Rich Girl Roundup: Student Loans are Back—What to Know (and a Potential Hack)

Katie: Welcome back, Rich People, to the Rich Girl Roundup weekly discussion of The Money with Katie Show. I'm your host, as always, Katie Gatti Tassin. And every Monday, Henah and I are gonna dig into an interesting money discussion tidbit in the news. Whatever's on our mind, you name it. But before we do, here's a quick message from our sponsors. 

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Katie: All right, so before we get into it, this week's upcoming main episode is about how to erase medical debt, and how to avoid overpaying for things. 'Cause lord knows if you're gonna walk into a hospital, or god forbid, get into an ambulance, it's pretty easy to do that. So we actually have two guests for this week's episode: Braden, from a company called Resolve, who's a medical billing negotiation expert. And Jean, who's a journalist-turned-healthcare activist, who's going to school us on how to shop around for medical procedures and utilize the lovely but little-known cash pay option. All right, onto the Roundup. Henah, what do we have today? 

Henah: Today's question was inspired from a number of readers, as well as some recent engagement we've had over on our Instagram, about the student loan ruling and this new proposal for what's called the “SAVE approach.” And so kind of the general question we've heard is, “What do we need to know about student loan repayments that start up again in October, and should I rush to pay them off if I can?” 

To kind of set the stage a little bit, as we have all probably heard by now, Biden’s student loan forgiveness plan was struck down, but the White House announced a new plan to replace the “revised pay as you earn,” also called “REPAYE,” plan. This new plan is called “SAVE.” And so when student loan repayments start up again in October—though as a note, interest begins accruing again starting September 1, which is just a couple weeks from now. There's just kind of been a lot of news out there. And so Katie, I thought we could kind of give the TL;DR since we're all sort of learning this together. What is the safe approach? What is that? Just kind of high level. 

Katie: For sure. And before we do, shout out to Nichole for helping us with this research so last minute while she was stranded in another city after canceled flights. She helped us out with getting all of this pulled together. 

Henah: We love you, Nicole. Thank you for this. 

Katie: So basically the SAVE plan, it's an income-driven repayment plan, and it's intended to cut borrowers’ monthly payments, as well as allow a lot of borrowers who are under certain income thresholds to make $0 monthly payments. And overall, I would say the intent is to save pretty much everyone a thousand dollars per year, at minimum. So it's really changing the way monthly payments are being calculated. And the biggest thing, I think, that's made somewhat of the biggest splash is that it is designed specifically to prevent balances from growing due to unpaid interest. 

So that has been a topic of discussion on Instagram where we're all in the comment section, we're trying to figure out, what exactly does that mean? So we're gonna get into that a little bit more shortly. But in general, the TL;DR is they're trying to lower monthly payments for everyone through a varied approach.

Henah: We love to hear it. Give me an example, maybe if you have undergraduate loans. 

Katie: Yeah, so for undergraduate loans specifically, it's gonna cut in half the amount that borrowers are gonna pay each month, from 10% of their discretionary income to 5% of their discretionary income. This is calculated using a kind of complicated equation. We'll get into that as well in a little bit. But part of this is that it guarantees that no borrower who's earning under 225% of the federal poverty level, so 2.25 times federal poverty wages, you know, it's about the annual equivalent of a $15 minimum wage for a single person with no dependents. They're not gonna have to make any payments under this plan. So it's raising the bar, really, as well as lowering the percentage of said bar that they're having to pay. 

And then the last thing is that it's not gonna charge borrowers unpaid monthly interest. So meaning if you have loan balances, they're not gonna grow as long as you're making your monthly payments, even when that payment is $0, if your income is too low. 

Henah: I mean, yeah, on the surface that seems really amazing. It feels like it'll impact a lot of people. When is this all kind of slated to start? There's been talk of this on-ramp period for some 2024 changes. So tell me a little bit about that, and if you have to enroll, or if this is all automatic. 

Katie: Yeah, so all student borrowers who are in repayment and are eligible to enroll can now do so as of August 1 on the new beta site. You can learn more at studentaid.gov/idr, and you can enroll before monthly payments are due. So it is in beta testing, and if you don't see an option to enroll now, you should see one soon. And any borrowers who are already signed up for the current “revised pay as you earn” or REPAYE plan that you mentioned, they'll be automatically enrolled in SAVE once that new plan is implemented. So it's basically replacing that plan while the others are phased out for new borrowers. 

Henah: Yeah, and I've read online that if you are interested in re-signing up for just this new SAVE approach, you can, even if you're already enrolled in the other one. But let's say that I make $75,000 and I have a $200 a month payment, where $25 if that is going toward interest. So what does that mean for me now? 

Katie: So this is where things get a little bit complicated, and I'm not exactly sure, because I had a hard time finding specific examples of that kind, where the interest was just a small portion of a payment already. But I don't believe your interest owed would change in that case. The clearest explanation I could find said that if you make your monthly payment, your loan balance will not grow due to unpaid interest. So for example, if $50 in interest is accumulating every month, but your monthly payment under this new SAVE plan is $30, that remaining $20 would not be charged. So I could be misinterpreting the language or misunderstanding the intent, but it does not sound to me as though it's going to eliminate the interest. Just that if it exceeds your monthly payment amount, it's not going to accrue; the loan balance will not be ballooning and getting bigger over time, which is a really impactful change. 

Henah: Does this essentially mean that the government is eating that $20 difference, or making it such that that's not going to ever be added?

Katie: I think so. I think that that is the case, and you know, we're mentioning the calculation that's being used 'cause if you recall a couple minutes ago, that is what this new 5% of discretionary income is being based on. So we can talk about how these changes would impact your monthly payment overall. So the example you gave was $75k per year, $200 per month. So, if you have a taxable income of $75,000, you're filing single, the poverty guideline is $14,580 per year. So we have to multiply that by 225%, and that gives us $32,805. So that's kind of that lower bound. So if you subtract that from your income, you get your discretionary income under this new calculation. So in this case would be $42,195, which means the annual amount that you would owe under the SAVE plan is 5% of that number. So $2,109.75, which makes your monthly federal student loan payment under the plan $175.81. So in this example, your monthly payment is going down by $25. 

Henah: Gotcha. Okay. But at least, best-case scenario, it's cutting what the 10% discretionary number was down to five.

Katie: Right. 

Henah: Gotcha. So what about student loan forgiveness with lower balances? Like let's say I'm a community or state college student. 

Katie: So it's my understanding that beginning in July of 2024, borrowers who have original principal balances of $12,000 or less are gonna receive forgiveness of any remaining balance after making 10 years of payments, with the maximum repayment period before forgiveness rising by one year for every additional thousand dollars borrowed. So for example, because that's kind of confusing, if your original principal balance is $14,000, you're gonna see forgiveness after 12 years.

Henah: Mm. Okay. That's actually the situation that I was in, was I think I had $14,000 for one of my student loans.

Katie: Right, so the idea is that you make your payments for 12 years, then the rest would be forgiven. And payments made previously, before 2024, and those made going forward will both count toward the maximum forgiveness timeframes. 

Henah: So this is still rolling out; this won't actually start until next year, but that's the goal. And then what about the public service loan forgiveness? I think that's what it's called. I used to be eligible for that when I was in nonprofit, but it's basically that they will forgive your loans after 10 years of public service as long as you qualify. So is that being affected in any way?

Katie: I don't believe so, but I did read that payments made under the SAVE program do count toward public service loan forgiveness payments. So those borrowers should be able to benefit from this. But since this is obviously a very impactful outcome, I would just double check that with your loan provider—maybe get it in writing to be safe. But it does sound like people that are eligible for that, that they could do this program and it would still count. 

Henah: Yeah. You actually just said the term “loan providers.” So tell me, 'cause we have private loans, we have Sallie Mae. What about private loans? How does this all fall under the same plan? 

Katie: Right. So unfortunately, in order to take advantage of this, borrowers must have federally held student loans to qualify for the SAVE repayment. These include direct subsidized, unsubsidized, and consolidated loans, as well as any Plus Loans made to graduate students.

Henah: What if…this did not happen, but let's say my parents took out a loan for me. How does that work? 

Katie: So parents who took out a federal Plus Loan to help their child pay for college are not eligible for the new repayment plan, unfortunately. 

Henah: Womp. Okay. And then you know, obviously with what happened with the forgiveness plan, there was that ruling that said that it was essentially struck down. Do we see any legal issues happening with this kind of program and this rollout? 

Katie: Well, from what I've read and what I can tell, and please couch this answer in the reality that I'm not a legal scholar, the Department of Education is within its legal rights to make these changes. So it sounds like this should be fine, but you never know. 

Henah: Fingers crossed. And then this is a popular question we've gotten, I would say at least 10 times. “If I have a balance that I can pay off in full, is it worth doing now, or would this reduced interest situation…should I keep paying it off monthly, and then I can also leverage the student loan interest deduction on my taxes?” 

Katie: Yeah, so I'm glad you brought up the student loan interest deduction. That initially was not even on my radar. 'Cause initially my gut instinct was, hey, just look at the interest rate; let that guide you. And I do think that that's still my answer.

So the first thing is I sometimes will hear people like, should I take a loan from my 401(k) or should I withdraw money from my Roth IRA? I would not personally be taking anything out of the stock market to pay off student loans, anything you've already invested. My point of view would be, leave that be. That's not financial advice, but I just personally would not be selling my positions to pay off debt of this kind. But when it comes to cash on hand, let's say maybe you've got a $5,000 balance; the rate's 5%; you've got $25,000 in cash sitting there. I think at that point it's kind of personal preference. If you want to get it off your balance sheet really badly, you wanna just be done with it. The interest rate is right around that point where the opportunity cost could kind of go either way. Depending on what the stock market does, though, obviously at this point in time you can get more than 5% pretty much risk-free in money market funds or a high-yield savings account. 

I think a rate much above 5%, I'd probably prioritize paying it down faster, but I don't know. With these changes, I am definitely probably leaning more in the camp of just making the monthly payments and living with it, especially if the interest rate is lower than 5%, just 'cause it's pretty cheap debt at this point. And we've already seen that there are measures being put in place to either forgive portions of debt or to ensure that the interest is not accruing. So I guess I'm more in the camp of, as long as the interest rate isn't egregious, I wouldn't be in any hurry. 

The other thing that kind of came to mind as I was thinking through this is debt to income ratio, which is something that lenders look at when you're trying to buy a home. I think that might also influence the speed with which you try to pay it off, depending on how your debt compares to your income, if that is something that's in the future for you. So there are more than one consideration here, but I tend to fall back on the interest rate as the thing that's gonna tell me what to do. 

Henah: Would you also agree that instead of making maybe bigger payments, not paying off the whole thing, but paying $300 instead of $200, you would still also just make the mandated payment, in the case that things could be forgiven or that things aren't going to be ballooning from interest anymore?

Katie: It's a good question. I think we've seen that at least with the first round of an attempt at total forgiveness. You know, just thinking about this from a cost/benefit analysis or the probabilities, in that instance, there was a look-back period where they were gonna reimburse people that had paid it back. I think, I might be wrong, I don't have the numbers in front of me or the dates in front of me, but I wanna say it was since the beginning of the pandemic, where they were gonna reimburse you if you had paid it off, if everything got forgiven. So I think that there's reason, we'd have reason to believe that if forgiveness went through for everything, that that would probably be the case again. But yeah, I think the amount that you pay and the speed and aggression with which you try to pay it off, I would say that I'm still leaning on that interest rate to tell me whether or not it's worthwhile.

But I have a more, I don't wanna say liberal relationship with debt, but I don't mind it as much, I think, so I think if it's psychologically really impactful for you to pay it all off and you can, then go for it. But I wouldn't feel like, oh, it's irresponsible not to if the interest rate's low. 

Henah: Got you. Okay. Is there anything else we should know? We recorded this in mid-July and then revisited this topic in early August as things evolved, so obviously more things can change between now and when the program launches next month. What are our best resources as this thing gets rolled out and we're hearing different updates? 

Katie: Yeah, so as we've already mentioned, we're not policy experts or legal experts. We're really just trying to digest the information that's available publicly. So this is our interpretation of things and to Henah's point, things could change. So I would say studentaid.gov, whitehouse.gov, those are your best direct sources. Even going to your own student loan provider also probably wise; there's probably gonna be information there that specifically applies to you. 

Henah: Cool. 

Katie: There's one last thing I do wanna cover…I don't know if there's something to this or not, but I did see it going viral on Twitter a couple weeks ago when all of this happened. And so I wanna share it. It's from a guy named Brian. He is, we haven't fact-checked this, apparently he's a lawyer, and he tweeted “Some of us satisfied our student loans the old fashioned way, suing the bullshit shell companies that bought up the debt without keeping proper chain of title.”

And then he retweeted it in light of these changes and said, “The easiest lawsuit I have ever filed, and anyone can do it. In my experience, none of these student loan servicers or loan sharks kept proper chain of title. You challenge their ownership of your debt, they decline to respond, you get a default judgment.” So he basically got his loans wiped out by doing this, and he has now put up a template for this filing where he said, I'm just gonna read you a little bit more of this thread 'cause I think that this could be an interesting Hail Mary for you if you're listening and you have a lot of debt and your provider has changed multiple times. Legally they might not be able to enforce it if they do not have what he's calling proper chain of title.

So he says, “Ironically, this started because I tried to pay off my student loans. The lender was not the bank I borrowed from.” So that's key. If your lender has changed, this might apply to you. “When I asked for proof that they owned the debt, they could not provide it. I had to take down my email address because I woke up inundated with requests of people that are like, how did you do this?” I think he might have put up a website now. So the steps that you follow: Look at your student loan bill. Who are you writing the check to every month? You're gonna write them a letter demanding that they verify the debt within 30 days. He's gonna post the letter and the quote “magic legalese” that you need to include in this letter. And you're asking them to just prove that they own your debt, showing the specific contracts that they bought your loan. 

They're gonna respond with a bunch of bullshit paperwork, mainly including your payment history. And this is not verification that they own your debt. So you're gonna file a complaint for declatory, declaratory…I don't know, not a lawyer. You're gonna file a complaint for declaratory relief in your local circuit court and you're gonna ask the court to declare or rule that you do not owe these people any money. You send the complaint via certified mail to your lender to serve it. They have 30 days to respond, or you win by default. They're not gonna respond. They don't have chain of title or they would've sent it to you in the first place, and it's expensive for them to defend these suits and they don't really care about losing one here or there. 

After 30 days, you file a motion for default judgment. You also send this to the lender by certified mail. Again, they're not gonna respond to you. Other Twitter lawyers in the replies that are like, “But what about this?” Or “This won't work because of that.” But there are other people that are saying that this worked. So I'm just throwing it out there. It's kind of interesting. 

Henah: It feels my due diligence as your senior editor, executive producer, to say, once again, we are not licensed financial professionals. We are not providing financial advice, but this is a life hack to consider. 

Katie: Yeah, this guy's a lawyer. He represented himself. It didn't cost him anything, but it seems legit. I haven't done it myself, obviously, but we're gonna share the thread and any resources associated with it in the show notes. If you are interested, if you're like, “Wait a second, my provider has changed several times; I bet you they don't have proof that they own my debt,” it might be worth trying because legally they might not be able to enforce it. 

Henah: And worst case, if you ask and they do send the stuff and it is legit, then you're no better or worse off than when you started. But at least you'll know either way. 

Katie: He also said he's done this with federal and private loans, that there's not much difference in the process. This is an interesting solution, potentially. So we'll link all of that. 

Henah: Good call-out. Excited to see if that blows up or if anybody tries it and it works out for them. 

Katie: Yeah, Don't sue us if it doesn't, I'm just passing along something that crossed my desk. 

Henah: Just the messenger. 

Katie: Yeah, I'm just the messenger. I hope it works for you, but you know, not legal advice. I am not a lawyer. I have no idea if this is legit or not, but this guy and some people in their replies were saying that it did work. So we'll see. All right, well that is all for this week's Rich Girl Roundup. We will see you on Wednesday to talk about medical bills and medical debt and how to handle those without breaking the bank. 

Henah: We love bills. Bye. 

Katie: Bye.