“Every person’s situation — and goals — are different,” said Manthei, of GreenPath.
Someone who does seasonal work — or doesn’t have a steady paycheck — might want to sign up for the SAVE plan to keep payments low, Manthei said. If their situation improves, they could add money to the principal to pay down the debt more quickly.
And there’s another key twist. The SAVE plan is going to undergo two important changes in July 2024 that would reduce both monthly and lifetime payments significantly for those with only undergraduate debt.
The online simulator didn’t spell that out for Edwards — so it’s not likely to be obvious.
First, the plan is to cut monthly payments on undergraduate loans — and all of Edwards’ loans are undergraduate —essentially in half beginning in July 2024. The Education Department notes that payments on undergraduate loans will be reduced from 10% to 5% of discretionary income when the SAVE plan is fully implemented next July.
Also, those borrowers who have undergraduate and graduate loans in the mix will pay a weighted average of between 5% and 10% of their discretionary income based on the original principal balances of their loans.
Based on the same income level, Edwards would see his payment drop to $57 a month next year from the $114 listed online at the calculator, Kantrowitz noted. As a result, SAVE could be far more beneficial and actually save more money for Edwards in the long run, too, Kantrowitz said, especially if he only sees modest raises in the years ahead.
For borrowers with undergraduate loans only, the maximum time for forgiveness is 20 years of qualifying payments.
How much payments change each year and add up over 20 years would depend on one’s income and it’s tricky to project into the future. But if payments ended up being roughly $87 a month or less over 20 years, Edwards would pay less than he would under a standard 10-year repayment. “It will even be lower than the $21,000 he owes now,” Kantrowitz said, adding: that “5% vs. 10% makes a big difference, so it is perturbing that the U.S. Department of Education calculator doesn’t reflect this.”
But Buchanan offered one possible explanation, saying that generally online calculators don’t make assumptions about the future rollout of regulatory changes before they actually happen. “They reflect what is true and available today,” Buchanan said. “It’s possible that the rollout of the other components could get delayed or tied up in litigation.”
The Education Department notes online that its loan simulator should not be considered financial advice.
A key change for loan forgiveness ahead A second important change beginning in July 2024 involves loan forgiveness. Under the SAVE plan, borrowers will see their loan balances forgiven after 10 years of repayments, instead of 20 years, if they had original loan balances of $12,000 or less.
Even borrowers with slightly higher balances win. The maximum repayment period before remaining debt is canceled rises by one year for every additional $1,000 borrowed. Loan forgiveness could happen in 12 years, for example, if your original principal balance was $14,000.
“Payments made previously (before 2024) and those made from now on will count toward these maximum forgiveness timeframes,” the Education Department notes online.
The department estimates that this reform will allow nearly all community college borrowers to be debt-free within 10 years.
Why your career path can influence SAVE payments Every 12 months, you need to recertify your income; and your monthly payment can change in future years. Beginning next July, the Education Department notes, an automatic recertification process will be available if you apply for income-driven repayment electronically in August 2023 or later and you agree to securely share your tax information.
“Part of the challenge of all income-driven repayment plans is that knowing today what plan is best depends upon projecting what future career and earning power looks like in the coming years,” said Buchanan.
Borrowers might want to talk with loan servicers or seek outside direction from nonprofits, such as GreenPath.
What are some advantages of the SAVE plan? Loan balances don’t grow: Unlike making only the minimum payment on a credit card, you’re not digging a deeper hole with SAVE. If you make your monthly payment, your loan balance won’t grow due to unpaid interest.
Say $50 of interest accumulates on your student loans each month but, based on your income and family size, you’re only required to make a $30 monthly payment under SAVE. The extra $20 a month in interest each month in this example wouldn’t be added to your loan balance, instead it would be canceled by the Education Department.
It’s a very unique twist in the income-driven repayment plans — and one that frankly could have saved much heartache for a lot of borrowers if it had been in place under earlier programs.
The $0 monthly payment: Scott Thompson, CEO of Tuition.io, a California-based platform for employee student loan contributions, said many borrowers might not realize that if they had a low income in 2022 — say if they weren’t working much or just started in their field — they could qualify for $0 monthly payments for 12 months under SAVE.
Thompson noted that if someone didn’t work in 2022 — and then maybe was hired in May or June this year — they still might qualify for another 12 months of $0 monthly payments next year.
No doubt, the SAVE calculation can be simple for some and harder for others.
Again, Edwards would have to review his numbers and consider what a $57 payment might mean to him next year and what he might pay in future years.
Edwards, who graduated in December 2016, has been on a 10-year repayment plan since 2017. He will owe student loan payments until 2030 — not 2027 — as a result of the payment pause.
Think of his loans as being put in hibernation. The principal balance, if no payments were made, is the same as it was before the pandemic. As a result, Kantrowitz said, a borrower on a standard 10-year plan who had made three years of payments before the 2020 pause will need to make seven years of payments when repayment restarts this year. Payments made during the pandemic count toward forgiveness.
Edwards paid about $10,000 on his loans for a while during the payment pause that began in March 2020 but he requested, as was allowed, a refund when it seemed likely that he’d qualify for Biden’s widespread loan forgiveness plan.
The refund wasn’t spent and, while he’d rather use it toward a down payment on a house, he says he plans to tap into it for student loan bills now.
On June 30, the U.S. Supreme Court blocked Biden’s plan to forgive up to $10,000 in student loans for many borrowers and up to $20,000 in student loans for borrowers who had Pell Grants in college.
Edwards says he would have qualified for the $20,000 in forgiveness — which would have erased most of his debt. He likely would have shopped for a home and helped his brother some with his student debt, which wasn’t going to be forgiven.
Some 26 million people already had applied for or were automatically eligible for one-time student loan debt relief, including 864,000 people in Michigan, according to a White House fact sheet issued in January.
Like many borrowers, Edwards said he was disheartened and angry when he lost an opportunity for $20,000 in loan forgiveness. But he’s also thankful that he’s living at home, working and able to address his situation and pay his bill in October.
Edwards —who now makes about $52,000 a year — estimates he’s already paid off about $13,000 in student loans — including $4,000 in interest.
Edwards has been taking his overall costs into account ever since he started college.
He attended Macomb County Community College after graduating from Lakeview High School in St. Clair Shores, where he ran cross country and track. Tuition was so reasonable then, he said, he covered those bills basically by working at Burger King.
Right now, his bills are modest, too. He has some low-cost hobbies, like running. On Aug. 31, a board in his classroom noted that Mr. Edwards ran 1,108 miles so far this year and 1,259 miles in 2022.
He realizes that many student loan borrowers owe more money, face far higher payments and have other expenses, like mortgages.
“I’m better off than a lot of people,” he said.
Contact personal finance columnist Susan Tompor: stompor@freepress.com . Follow her on Twitter @ tompor .
