to the “Fresh Start” program, which provides a pathway out of default. Borrowers who opt in to the program will no longer experience certain negative consequences of default, such as collections activity, but must take additional steps to claim full benefits.
New Repayment Plan Option
Borrowers can now begin applying for a new income-driven repayment plan, known as Saving on a Valuable Education (SAVE). This plan is more generous than existing income-driven repayment plans, which allow borrowers to make monthly loan payments that are tied to their income rather than the amount they borrowed.
The Education Department estimates that the SAVE plan will save borrowers at least $1,000 a year compared with existing plans. The Congressional Budget Office estimates that the plan will cost an average of $27.5 billion a year through 2033.
The SAVE plan will immediately increase a borrower’s income that is exempted from repayment to $32,805 from $21,870. This means that borrowers who make less than $32,805 will not owe a monthly payment and still receive credit toward loan forgiveness thresholds. The SAVE plan will also immediately eliminate the accrual of unpaid interest if a borrower’s monthly payment does not cover the entire amount of interest due.
Starting July 1, 2024, borrowers with undergraduate loans will receive two additional key benefits. First, they will make monthly payments based on 5% of their monthly discretionary income (income above the exemption threshold) compared with 10% under existing income-driven repayment plans. Undergraduate borrowers who owe less than $12,000 will be eligible to receive the remaining balance of their loans forgiven after 10 years. Under existing plans, borrowers must make 20 or 25 years of eligible payments to have their loans forgiven.
Borrowers who are currently enrolled in the REPAYE plan will automatically be enrolled in the SAVE plan, and borrowers in other plans may learn more and apply here.
Loan Forgiveness Pathways
On June 30, the Supreme Court struck down President Joe Biden’s plan to forgive at least $10,000 in student debt for most borrowers. In response, the Department of Education has initiated regulatory procedures to explore the secretary of education’s authority to broadly cancel student debt through the federal Higher Education Act. The regulatory process could be lengthy and will likely last well into 2024.
But there are other existing pathways for student loan forgiveness. Since 2021, the Education Department has forgiven $116 billion in student debt. Many of these forgiveness pathways were difficult for borrowers to successfully navigate, and recent reforms are rapidly increasing the pace of loan forgiveness for millions of borrowers. Borrowers can expect billions in additional forgiveness in the coming years as these reforms take effect. Each month of the student loan pause counted toward forgiveness thresholds, meaning borrowers enrolled in forgiveness programs are also 42 monthly payments closer to have their remaining balances cancelled.
The department recently announced $39 billion in loan forgiveness for borrowers on income-driven repayment plans. This was the result of a previously announced one-time account adjustment that awarded borrowers retroactive payment credits. No action was necessary from borrowers and many are now months closer to forgiveness thresholds.
The department has also forgiven $45 billion through the Public Service Loan Forgiveness program due to a one-time waiver program, which ended last year, and other ongoing reforms.
Another $22 billion has been forgiven through the Borrower Defense to Repayment authority, and another $10.5 billion has been provided to students who are unable to repay their loans due to a total and permanent disability.
Austin Reid is a senior legislative director in NCSL’s State-Federal Relations Division.