A perfect storm is brewing for millions of federal student loan borrowers, who may experience dramatic increases in their monthly payments later this year.
Several Biden-era student loan forgiveness initiatives have been either struck down by courts or withdrawn, and mass debt relief is unlikely to happen under the Trump administration. Meanwhile, the SAVE plan — another key Biden-era program — remains blocked due to a legal challenge, and appears poised to either get overturned by a federal appeals court or repealed by congressional Republicans in an upcoming reconciliation bill. Many other borrowers on income-driven repayment plans may also see larger-than-expected spikes in their monthly payments as they update their income with their loan servicer, in some cases for the first time in five years or more.
Any one of these issues may cause borrowers to see an increase in their student loan payments. But the combination of these intersecting developments could cause some Americans to wind up with a student loan bill that is several times the amount they have been paying.
SAVE Plan Repeal Could Lead To Increases In Student Loan Payments For Millions
The SAVE plan, a new income-driven repayment (or IDR) plan launched by the Biden administration in 2023, reduced the monthly student loan payments for more than eight million borrowers who enrolled. Like all IDR plans, SAVE uses a formula applied to a borrower’s income and family size with eventual student loan forgiveness if the full balance is not repaid, typically after 20 or 25 years in repayment.
But SAVE’s days may be numbered. Republican leaders in Congress are floating the possibility of repealing the SAVE plan in an upcoming reconciliation bill primarily intended to extend expiring tax cuts. If that doesn’t happen, the 8th Circuit Court of Appeals — which is handling a legal challenge involving the SAVE plan — could strike down the program, or the Trump administration could take steps to initiate a repeal process through regulations.
If SAVE is repealed or struck down, borrowers may have to select a different IDR plan such as Income-Based Repayment, Pay As You Earn, or Income-Contingent Repayment. All of these plans are more expensive than SAVE, which means higher student loan payments for nearly everyone. But the exact increase in a borrower’s monthly payment would depend on several factors including their income, whether they have graduate school loans, when they originally took out their loans, and which plans they qualify for. Here are some examples:
- An undergraduate borrower with a family size of 1 and an income of $60,000 would have had a monthly SAVE student loan payment of around $150 per month. If she has to switch to the PAYE plan, her payment based on the same income would jump to around $300 per month, because she would lose access to SAVE’s more favorable repayment formula for undergraduate borrowers.
- A graduate school borrower may see less of an impact, but the size of the monthly payment increase would depend on when they took out their student loans. A graduate school borrower with an income of $75,000 and a family size of 1 would have had a monthly student loan payment under SAVE of around $330 per month. If she took out her loans after 2011, she may qualify for the PAYE plan with only a modest increase in her monthly payments to around $430 per month. But if she took out her loans prior to 2007, she may only qualify for an older, more expensive version of the IBR plan, which would cause her payments to jump to around $645 per month.
“These dangerous cuts will cause chaos across the economy—causing monthly student loan payments to spike for millions of working families,” warned Mike Pierce, executive director of the Student Borrower Protection Center, in a statement last week.
IDR Recertification May Also Lead To Big Increases In Student Loan Payments
But even borrowers who are not impacted by the SAVE plan litigation may see their monthly student loan payments increase this year due to upcoming required income recertifications.
Typically, borrowers must recertify their income information annually to remain in an IDR plan. Any changes to their income would result in adjustments to their student loan payments. But many borrowers in IDR plans — including IBR, PAYE, and ICR — have not had to recertify their income for several years. Annual income recertification requirements were suspended during the Covid-19 forbearance period, which lasted from March 2020 until September 2023. And the Biden administration pushed out annual recertification deadlines several times after that, with some borrowers now not required to recertify until later in 2025 or even in early 2026. As a result, many borrowers on IDR plans have monthly payments based on income information from 2020 or even earlier.
Borrowers who have experienced an increase in their income during the last several years or other changed circumstances, such as getting married, may be in for a surprise when they must recertify their income later this year. Assuming average annual income increases of around 5%, let’s assume that on average, borrowers have seen their incomes increase by 25% over the last five years. This would mean that someone with a 2020 income of $60,000 may have a current income of $75,000. Here’s how that could change a their monthly payment:
- Under the PAYE and post-2014 IBR plans, their payments would go from $305 to $430 per month.
- Under the older version of IBR, their payments would go from $460 to $645 per month.
- Under the ICR plan, their payments would go from $740 to $990 per month.
A Combination Of These Factors Could Cause Student Loan Payments To Increase Even More
The biggest increases in student loan payments will hit borrowers who will experience a combination of these issues — borrowers in SAVE who, as a result of an expected congressional repeal or court decision, may have to switch to a different IDR plan and update their income information after not being required to do that for the last several years. Here’s what this might look like:
- An undergraduate borrower who had enrolled in the SAVE plan based on 2020 income of $50,000 may have to switch to PAYE or IBR. Assuming she now has an income of $62,000, her payments would increase from around $120 per month to $320 per month. If she took out loans prior to 2007, she may only qualify for the older version of the IBR plan, which would mean payments of around $480 — four times what her payments were under the SAVE plan.
- A graduate school borrower who had enrolled in SAVE based on a 2020 income of $80,000 may now have an income of $100,000. Under SAVE, her payments may have been as low as $375 per month. But under the other IDR plans, based on her updated income, her payments could be between $640 per month and $960 per month, depending on whether or not she qualifies for PAYE or the newer version of IBR.
- Parent PLUS borrowers could also be hit hard. Parent PLUS borrowers who used the so-called “double consolidation” loophole to access the SAVE plan could see extreme increases to their monthly payments if they have to switch to the ICR plan, which is the most expensive IDR option and is typically the only one available for Parent PLUS borrowers. With an income of $100,000, their payments under SAVE may have been around $540 per month. But under ICR, even assuming no changes in income, that payment could go up to more than $1,400 per month.
Strategies To Reduce Student Loan Payments Under IDR Plans
There are limited but potentially useful ways for borrowers to mitigate some of these anticipated increases to student loan payments. For example, borrowers can work with a tax advisor to evaluate strategies for reducing their Adjusted Gross Income, a figure from the borrower’s federal tax return that is usually the basis for an IDR student loan payment calculation. Contributing more towards retirement, or putting money into certain types of health savings accounts, can reduce a borrower’s AGI and, in turn, their IDR student loan payments.
In addition, borrowers who are married may want to explore filing taxes as married-filing-separately. Doing so can allow borrowers to exclude their spouse’s income from the IDR payment calculation, keeping their student loan payments tied to only their income. However, filing taxes separately can cause some households to pay more in taxes, so this should be carefully evaluated with a qualified tax advisor.
Read the full article here
