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1.4 million Texans’ student debts won’t be canceled. But a new loan repayment plan could bring savings.

By Francisco Uranga, The Texas Tribune

1.4 million Texans’ student debts won’t be canceled. But a new loan repayment plan could bring savings.” was first published by The Texas Tribune, a nonprofit, nonpartisan media organization that informs Texans — and engages with them — about public policy, politics, government and statewide issues.

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Texans with college loans are expected to begin or resume making payments later this year after the U.S. Supreme Court struck down President Joe Biden’s plan to forgive up to $20,000 in debt, and after other COVID-era relief ends.

The high court on Friday struck a decisive blow to one of Biden’s signature campaign promises when it declared his debt cancellation program was unconstitutional. The decision, which affects 1.4 million Texans who had already been approved for forgiveness, came a few months before the end of a pause in borrowers’ payments.

But while it will surely cause some financial shock to borrowers who have not been required to make loan payments during the COVID-19 pandemic, other changes are planned for this summer that can reduce monthly payments, stop interest accruals and forgive debts after 10 to 25 years.

And you probably haven’t heard of them.

The Saving on a Valuable Education plan, or SAVE, is an update to the Revised Pay As You Earn plan, or REPAYE. The new program takes effect next year, but several of its features are scheduled to begin before borrowers need to resume their monthly debt payments.

REPAYE is the largest federal income-driven repayment plan — programs that calculate how much a borrower will pay each month based on how much they earn. It has been adopted by 3.3 million borrowers who owe nearly $200 billion, according to March 2023 data from the Department of Education. Those who follow other repayment plans — income-based or not — may switch to REPAYE as long as they comply with the program’s conditions.

Texas residents have the second-highest amount of student debt, behind Californians. Some 3.8 million students owe $33,400 on average. Fewer than 20% of Texas borrowers are on an income-driven repayment plan.

According to groups that advocate for affordable higher education, many students are unaware of this repayment alternative or do not understand it. They believe it needs to be better promoted as it is an effective option for borrowers who struggle to repay loans.

“All of these students should be in the income-driven repayment plan,” said Sandy Baum, an expert on higher education finance and senior fellow at the Urban Institute. “But some of them do not know about it or have faced bureaucratic difficulties getting into the program.”

Here is what you need to know if you are one of the eight in 10 Texans with student loans who are not on an income-based repayment plan.

What is the new income-driven repayment plan about?

Income-driven repayment plans set monthly payments as a percentage of the borrower’s income, rather than the amount owed. This is supposed to make repayment easier on borrowers’ wallets.

On Jan. 10, the U.S. Department of Education announced that it would modify REPAYE conditions to solve some of the program’s problems. The result, advocates say, is a more generous policy that improves repayment conditions for borrowers.

How does the current program work?

Under the current REPAYE plan, borrowers must pay 10% of their discretionary income each year. Discretionary income is defined as the part of a borrower’s earnings that exceeds 125% of the poverty guideline. That threshold is $18,225 for a single person, but varies by family size and is updated periodically.

In many cases, the payments calculated with this method are lower than the interest that the borrower should pay each month. As it stands right now, any interest left unpaid by these monthly payments is added to the total debt. As a result, there are borrowers who comply with their repayment plans and yet are seeing their debts grow month by month.

This will end with the SAVE plan, which will replace REPAYE.

What will change in the revised plan?

There are three main changes.

First, unpaid interest does not accrue and, therefore, borrowers’ total debt does not grow.

Second, discretionary income would be redefined as earnings above 225% of the poverty guideline. The threshold would increase to $32,805 for a single person. These changes would apply to both undergraduate and graduate student debt.

Finally, borrowers’ monthly payments would be calculated as 5% of their discretionary income for undergraduates. They would remain at 10% for graduate students.

Criteria for debt forgiveness would also change. Under the current REPAYE plan, if an undergraduate student makes payments over 20 years and does not complete loan repayment, the remainder of the debt is forgiven. The same applies to graduate students over a 25-year period.

This will continue to be the case, but there would be more generous criteria for lower debts.

If an undergraduate borrower has a loan of up to $12,000, makes payments over 10 years and hasn’t fully repaid his debt after that time, the remainder would be forgiven. For each additional $1,000 in debt, one year is added to the period of time a borrower must make payments before the remainder of the loan is forgiven. For example, if a borrower has a loan of $14,000, they must make payments for 12 years before the rest of the loan is forgiven.

The period of time a borrower must make payments before qualifying for forgiveness has a ceiling of 20 years for all undergraduate borrowers and 25 years for graduate borrowers. For example, a graduate student who hasn’t finished paying off a loan of $22,000 or more after 25 years of payments would have the rest of their debt forgiven.

Finally, the revised plan would allow married borrowers to file taxes separately so the monthly payment would not be calculated based on joint income.

Can you give me an example of how the plan would work?

Consider a single undergraduate borrower earning $60,000 a year, according to tax returns.

That borrower’s discretionary income — or the amount that person earned above 225% of the poverty guideline — would be $27,195. The borrower would have to use 5% of that amount, or $1,360 that year, to pay back their loan, so their monthly payment would be $113. If this amount does not cover the interest they owe each month, their total debt wouldn’t decrease, but it wouldn’t increase either. If the loan is not fully repaid in 20 years, the remainder would be canceled.

Who can apply for this plan?

All REPAYE borrowers would automatically switch to these new terms. Those with another repayment plan, income-driven or not, may also apply, as long as they have a federal direct loan. That means a loan provided directly by the U.S. Department of Education. There are four types: Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans and Direct Consolidation Loans. Every borrower with these types of loans can apply for the SAVE program.

Those with Parent PLUS Loans are not currently eligible for this plan. However, it should be noted that the final version of the new rules has not yet been published. Advocacy groups have requested that these loans also be included in the SAVE plan.

A borrower interested in changing repayment plans should contact their loan servicer. There is no charge for the switch.

What other repayment alternatives exist and how do they compare to the new plan?

In addition to the REPAYE plan, there is the Pay As You Earn plan (PAYE), the Income-Based Repayment plan (IBR), and the Income-Contingent Repayment plan (ICR). The difference between each is related to who can apply, the monthly payment calculation and the loan forgiveness terms.

The SAVE Plan has more favorable terms than all previous programs. However, ICR is the only one that accepts Parent PLUS Loans, which are unsubsidized loans made to parents of dependent undergraduate students.

When would the new plan come into effect?

It would come into effect on July 1, 2024, the Department of Education said. However, the agency announced that it would implement three aspects of the SAVE plan this summer before student loans resume in October: the change of discretionary income definition from 125% to 225% of the poverty line; ending the accrual of unpaid interest; and allowing married borrowers to file separate tax returns for income calculation purposes.

Next July, the department will implement other parts of the plan, such as reducing undergraduate borrowers’ monthly payments to 5% of their discretionary income and forgiving outstanding debts for loans of up to $12,000 after 10 years.

Why might the new program be more beneficial for borrowers?

The SAVE plan changes would allow low- to middle-income borrowers to make smaller monthly payments without accruing debt for unpaid interest. Many of them would reach the forgiveness deadline without fully repaying the debt, according to experts. This is particularly true for borrowers with smaller debts and lower incomes, they said.

Financial aid experts such as Mark Kantrowitz noted that while the SAVE plan may help make higher education more affordable, it is not an optimal solution because students are still getting into debt. It would be better for them if they had access to more, bigger grants and if public universities would get more funding so they could lower tuition fees.

Kantrowitz said Biden also succeeded in doubling the Pell Grant budget over the next few years, which he believes helps, but is insufficient to fully prevent low-income students from accruing debt. For Kantrowitz, tripling the Pell Grant budget would allow students to graduate debt-free at some of the least expensive universities.

The Department of Education estimates that borrowers would see their total payments fall by 40% under the SAVE plan, with a reduction of 83% for lower-income borrowers. On average, Black, Hispanic and Native American borrowers would have their total lifetime payments cut in half, according to the agency.

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