Student Loan Forgiveness Plans Could Actually Cost Borrowers More

Student loan debt is a "monster in the closet" for many, though debt forgiveness programs are not always the best route for individuals who want to improve their financial situations as swiftly as possible, experts recently told Newsweek.

Interest on student loans began accruing again today following a moratorium enacted by the Trump administration in March 2020 at the start of the COVID-19 pandemic, which continued under President Joe Biden. Current federal interest rates range between 4.99 and 7.5 percent for the approximate 45 million borrowers across the United States, according to the Education Data Initiative.

Payments on student loans begin in October, when borrowers who were already on particular plans—income-driven repayment (IDR) or otherwise—will resume paying back debts while new college graduates within the past three years will be doing so for the first time.

A Department of Education (DOE) spokesperson told Newsweek via email that borrowers new and old are suggested to become acclimated with their borrowing services and different available options. That includes signing in to StudentAid.gov to access all related information, and to look at options like the Saving on a Valuable Education (SAVE) plan introduced last month by the Biden administration.

That IDR plan is projected to impact over 20 million borrowers by reducing payments, cutting the discretionary income cap in half from 10 to 5 percent, and those who maintain consistency in monthly payments will have interest accrual.

Evaluate Your Own Financial Situation

SAVE is a new iteration of the Revised Pay As You Earn (REPAYE) plan, and those who were on REPAYE will automatically be enrolled into SAVE.

"The question really is not, who does this benefit? It's more about opting out if you don't want to be caught up in this," Jade Warshaw, a personal finance expert at Ramsey Solutions, told Newsweek via phone. "We have to be on the defensive instead of on the offensive because this stuff is happening automatically. They're automatically enrolling people in SAVE, they're automatically enrolling people in this 12-month on-ramp.

"I think that you've got to evaluate your own financial situation and go, 'OK, what do I want instead of letting the government just slide me like cattle, push us all as a herd. What's best for me? What's best for my finances? What are my goals?'"

Warshaw had $280,000 debt of college debt, and has since paid off over $460,000 of total debt with her husband. She tells borrowers who seek her guidance that they should make continuous payments on time and free themselves from their debt burdens rather than hoping that the government will bail them out with forgiveness or otherwise.

The Biden administration suffered a legal blow in June when the U.S. Supreme Court knocked down its forgiveness plan that would have collectively eliminated over $400 billion in student loan debt by way of canceling $10,000 in student debt for all borrowers who made less than $125,000, and up to $20,000 for borrowers who also received Pell grants.

Warshaw said the only way she would utilize the SAVE plan is if helped free up budget margins for other needs, like paying off car loans during a time that the Federal Reserve continues to hike interest rates.

"I would never use it as a vehicle for forgiveness....You can put aside $500 every month and have that thing paid off lickety split," she said. "Why would you wait 10 years [for loan amounts to depreciate]? It doesn't make any sense. The average person having $30,000 or more in federal student loans, that's what, 28 years for forgiveness? That's complete absurdity. I would never recommend that for anyone."

Borrowers 'Overwhelmed' Following Moratorium, U.S. Supreme Court Decision

Betsy Mayotte, president and founder of the nonprofit The Institute of Student Loan Advisors (TISLA), told Newsweek via phone that following the Supreme Court's decision she has received a "significant and steady increase of volume" in individuals young and old seeking advice on how to navigate their finances.

"I would say 70 percent of the questions we're getting basically will roll up to, what payment plan should I pick?" Mayotte said. "Some people have read all the things and done their own research, which is great, but the programs can be somewhat confusing and a little overwhelming.

"There's been a lot of changes in the past three-and-a-half years. So, sometimes it's people saying, 'Here's what I think I should do and why I think I should do it. Did I miss anything? Did I get anything wrong?' And then there's other people that are like, 'I'm overwhelmed, tell me what to do.' We get everything in between."

Mayotte has done compliance and advocacy work in the student loan industry for over 25 years. She said the way the government has informed borrowers about student loans, which preceded the Higher Education Act of 1965, has changed exponentially the past five years.

That is due to the ubiquity of the internet combined with tools like loan simulators in which borrowers can visualize their financial routes that work best for them. However, a plan that may work for one could negatively affect another.

"What people need to understand is that SAVE is not automatically going to mean a lower payment for everybody," she said. "For borrowers whose income is a bit higher than maybe their loan balance is then SAVE may not be the lowest payment amount for that.

"People need to remember that the name of the game is paying the least amount over time. So, unless you need the lowest payment possible because you're either pursuing a loan forgiveness program, or your budget requires you to have the lowest payment possible, people should actually be trying to pay as much as possible because most of the time that's the way to pay the least amount over time."

Public Service Loan Forgiveness (PSLF) is another popular loan program where people qualify by paying federal loans directly, work full time for the government or a nonprofit in many instances, and utilize an IDR plan to make 120 monthly payments and not miss any in 10 years.

But according to Ramsey Solutions, only 24,743 applicants of a total 1.68 million between November 2020 and July 2022 met the proper requirements. That equates to an approximate 1.97 percent success rate.

Warshaw said smaller steps can make a difference, like even paying minimum amounts to cover multiple debts to combat economic uncertainty and financial insecurity. IDR plans are one way to do that.

In other instances, she encourages borrowers to make payments as soon as possible since most people are capable of getting out of debt within 12 to 24 months.

"You need to be able to eat, you need to keep the lights on," Warshaw said. "But you also need to get on a long-term plan for your money because you don't want to stay that way forever. I want [borrowers] to make sure that they have a plan for paying off their debt and not taking IDR simply to kick the can down the road and hope that after 25 years the right person is an office to possibly get them some piece of forgiveness."