Today, let’s walk through the analysis that goes into making this decision and explore the reasons why a borrower might choose to stay on SAVE or switch to another plan.

The SAVE Forbearance Problem

With Donald Trump winning the election, the SAVE repayment plan as we know it is likely coming to an end. The plan is struggling in the court system, and it is unlikely that the new administration will work to keep it in place.

With the SAVE litigation forbearance likely ending in the coming months, many borrowers want to know the next steps. The problem is that we don’t know what options will be available moving forward. IBR has a high likelihood of being available indefinitely, while ICR and PAYE could be returning before Biden leaves office. REPAYE might also reappear.

The biggest downside with the SAVE forbearance is that the time spent in this payment pause does not count toward student loan forgiveness. Initially, I hoped this rule might change retroactively, but the new administration is unlikely to take that approach. For many borrowers, switching to a plan that counts toward forgiveness could make the most sense.

What protections do borrowers have in place? Learn how Trump’s election could impact various federal repayment plans and forgiveness programs.

The Case for Staying on the SAVE Forbearance

For some borrowers, staying on SAVE might still make sense despite the uncertainty. Here’s why:

• 0% Interest: While the forbearance is active, borrowers enjoy a 0% interest rate on their loans. This is a considerable savings and it means the forbearance is truly a student loan pause.
• Unknown Resolution and Timing: We don’t know when the SAVE forbearance will end or what repayment plans will be available at that time. Waiting provides time to make a decision when more information is available.
• Payment Break: The payment break allows borrowers to save up for whatever comes next or build up an emergency fund.
• PSLF Buyback Potential: The buyback program could still benefit borrowers working toward Public Service Loan Forgiveness (PSLF).

The election is a big change and there is certainly temptation to “take action” in order to protect yourself moving forward. Being proactive might feel good, but in many cases, being patient might be the prudent approach.

Switching to IBR Now

One of the most stable options available is the Income-Based Repayment (IBR) plan. Here are some key considerations:

• Stability: IBR is statutory law and is expected to remain a reliable repayment option moving forward. This makes it a good choice for borrowers looking for long-term stability.
• Forgiveness Progress: By switching to IBR, borrowers can begin making qualifying payments toward loan forgiveness immediately.
• Tax-Free Forgiveness Window: Enrolling in IBR now may allow borrowers to receive forgiveness before taxes on forgiven balances return in 2026, potentially saving thousands of dollars in tax liabilities.

Drawbacks of Switching to IBR

Switching to IBR has some drawbacks that borrowers should be aware of:

• Higher Costs: For many borrowers, IBR can be more expensive than SAVE, particularly for those who don’t qualify for the more favorable terms of IBR for New Borrowers (2014 version). The older version of IBR requires borrowers to pay 15% of their discretionary income, compared to SAVE’s 10%. This difference alone can lead to significantly larger monthly payments. 
• Discretionary Income Definition Change: IBR defines discretionary income as the amount above 150% of the federal poverty level, whereas SAVE uses a more generous 225% of the federal poverty level.
• Eligibility Limitations: IBR comes with an income cap, meaning not everyone will qualify for this plan. Borrowers whose income exceeds the cap may be ineligible. These borrowers could be better off waiting to see what happens with SAVE/REPAYE.
• Income Recertification: Many borrowers have not recertified their income since before the pandemic. A new recertification could result in a significant payment increase if income has risen during that time.

Waiting for ICR or PAYE to Return

For borrowers not eligible for IBR but eligible for PAYE, waiting might be a smart move, as PAYE could soon become available for new enrollments again.

Income-Contingent Repayment (ICR) is also worth considering. It’s a good option for borrowers with higher incomes and smaller balances who are close to reaching forgiveness. ICR doesn’t get much attention, but it can work well in specific scenarios.

What we know for now is that the Biden administration plans to bring both of these plans back. Additionally, with SAVE unlikely to survive, bringing back both of these plans seems logical, and potentially legally required.

Holding Out Hope for REPAYE

I’m not ruling out the possibility that REPAYE could return.

There is also the potential for a REPAYE/SAVE hybrid plan, which might incorporate some changes from SAVE—such as the 10% discretionary income payments—but eliminate the earlier forgiveness and 5% discretionary income payments that are currently being litigated. This could end up being a compromise solution in the near future.

A REPAYE/SAVE hybrid is probably the optmistic outcome for borrowers, but I think it is a somewhat realistic outcome as well.

Final Thoughts: Two Things to Keep in Mind

If you decide to switch out of the SAVE forbearance, remember that processing times for IDR enrollments are still quite slow. Moving to IBR now and then switching to another plan in a few months might not save much time overall.

Above all, it’s important not to assume the worst. Borrowers’ fears about what could happen to their repayment options are justified, but assuming that all forgiveness and IDR plans will be eliminated is premature. The ideal strategy is to stay flexible and be ready to adjust as more information becomes available.

Stay Up to Date: Student loan rules are constantly changing, and temporary programs create deadlines that can’t be missed. To help manage this issue, I’ve created a monthly newsletter to keep borrowers up to date on the latest changes and upcoming deadlines.

Click here to sign up. You’ll receive at most one email per month, and I’ll do my best to make sure you don’t overlook any critical developments.

The post Should I Switch Out of the SAVE Forbearance? appeared first on The Student Loan Sherpa.

Sherpa Thought: This article is not meant to spark a political debate or take sides in the upcoming election.

Instead, it is crafted to be an analysis of the potential consequences of the 2024 election for student loan borrowers.

Forgiven Student Debt: Taxed Starting in 2026

One of the first major concerns for borrowers is the taxation of forgiven student debt. Starting in 2026, student debt that is forgiven could be considered taxable income. This means that borrowers might face significant tax liabilities, potentially limiting the financial relief they experienced from forgiveness.

I’m still hopeful that the tax on forgiven student debt will be permanently eliminated, but a second Trump term likely increases the odds of the tax on forgiveness returning.

A Halt on New Help for Borrowers

During a second Trump presidency, it’s likely that initiatives to fix past issues, and the introduction of new repayment plans would cease. Borrowers should not expect new improvements or relief measures.

Cessation of Forgiveness Initiatives

President Biden has been aggressive about remedying past student loan issues with programs like the one-time account adjustment and temporary expanded public service loan forgiveness. These initiatives have provided significant relief to borrowers. However, Trump hasn’t shown any inclination to expand or fix existing federal student loan repayment programs. Under his administration, such programs would likely be halted, leaving many borrowers without anticipated relief measures aimed at easing their debt burdens.

Stagnation of Repayment Plans

The introduction of new repayment plans would also likely stop, meaning borrowers would not see new options designed to ease their repayment burdens. The focus would shift away from creating new, borrower-friendly policies, leaving many to rely on existing plans that may not fully address their financial needs.

SAVE Plan: A 50/50 Chance of Survival

The SAVE (Student Aid and Value Education) plan, which aims to provide financial relief to borrowers, faces uncertain prospects. Its survival is estimated at 50/50 under a Trump administration. The GOP has been largely opposed to the SAVE plan, and multiple lawsuits threaten its existence.

Challenges to Eliminate SAVE

Eliminating the SAVE plan would not be straightforward. It would require substantial time and effort to roll back the rules.

While Trump’s core supporters might favor the elimination of the plan, it doesn’t present a significant political victory he could boast about. Additionally, it would directly harm many of his supporters who benefit from the SAVE plan.

Rolling back an existing rule is difficult, increasing the likelihood that it survives.

Potential for Grandfathering Existing Borrowers

There’s also a possibility that the administration might grandfather in existing borrowers under the SAVE plan, allowing them to continue benefiting while preventing new borrowers from enrolling. This compromise could be a strategic move to avoid widespread backlash while still fulfilling a political agenda.

PSLF in a Second Trump Administration

The Public Service Loan Forgiveness (PSLF) program, which forgives the remaining student loan balance for borrowers working in public service for ten years, is another area of concern of many borrowers.

The good news is that PSLF is almost certain to survive. PSLF is established by statutory law, making it nearly impossible to eliminate without 60 senators’ approval.

However, the program could be made significantly more difficult to access.

In the past, many borrowers found it challenging to qualify for PSLF, and a second Trump administration might reinstate similar hurdles, reversing the recent ease of qualification.

Other Programs and Protections Remain

Income-Driven Repayment (IDR) forgiveness will likely still exist, as it is also protected by statutory law. The Income-Based Repayment (IBR) plan, another critical option for borrowers, is similarly safeguarded.

Looking beyond existing statutes, there are some additional protections for borrowers.

Master Promissory Note: A Key Guardrail

The master promissory note, which outlines the terms and conditions of federal student loans, serves as a key guardrail for borrowers.

Specifically, the REPAYE plan is mentioned in the master promissory note.

This means that even if the SAVE plan were eliminated, it would likely revert back to REPAYE, which carries many benefits similar to SAVE. It ensures that certain rights and protections cannot be easily stripped away, even by new administrative policies.

Complexity of the System

The complexity of the student loan system itself acts as a barrier to drastic changes.

Student loan programs have a meaningful impact on many lives, and while there is opposition to these programs, it is not a primary voting issue for many detractors. This complexity and the broad, deep-rooted benefits of these programs make significant overhauls less likely.

Final Thoughts

A second Trump presidency could bring several challenges for student loan borrowers.

The taxation of forgiven debt, the potential cessation of new relief measures, and the uncertain future of the SAVE plan and PSLF are key concerns.

However, statutory protections and the inherent complexity of the system provide some safeguards. Borrowers should stay informed and prepared for possible changes while advocating for policies that support their financial well-being.

The post The Worst-Case Scenario for Student Loan Borrowers in a Second Trump Presidency appeared first on The Student Loan Sherpa.