I remember the beginning of the pandemic like it was yesterday … my husband walking up to me, showing me a clip on his iPhone from Wuhan of people wearing masks and being locked in their homes to quarantine—it seemed like an apocalyptic movie. Little did I know we would be experiencing a similar fate soon after.
One of the only positives that came out of that was that student loan payments were paused as part of the COVID-19 Economic Relief, going on more than three years now. That’s three years of no payments on federal student loans and no interest accrual—quite a big relief for anyone with significant student debt. For many dentists who have six-figure dental school student loans and six-figure incomes, that amounts to thousands every month in free cash flow they’ve been able to either save or spend elsewhere these past few years. That’s all about to change.
Now that federal student loan payments will resume in September, many of you will have the equivalent of a car payment or worse, a mortgage payment, to budget for every month.
Steps to take now
Starting September 1, interest will accrue on your loans again. Your first payment post forbearance may vary depending on your servicer. The most important thing now is to have a plan in place so you don’t have to adjust your lifestyle significantly and aren’t shocked when those payments hit your bank account. Here are some things to be aware of:
- Locate your student loan servicer. The company that manages your student loans may have changed since forbearance began. Find your servicer by logging into the Federal Student Aid website.
- Contact your servicer. Log in to your servicer’s website or give them a call. I always prefer to just do it online, but if you prefer chatting, a call works too. Update your contact information. Ask how much you might owe when payments resume, how much your monthly bills could be, and what payment plans are available to you. If you had automatic payments before forbearance, set those up again. Servicers expect a customer service bottleneck when payments resume, says Scott Buchanan, executive director of the Student Loan Servicing Alliance, so get ahead of traffic now.
- Consider an income-driven repayment plan. Your servicer can help you sign up for an income-driven plan if you weren’t already set up on one. These plans lower your monthly bills to a set portion of your disposable income, typically up to 10% based on a set formula. Your payment could be as low as $0 per month depending on your income. Usually income-driven plans benefit those whose student loan debt-to-income ration is less than two: as an example, you make $200K but you owe $400K on your federal student loans.
- Consider all your options and adjust your plan and budget accordingly. I think each and every one of you with significant student loans needs to crunch the numbers. This way you can make an educated decision about the right repayment plan and include that amount in your monthly budget.
What's in the new SAVE plan?
A new income-driven plan (“SAVE” or the new REPAYE plan) is expected to roll out later this year and it might save some dentists money.
The regulations creating the new plan don’t fully go into effect until July 1, 2024, but the Biden administration plans to implement parts of it early.
The elements of the SAVE plan that will go into effect early are:
- The income amounts protected from the payment calculations on the SAVE plan will increase to 225% of the federal poverty guidelines. The change means borrowers with relatively low incomes—single people earning less than $32,805 ($67,500 for a family of four), will have their payment amount set to $0 if they enroll in the plan. The Biden administration estimates that more than one million additional borrowers will be eligible for a $0 payment. Borrowers currently enrolled in the Revised Pay-As-You-Earn plan (REPAYE) will automatically move to the replacement SAVE plan. REPAYE is presently the most generous IDR option available.
- Borrowers not eligible for a $0 payment on the SAVE plan should expect to save $1,000 a year compared to the current REPAYE plan. A single borrower would save $91 a month on payments ($1,080 a year), with a family of four saving $187 a month or $2,244 a year.
- Borrowers who have a payment that doesn’t cover all the interest accruing on their loans each month will no longer have the remaining interest added to their balance. The elimination of negative amortization means borrowers with low or $0 payments will no longer see their total loan balance constantly grow due to unpaid interest. The administration says around 70% of borrowers enrolled in an IDR plan before the payment pause will benefit from this change.
- Married borrowers who file their taxes separately will no longer be required to include their spouse’s income in their payment calculation for SAVE. Spouses will also be excluded from household size if they are enrolled in SAVE and file their taxes separately.
One thing to be aware of is that as good as SAVE sounds (and is), some dentists, especially those who have already been on PAYE for a while and made progress toward the 20-year timeline to forgiveness, may be better off staying on PAYE. It depends on your specific situation and requires you to crunch some numbers to determine what’s best for you.
Refinancing is another option, but while last year rates were low and favorable, this year is less so and refinancing may not be beneficial over an income-driven plan.
I encourage you to crunch your numbers or work with a student loan planner or your financial planner to review your options given your specific situation to see what’s in your best interest: PAYE, SAVE, refinancing, or sticking to your existing strategy. After all, the decision you make will either cost or save you thousands over the course of your loan, so choose wisely.
Student loan repayment calculator (Student Loan Planner)
When do student loan payments resume? (NerdWallet)
PAYE (Pay As You Earn) gets sunsetted (The Student Loan Sherpa)