Changes in Federal Student Loan Repayment Plans
Millions of federal student loan borrowers have received “Final Notice” warnings as the government phases out the SAVE repayment plan. These borrowers have 30 more days to choose a new plan before their loans automatically switch to a fixed-payment plan. This change follows a federal court order in March halting the SAVE plan. Loan servicers began issuing notices on July 1, initially giving borrowers 90 days to decide, but the final notice adds another 30 days.
Implications for Borrowers
Failure to select a new plan means loans will be enrolled in a fixed-payment plan, leading to potentially higher bills. Over 7 million borrowers were part of SAVE, which based payments on income and family size. The Department of Education alerted 7.5 million borrowers about the transition. Federal Student Aid warns that payments under Standard or Tiered Standard plans may exceed those of income-driven plans. Finance expert Michael Ryan highlights the importance of choosing a plan: “Choose your repayment plan, or we’ll choose one for you.”
Understanding the ‘Final Notice’
The “Final Notice” serves as a second warning. After SAVE ended, borrowers were notified to select another eligible repayment plan within 90 days. Some, reaching this deadline, received another chance to act. Financial literacy instructor Alex Beene notes that after two years of uncertainty, borrowers must quickly choose a new option.
If no selection is made, Mohela states that borrowers will shift to either the Standard Repayment Plan or Tiered Standard Plan. Beene points out the financial consequences: “Ignoring their loans risks credit damage.” Although challenging to afford, higher payments are less damaging than a poor credit history or wage garnishment.
Action Steps for Borrowers
Ryan advises, “Don’t ignore the notice.” Instead, determine if repayment plans like Income-Based Repayment or Pay As You Earn are available before the deadline. Use the Federal Student Aid Repayment Calculator to compare options and costs. Ryan warns against default: “Ignoring it leads to fixed payment plans with high bills, risking financial strain.”
Available Repayment Options
Repayment options include Income-Based Repayment, Income-Contingent Repayment, and Pay As You Earn. As of July 1, the Repayment Assistance Plan (RAP) is also available. Fixed-payment options include the Standard plan, which typically repays loans in 10 years, although consolidation loans may extend from 10 to 30 years. For Direct Loans, Tiered Standard varies from 10 to 25 years based on the amount borrowed.
If You Can’t Afford the New Payment
Borrowers unable to afford new plan payments have other strategies. Income-based plans adjust payments according to income and family size. The National Consumer Law Center urges contacting loan servicers to explore options like temporary forbearance or deferment. Thompson suggests consulting professionals to find the best course of action.
What Happens Next
Missing the final deadline won’t lead to immediate default. However, loans will automatically shift to a fixed-payment plan, necessitating monthly payments under this scheme. Borrowers should make an informed plan choice to avoid financial difficulties.