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The Best Ways to Handle Repaying Your Student Loans

As of October 1, 2023, the payment pause that had been in effect for federal student loans ended.

That means millions of borrowers who had not been making any federal student loan payments during the pandemic now have to think about another major expense in their budget.

According to the Federal Reserve Bank of New York, the average student loan repayment is $393 monthly. That’s no small chunk of change.

If you’re among the 45 million people who owe student loans, and you’re worried about juggling college debt along with all the rest of your bills, don’t stress about it.

As it turns out, there are many good options to help you get financial relief from those college loan obligations.

Here’s what you need to know about the best ways to handle repaying your federal student loans.

Sign Up For The New SAVE Program 

For starters, the Biden Administration has rolled out a new income-based program called SAVE. It stands for Saving on a Valuable Education.  

The SAVE initiative replaces two previous income-based repayment plans, which were PAYE (Paye As You Earn) and REPAYE (the Revised Pay As You Earn program).

Like those older plans, SAVE calculates your monthly payment based on your income and the number of people in your household. But unlike the old programs, SAVE has a ton of better features that help borrowers reduce student loan costs.

For starters, the SAVE plan carves out more of your income and lets you keep that as discretionary income.

With SAVE, your monthly payment is based on the difference between your adjusted gross income and 225% of the poverty line. With previous plans, the income exemption was only 150% of the poverty line. This change is why borrowers enrolled in SAVE will have lower payments – or even no payments at all.

A couple of examples: If you’re single and making about $15 an hour, or $32,800 a year or less, the new formula sets your payment at $0. The Department of Education says people making more than that will save at least $1,000 annually with the new income-driven SAVE plan.

Meanwhile, a family of four with an income of $67,500 or less will also have a payment of $0.

And get this: even a $0 payment can apply toward future student loan forgiveness. Those with $12,000 or less in student loans can pay off their loans for ten years and get any remaining balance completely wiped out. In the past, you had to pay at least 20 years to qualify for loan forgiveness.

No More Added Interest and Other Future Benefits

Another huge advantage of the SAVE plan is that you won’t see your balances increase due to crazy interest charges.

One of the biggest things that drove a lot of people crazy was making student loan payments but then not seeing their balances decrease. In fact, for many people, their balances increased – despite their paying on time. That was due to how interest was calculated on student loans.

Going forward, the SAVE Plan eliminates 100% of the remaining monthly interest after you make a scheduled payment. (That goes for both subsidized and unsubsidized loans). So, any time you make your monthly payment, your loan balance won’t grow due to unpaid interest accrued since your last payment.

Case in point: If you have $75 in interest that accrues per month and you have a $35 payment, the remaining $40 would not be charged to you.

And that’s not all. Future benefits are also on the way with SAVE.

In the summer of 2024, people enrolled in SAVE plans will see their payments slashed in half. That’s because the repayment formula will be tweaked again, cutting required payments from 10% to 5% of income above 225% of the poverty line.

As you can see, it’s a no-brainer to sign up for SAVE if you want to save money on your federal student loans and free up some cash flow.

NOTE: If you were already on the REPAYE Plan, you should’ve been automatically enrolled in SAVE. Otherwise, you can go to this website to sign up for SAVE.

A 12-Month Transition to Repayments

Another important thing to know is that the Biden Administration has created what it’s calling a 12-month “onramp” to repayments. Simply put, this means that for the 12 months starting October 2023, the Department of Education will be lenient with people having trouble making federal student loan repayments.

So they won’t report people to the credit bureaus, throwing their loans in delinquency or default status, or garnishing anyone’s wages just because they can’t pay their student loans.

The idea is to provide people with a smooth transition as they ease back into making payments on college debt, considering the payment pause on federal student loans has been in effect since 2020. People are now dealing with a host of situations: higher inflation, layoffs, unexpected bills, credit card debt, and more.

So this 12-month transition or “onramp” period will likely be a blessing to a lot of people who otherwise would struggle with student debt.

Get Help From Your Employer to Repay Your Student Loans

One final tip: if you’re seeking help with your student loans, another source of help could be your employer.

Regardless of whether you have federal or private student loans, new IRS rules permit companies to use employee assistance programs and repay your college debt tax-free for up to $5,250 per year through December 31, 2025.

The payments are 100% tax exempt — meaning they’re tax-free for workers, and employers get a payroll tax exclusion.

Payments can cover your principal and interest. Employers can also make payments directly to you, the employee, or your lender(s).

Next step: simply email your HR office and say, “Section 2206 of the CARES Act that Congress passed in 2020 lets employers repay workers student loans. Does our organization offer that benefit, and if not, how can we get it implemented?”

Don’t stress out about the end of the federal student loan payment pause.

Simply enroll in the SAVE plan and take this additional step to put in motion the opportunity to get a total of $15,750 of your loans paid off (5,250/year in 2023, 2024 & 2025).

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