What Student Loan Borrowers Need to Know Before Switching from a SAVE Plan

Federal student loan borrowers who relied on the SAVE plan now face a big question: What happens next? Starting July 1, more than 7 million federal student loan borrowers under the now-defunct SAVE plan will begin receiving information from their loan officers about switching to a new repayment plan. Some of these plans can increase a borrower’s monthly bills by several hundred dollars. “It’s like the perfect storm,” said Betsy Mayotte, president of the Institute of Student Loan Counselors, a nonprofit that offers free student loan counseling. “Gas prices are enormous, healthcare costs have increased significantly, and student loan payments are likely to be much higher than in the past.” By comparison, a borrower with a family of four earning $120,000 per year and owing $60,000 could see monthly payments increase from about $430 under the previous SAVE plan to about $630 to $850 under the income-driven repayment plan. “There is a lot of confusion. People are angry, they are worried,” Mayotte said. Mayotte has been working in the student loan industry for over 25 years. The National Consumer Union asked her to answer the most common questions she receives from borrowers. Which repayment plan should I choose? The number one question Mayotte receives from borrowers is: “Which payment plan should I choose?” “So, with that in mind, you don’t necessarily have to look for the lowest payment I can get. You should look for the highest payment I can afford to pay because the faster you pay off your loans, the less you will pay in interest.” If you qualify for loan forgiveness through either the Public Service Loan Forgiveness Program (PSLF) or an income-driven plan, you should look for a plan with the lowest possible income. Once you determine whether you are eligible for forgiveness or not, you will need to figure out which specific plan you are eligible for. Mayotte advises researching which plan you qualify for to find out when you took out your very first student loan, even if you’ve already paid off that first loan. How can I check which repayment plan is right for me? Several online tools can help borrowers compare repayment options, such as the Federal Student Aid Loan Simulator or the Institute of Student Loan Counseling Calculator. However, the Federal Student Aid office says its simulator cannot predict your future payments with 100% accuracy. When will I have to start paying for the new plan? Once you choose a new repayment plan, the processing time for your request can vary from a couple of days to a couple of weeks, Mayotte says. Once the request is processed, Mayotte says it will be 30 to 45 days before your first payment is due. Avoid these costly mistakes. Beware of misleading messages on the Internet. Mayotte said she found “erroneous” messages online telling borrowers that if they consolidated their loans, they would be eligible for different repayment plans. “That’s actually not true,” Mayotte said. “Unless you have really old loans that aren’t direct loans, like really, really old, consolidation won’t change the plans you’re eligible for. In fact, it will take away from you the plans you are currently eligible for, and worse, if you were seeking the forgiveness that is built into income-driven plans, the consolidation will reset your progress.” For those who are concerned that they cannot afford any of the repayment options, Mayotte recommends making the lowest payment you can to avoid defaulting on your loans. Defaulting on your loans can result in wage garnishment, high collection costs, and a serious deterioration in your credit score. “Get a part-time job, get a roommate, and I don’t say that to mean I think it’s easy. I say this because if you can’t afford the payment now, you really won’t be able to afford it if you default.” Form this new habit. One habit Mayotte recommends to all borrowers is to review your loan repayment options once a year as your income changes. “One of the biggest long-term mistakes I see consumers make is they want the lowest payment they can get, so they choose this plan, set it and forget about it. And then, 20 years later, they see that they barely paid off the loan at all.”

Federal student loan borrowers who relied on the SAVE plan now face a big question: What happens next?

Starting July 1, more than 7 million federal student loan borrowers under the now-defunct SAVE plan will begin receiving information from their loan officers about switching to a new repayment plan. Some of these plans can increase a borrower’s monthly bills by several hundred dollars.

“It’s like the perfect storm,” said Betsy Mayotte, president of the Institute of Student Loan Counselors, a nonprofit that offers free student loan counseling. “Gas prices are enormous, healthcare costs have increased significantly, and student loan payments are likely to be much higher than in the past.”

By comparison, a borrower with a family of four earning $120,000 per year and owing $60,000 could see monthly payments increase from about $430 under the previous SAVE plan to about $630 to $850 under the income-driven repayment plan.

“There is a lot of confusion. People are angry, they are worried,” Mayotte said.

Mayotte has been working in the student loan industry for over 25 years. National Consumer Affairs asked her to answer the most common questions she receives from borrowers.

Which repayment plan should I choose?

The number one question Mayotte receives from borrowers is: “Which payment plan should I choose?”

Ultimately, Mayotte advises finding a plan that will allow you to pay the least amount out of pocket in the long run.

“Most people are going to pay off their loans in full on their own,” Mayotte said. “So, with that in mind, you don’t necessarily have to look for the lowest payment I can get. You should look for the highest payment I can afford to pay because the faster you pay off your loans, the less you will pay in interest.”

If you qualify for loan forgiveness through either the Public Service Loan Forgiveness Program (PSLF) or an income-driven plan, you should look for a plan with the lowest possible income.

Once you determine whether you are eligible for forgiveness or not, you will need to figure out which specific plan you are eligible for.

Mayotte advises researching which plan you qualify for to find out when you took out your very first student loan, even if you’ve already paid off that first loan.

How can I check which repayment plan is right for me?

Several online tools can help borrowers compare repayment options, such as the Federal Student Aid Loan Simulator or the Institute of Student Loan Counseling Calculator.

However, the Federal Student Aid office says its simulator cannot predict your future payments with 100% accuracy.

When will I have to start paying for the new plan?

Once you choose a new repayment plan, the processing time for your request can vary from a couple of days to a couple of weeks, Mayotte says. Once the request is processed, Mayotte says it will be 30 to 45 days before your first payment is due.

Avoid These Costly Mistakes

Beware of misleading messages on the Internet. Mayotte said she found “erroneous” messages online telling borrowers that if they consolidated their loans, they would be eligible for different repayment plans.

“That’s actually not true,” Mayotte said. “Unless you have really old loans that aren’t direct loans, like really, really old, consolidation won’t change the plans you’re eligible for. In fact, it will take away from you the plans you are currently eligible for, and worse, if you were seeking the forgiveness that is built into income-driven plans, the consolidation will reset your progress.”

For those who are concerned that they cannot afford any of the repayment options, Mayotte recommends making the lowest payment you can to avoid defaulting on your loans.

Defaulting on your loans can result in wage garnishment, high collection costs, and a serious deterioration in your credit score.

“Get a part-time job, get a roommate, and I don’t say that to mean I think it’s easy. I say this because if you can’t afford the payment now, you really won’t be able to afford it if you default.”

Form this new habit

One habit Mayotte recommends to all borrowers is to review your loan repayment options once a year as your income changes.

“One of the biggest long-term mistakes I see consumers make is they want the lowest payment they can get, so they choose this plan, set it and forget about it. And then, 20 years later, they see that they barely paid off the loan at all.”