There has been a dizzying number of developments swirling around the federal college loan programs since the pandemic struck.
During this period, federal loan payments were paused for 3½ years.
Another major development was the Biden administration’s rollout of SAVE (Saving On a Valuable Education), an income-driven repayment plan, that was created with incredibly generous terms for borrowers.
It turns out SAVE, which was the no-brainer financial choice for the vast majority of borrowers, might be too good to be true.
Recently, the U.S. Department of Education put eight million borrowers repaying their debt via the SAVE program into forbearance. In doing so, the government paused all required monthly payments, as well as any interest that would have accrued.
The government paused SAVE in reaction to orders by both the 8th Circuit and 10th Circuit Court of Appeals. The federal circuit courts issued temporary injunctions to the SAVE Program. The action was linked to two lawsuits filed by numerous attorney generals in Republican-led states.
The attorneys general argued in one of the complaints that the “President is unilaterally trying to impose an extraordinarily expensive and controversial policy that he could not get through Congress.”
The SAVE program was launched last August after the U.S. Supreme Court ruled that Biden’s proposed massive loan forgiveness program, which did not have Congressional approval, was unconstitutional. The new SAVE program was a way to lower payments for millions of borrowers and outright forgive debt for some of them.
SAVE has been rolled out in stages and the most lucrative terms were supposed to take effect on July 1. The court’s actions stopped that from happening.
That leads to this question: What is going to happen to the SAVE program and the millions of Americans depending on it?
I suspect that the SAVE program will ultimately disappear.
Regardless of what happens at the appellate level, either the federal government or the state attorneys general, will appeal to the U.S. Supreme Court. I doubt that the conservative highest court will look kindly on the SAVE program. That is especially so since the trial-level judges for both cases were Obama appointees who issued injunctions for sections of the plan that hadn’t taken effect yet.
Those provisions would have dropped payments down to 5% of eligible income from 10% and dropped the repayment period for some undergraduate borrowers from 20 years down to 10 years.
Another wrinkle in this legal battle was the Supreme Court’s recent overturning of the decades-long Chevron precedent. This precedent allowed federal agencies quite a bit of freedom to interpret vague federal laws. This reality allowed the U.S. Department of Education to create SAVE without worrying about what Congress thought of the idea.
Here is an excellent story from the National Association of Student Financial Aid Administrators on the Chevron ruling and what it means going forward for federal education initiatives:
Supreme Court Decision Could Change Regulatory Process and Put ED Regulations in Jeopardy, Including SAVE Plan and Student Debt Relief
There were many reasons why the SAVE program was so popular. For starters, SAVE does not consider the income for a borrower’s spouse. To pull that off, the couple has to file married filing separately on their taxes. This will usually require paying more in taxes but that still was worth it for many borrowers because the SAVE benefit was higher.
The formula determining payments also lowered the monthly tab that borrowers owed. In addition, and this is a biggie, the interest no longer was capitalized.
Also, some Parent PLUS borrowers, who weren’t eligible for the desirous SAVE program, were going through Herculean efforts to do so through multiple consolidations of their PLUS Loans.
If SAVE is ultimately ruled unconstitutional, there will be a question if the PAYE repayment plan—that the federal government discontinued to make way for SAVE—will be reintroduced. PAYE had better terms than two older plans—Income-Based Repayment (IBR), which is 15 years old and Income-Contingent Repayment (ICR), which was introduced 30 years ago. Another plan, REPAYE, was absorbed into SAVE and the term REPAYE was discontinued.
Great news for 401(k) savers
You are going to want to tell your clients about a positive development for parents who want to turbocharge their workplace retirement accounts.
You may have gotten questions from parents who wanted to know if contributing more to their workplace retirement accounts would ultimately lower their Expected Family Contribution.
Until the 2024–2025 year, contributing more to pre-tax retirement accounts to lower income and thus lower the EFC or Student Aid Index (the new federal name for EFC), would not have worked.
In the past, if you contributed to a pre-tax retirement plan, the federal formula would add those contributions back in your AGI when calculating your EFC. Starting with the 2024–2025 school year, the pre-tax contributions you made through a 401(k) or 403(b) are not added back to your AGI when filing the Free Application for Federal Student Aid.
This change only applies to 401(k) and 403(b) contributions, which don’t appear on the federal income tax return. Contributions to an IRA, which do appear on federal income tax returns, will still be added back in.
This is now a planning opportunity. Saving pre-tax through your employer into a 401k or 403(b) is a viable way to reduce income and achieve a lower SAI.
Be aware: This strategy, however, only works for the FAFSA and not the CSS Profile, which 187 schools, nearly all private, use to determine who will get their own institutional aid.