The Latest for PSLF: The Revolution Will Be REVISED (Pay As You Earn)
The student loan marketplace continues to provide headlines, and we’re excited to share more good news for borrowers and qualified employers of the PSLF program, which has grown over 1100% in the past year due to the Limited PSLF Waiver announced in October of 2021. Moving forward, the proposed Overhaul of PSLF keeps many of the waiver benefits in place indefinitely.
Additionally, millions of borrowers will benefit from the scheduled one-time adjustment for all participants of Income-Driven Repayment (IDR) plans, known as the IDR waiver. It only makes sense that next in line would be an overhaul of available IDR plans to keep key changes in place and ultimately simplify your options moving forward.
If you’re new to this nomenclature, admittedly, what we’ll share here will not sound exactly simple… but that’s why we’re here. Suffice it to say, come July of next year, we expect that one IDR plan will be most appropriate for borrowers seeking payment relief and/or loan forgiveness versus the four borrowers must choose from today.
Overhaul of the REPAYE Plan
The “new” plan forthcoming is effectively an overhaul of the current Revised Pay As You Earn (REPAYE) plan. Here are the notable changes:
- Poverty Level Deduction: The current 150% poverty level deduction will be raised to 225%. This calculation reduces a borrower’s Discretionary Income (DI)… which means lower payments for all borrowers.
- Payment Formula: Payments will be equal to 5% of discretionary income on undergraduate loans. Those with graduate loans will keep paying 10%. Those with a mix of undergraduate and graduate will have a weighted average between 5% and 10% depending on the breakdown of their loan portfolio.
- Example: You have $100k in student loan debt, $30k from undergrad and $70k from a graduate school. Your discretionary income (DI) is $60k based on your family size. Since your undergrad loans represent 30% of your total debt, your monthly payments will be 8.5% of your DI, or $425/month.
*The cheapest plan today would cost $500/month.
- Interest accrual: When applicable, REPAYE currently eliminates 50% of any accrued interest which remains after a borrower’s payment is applied each month. The new REPAYE plan will eliminate 100% of that interest!
- Income Adjustments for Married Borrowers: One of the biggest drawbacks to the existing REPAYE plan is that it penalizes married borrowers by using their joint income to calculate the payment amount. The proposed rules will allow borrowers who file their taxes MFS to exclude their spouses’ incomes.
- Recertification: Borrowers will have the option to opt-in and have their payments automatically recertified (recalculated) using their tax return information. This is convenient, but proceed with caution as tax returns are not always the most advantageous way to document income.
- New Forgiveness Terms: If you’re not pursuing PSLF, REPAYE still offers taxable loan forgiveness after 20 years for undergraduate borrowers, and 25 years for graduate borrowers. The tax implications still apply, but the new forgiveness rules are as follows:
- 10 years for undergrad borrowers with $12k or less1 additional year for each $1000 between $12k and $22k20 years for undergrad borrowers with $22k or more25yr forgiveness for grad borrowers
- Payment Cap: Payments are not subjected to a cap. The more you make, the more you will pay, without a ceiling. We view this as a good problem to have!
Along with these enhancements to REPAYE, the Dept. of ED also announced new rules pertaining to all IDR plans, one of which is to restrict access to existing plans. While the Dept. can’t legally eliminate existing plans or force people to change plans, the economic incentive to switch into the new REPAYE plan is impossible to ignore. Key changes include:
- Only those already enrolled in PAYE can stay in it once the new plan is effective.
- The first IDR plan created back in 1995, Income-Contingent Repayment, will also be restricted, but those with Parent Plus loans will still be able to utilize it.
- Once you’ve made 120 payments under REPAYE you won’t be allowed to switch to IBR.
Other changes include certain deferments and forbearances (NOT residency forbearance) counting towards forgiveness, consolidation no longer restarting the forgiveness countdown, and defaulted borrowers will now be allowed to enroll in an IDR.
We expect these changes to take effect on 7/1/2023, in line with similar changes historically.
At the end of the day, all of these proposed changes increase both the number of eligible borrowers for PSLF, as well as the saving opportunity for most borrowers. Register for your PSLF Opportunity Assessment from BenElevate and get on track for savings under the new regulations.