Student Loan Repayment Outlook: What You Need to Know

IDR Waiver and Payment Count Adjustments

Let’s start with the silver lining for borrowers paying back federal student loans with an income-driven repayment (IDR) plan: the IDR waiver and payment count updates. This one-time initiative retroactively counts qualifying payments, periods of forbearance, and deferment toward loan forgiveness, benefiting both private and public sector workers. Borrowers who consolidated their loans by June 30, 2024, are also eligible for the waiver, with many seeing accelerated progress toward forgiveness.

Under the waiver, 12 consecutive months or 36 cumulative months of forbearance now count toward forgiveness credit, offering relief to those impacted by financial hardships. While the deadline to qualify has passed, the Education Department is expected to make the adjustments by January 2025 so that borrower accounts show the correct amount of forgiveness credit.

The End of ‘On-Ramp’ and Fresh Start Programs

With the expiration of the "on-ramp" and Fresh Start programs, many borrowers could face a challenging return to making repayments despite the promise of the IDR waiver.

What was the on-ramp program?

The on-ramp program provided a penalty-free period for missed payments, shielding borrowers from credit reporting and giving time to adjust. Now that it's gone, missed payments can:

• Harm credit scores, affecting applications for housing, loans, and jobs.
• Trigger collections, like wage garnishments and tax refund seizures.
• Increase the risk of default for those already struggling.

What about Fresh Start?

Fresh Start helped borrowers exit default, avoid garnishments, and regain federal aid access. Its expiration leaves defaulted borrowers vulnerable to severe financial consequences.

SAVE Plan Court Actions and Their Impact

A key question for many borrowers is the future of the Saving on a Valuable Education (SAVE) plan. This new income-driven repayment plan promised reduced monthly payments and substantial long-term savings, particularly for low-income borrowers. According to an April 2024 White House statement, nearly eight million borrowers have enrolled in the SAVE plan, 4.5 million borrowers have a monthly payment of $0 under the plan, and an additional one million borrowers have a monthly payment of less than $100. However, recent court actions have introduced a wave of uncertainty for those enrolled in the plan.

What’s happening in court?

Legal challenges to the SAVE plan argue that it oversteps executive authority, mirroring the debates over the broader student loan forgiveness initiative struck down by the Supreme Court. These court actions could delay or dismantle the plan, leaving borrowers in limbo. If the SAVE plan is halted, borrowers could face higher payments and fewer protections.

This legal battle also highlights a broader challenge for borrowers: navigating their repayment obligations while courts continue to debate the legality of the plans. With the new administration taking office in January, the future of this program is less certain. A qualified financial professional with experience in student loan repayment planning can help discuss your options.

For borrowers on income-driven repayment plans, adjusted gross income (AGI) is a critical factor in determining monthly payments. A lower AGI can significantly reduce payments, while a higher AGI can raise them. Here's how borrowers can plan to optimize their AGI so that their student loan payments remain manageable:

1. Contributions to a donor-advised fund (tax bunching): Charitable giving through a donor-advised fund allows borrowers to "bunch" donations into a single tax year, effectively reducing taxable income. This can lower AGI without impacting cash flow in subsequent years.

1. Increasing contributions to a qualified retirement plan: Maximizing contributions to 401(k)s, 403(b)s, or traditional IRAs reduces taxable income. It’s a win-win: lower student loan payments and greater long-term financial security.
2. Delaying required minimum distributions (RMDs) from inherited IRAs (if permitted): If circumstances allow, delaying RMDs can help maintain a lower AGI, avoiding unnecessary increases in monthly student loan payments.
3. Accounting for additional business expenses: Self-employed borrowers can deduct legitimate business expenses, such as equipment or professional development costs, to reduce AGI.
4. Avoid realizing capital gains: Selling investments with significant gains adds to AGI. If possible, defer sales or offset gains with losses to minimize the impact.

Wrapping Up the Year

Understanding how your financial decisions impact your AGI is the gift that keeps on giving—especially for borrowers on income-driven repayment plans. By making a list (and checking it twice), you can optimize your repayment strategy and set yourself up for long-term success.

Consult your wealth advisor if you have questions on how to navigate the complexities of student loan repayments. Together, we can help you tackle your options and create a strategy that can help you save in the long run. Cheers to a brighter financial future and a prosperous new year!

If you are not working with an advisor or would like a second opinion, we would be happy to help. We encourage you to schedule a phone call or virtual meeting with our Client Development team.

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