800K Borrowers Just Had $39 Billion in Student Debt Wiped Clean

For more than 800,000 student loan borrowers, today is a day to celebrate.

Though President Joe Biden’s general student loan forgiveness plan was blocked by the Supreme Court, the Biden administration has canceled the remaining student loan debt – totalling $39 billion – for one set of borrowers.

Essentially, the latest round of forgiveness is just the federal government finally fixing the way it counts payments. The forgiveness is a part of corrections to income-driven repayment (IDR) plans the administration announced in April 2022.

Borrowers are eligible to get remaining debt canceled when they have made payments for either 20 or 25 years, based on when they initially borrowed and the type of loan they have.

Because of failures and mismanagement within the student loan system, many payments weren’t previously counted. Now, the federal government will count payments for borrowers who made payments during certain forbearance and deferment periods, as well as those who made partial or late payments.

“Inaccurate payment counts have resulted in borrowers losing hard-earned progress toward loan forgiveness,” the administration announced in a press release on July 14, 2023.

Eligible loans include Direct Loans and Federal Family Education Loans held by the Department (including Parent PLUS loans of either type) for any of the following periods:

• Any month in which a loan was in repayment, regardless of whether payments were partial or late, the type of loan or the repayment plan.
• Any period in which a borrower spent 12 or more consecutive months or 36 or more cumulative months in forbearance.
• Any month spent in deferment, except for in-school deferment, prior to 2013.
• Any month spent in economic hardship or military deferments on or after January 1, 2013.

Any of these months can also count toward Public Service Loan Forgiveness (PSLF) if the borrower documents qualifying employment for that same period.

The Biden Administration says they will notify affected borrowers in the coming days.

What Is an Income-Driven Repayment Plan?

Income-driven repayment plans (IDRs) are just that — payment plans for federal student loans that are intended to be affordable based on a borrower’s income and family size.

Under the four different IDR plans, the monthly payment amount is a percentage of your discretionary income, with the percentage varying under each plan — anywhere from 10% to 20%.

What Other Changes Have Come to Income-Driven Repayment Plans?

In June 2023, the White House announced the Saving on Valuable Education (SAVE) plan, which will automatically replace Revised Pay As You Earn (REPAYE) Plan. The following changes go into effect this summer:

• Raises the “discretionary” income level. At certain income levels, borrowers are eligible for reduced or no payments.
  The proposed changes would mean borrowers earning under 225% of the federal poverty level — the annual equivalent of $15 minimum wage — wouldn’t make any payments. Borrowers earning above that amount will save more than $1,000 a year on their payments compared to other IDR plans.

• Covers borrowers’ unpaid monthly interest. In current IDR plans, the monthly interest continues to accrue and grow the total balance, so even if borrowers are making on-time monthly payments, their total amount owed could still grow.
  These changes would protect the balance from monthly interest as long as the borrower continues making monthly payments. So if your loan payment is $30 per month but your loan accrues $50 in interest every month, you would not be charged the additional $20.

Beginning next summer, the SAVE plan will cap monthly payments for undergraduate loans at 5% of discretionary income — half the rate that borrowers pay under most existing plans. Because of this change, the DOE said the average annual student loan payment would be lowered by more than $1,000.

What Should I Do Next if I Have an Income-Driven Repayment Plan?

If you weren’t one of the borrowers whose loans were canceled through the IDR adjustments, these changes can still help you in a meaningful way.

Focus on making the most with those extra savings:

1. Build an emergency fund. Use the extra savings each month to build an emergency fund in less than a year. Emergencies are going to happen — it’s just a matter of when. That fund, preferably stored in a high-yield savings account, can keep you from dipping into a high-interest credit card when you have an emergency car repair.
2. Contribute to an HSA. A health savings account (HSA) is an excellent way to pay for your medical expenses using your pre-tax income. While an HSA is typically used to pay for medical expenses, like co-pays, not covered in a typical high-deductible health plan, it can also be a long-term investment vehicle for retirement.
3. Fund your retirement. When it comes to retirement, compound interest is your friend. Every little dollar matters. Each month’s savings could begin building the foundation of your retirement plan – or give it a nice boost if you’re already underway.
4. Save for a house down payment. Again, every little bit helps when you’re trying to reach your financial goals. If buying a house is a goal for you, use that extra income to put toward your down payment. While not required, a 20% down payment would help you avoid private mortgage insurance (PMI).
5. Pay off other debt. You could use the debt snowball method to put that extra money toward other debt. If you have high interest credit card debt, start there. Otherwise, consider private student loans or even your mortgage. Making the equivalent of one extra mortgage payment a year can save you tens of thousands in interest.
6. Fund your kids’ college. If you have kids, or plan on having them in the future, it’s not a bad idea to start thinking about college funds. Whether it’s a 529 plan or just a general investing plan, you have plenty of options. And the best part of saving for your kids’ college? They might not have to worry about as many student loans as you did.

Robert Bruce is a senior staff writer at The Penny Hoarder covering earning, saving and managing money. He has written about personal finance for more than a decade.