How Changes in the Student Loan Landscape May Affect You

According to AARP, people aged 60 and older owe upwards of $290 billion in student loan debt. Thankfully, many federal student loan borrowers have experienced payment reprieves for the past few years due to multiple payment pauses enacted during the pandemic by the CARES Act and other loan relief efforts.

These pauses on making payments for federal student loans are ending in August 2023, however. Interest will resume accruing on paused loans effective September 1, 2023, and student loan payments will be due in October 2023. To help borrowers get back on track with their payments, the Department of Education is implementing several programs.

Resuming Payments

One of the new initiatives is a yearlong “return-to-repayment” program designed to get borrowers back into active repayment status. Between October 2023 and September 2024, borrowers who miss payments will not be considered delinquent. Their loans will not be reported to credit bureaus as delinquent due to missed payments.

In addition, they won’t be considered to be in default. Although interest will still accrue, it will not be capitalized. The idea behind this program is to give borrowers time to contact their student loan servicers, explore their options, and hopefully enroll in an affordable repayment option.

Fresh Start Initiative

Additionally, the Department of Education is implementing a “Fresh Start” initiative. This program provides borrowers who were in default of their student loans before March 2020 with a way to get their loans out of default going forward. It allows them to request that their loans be removed from default and put back into repayment status via a simple request to their loan servicer.

This is significantly different from what borrowers previously had to do to get out of default, which often included a “trial” repayment effort before a loan was taken out of default.

The benefits of the Fresh Start program include allowing borrowers to:

• start paying their loans again regardless of prior missed payments,
• improve their credit scores,
• avoid administrative wage garnishment (AWG), and
• access income-driven repayment (IDR) options quickly. (IDR options often result in $0 monthly payments for low-income or fixed-income borrowers.)

Avoiding Administrative Wage Garnishment (AWG)

The ability to avoid AWG is significant. AWG can affect people at all stages of life, including seniors. AWG allows a federal agency to order a non-federal employer to withhold up to 15 percent of an employee’s wages to pay a debt owed to the agency, such as defaulted federal student loans. AWG can also mean receiving a lower tax refund or having a portion of one’s monthly Social Security benefits withheld.

However, if borrowers take advantage of the Fresh Start program prior to August 31, 2024, they can avoid a loan default that leads to AWG.

The SAVE Plan

In addition, the Department of Education is implementing a new IDR option in mid-2024 called the Saving on a Valuable Education (SAVE) Plan. The SAVE Plan amends and replaces the REPAYE Plan.

Typically, the amount a student loan borrower with an IDR plan must pay depends on their income and the size of their family. Effective July 1, 2024, the SAVE Plan will protect more of a borrower’s income from monthly payments. Compared with other IDR plans, the SAVE Plan will therefore lead to reduced monthly payments. For details, check out this fact sheet from the Department of Education.

Borrowers With Disabilities May More Easily Qualify for a TPD Discharge

Effective July 1, borrowers with disabilities will have an easier time qualifying for a total and permanent disability (TPD) discharge. New rules allow the Department of Education to offer TPD discharges (often automatically) to borrowers receiving SSDI or SSI who:

• have an onset of disability date five or more years ago and have been receiving Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) based on this disability for at least five years;
• SSDI or SSI recipients who suffer from a condition on the Social Security Administration’s List of Compassionate Allowances;
• SSA beneficiaries receiving retirement benefits who met the requirements for a disability discharge before they retired;
• SSDI or SSI recipients receiving these benefits based on disability with a three-year disability review period; or
• SSDI or SSI recipients receiving these benefits based on disability with a five- to seven-year disability review period.

Disabled individuals who do not meet these criteria and wish to apply for a TPD discharge based on a doctor’s certification may now seek out certification from professionals beyond those holding an M.D. Nurse practitioners, physician assistants, and osteopathic doctors may now sign the certification verifying a borrower’s disability.

Borrowers who receive a TPD discharge in this manner will no longer be subject to a three-year income monitoring rule. However, if they apply for new federal loans within three years, they may lose their TPD discharge.

Forgiven Student Loan Debt Won’t Result in Taxable Income (For Now)

At the moment, student loan debt cancellation is not counted as taxable income to borrowers. This protection from additional taxes will remain in effect until December 31, 2025.

So, if you are considering applying for a TPD discharge or completing an IDR plan you previously started that would lead to loan forgiveness, now may be the time to act. However, note that this rule only applies to federal tax liability. Borrowers may still have liability under their state’s income tax rules.

For more information on how the recent developments in the federal student loan landscape may affect you, speak with a qualified attorney in your area.