(Ep. 282) What Happens After the IDR Waiver?

Hello and welcome to another episode of the Student Loan Planner Podcast. I'm your host, Travis. Today, we're going to talk about stuff that I think just really matters for a lot of people, which is the IDR waiver expiring. Now, we still don't know if the administration will, you know, at the very last second, extend this IDR waiver expiring until the end of June instead of the end of April. But, you know, probably by the time this comes out, we'll probably know that. But, you know, I think that there's something big to think about in terms of what's going to happen when the IDR waiver ends. So everybody is used to this rule where you have forbearance counting, deferment counting, any kind of payment whatsoever counting, and that is going away. And it is going away because they are changing the rules to make them less generous because the rules that they did under the IDR waiver have no resemblance whatsoever to the rules that Congress actually wrote, right? And that's been great for borrowers, but there's a reason that it's ending because it can't last forever because of how much it bypasses the normal rules for things for, you know, income-based repayment. So let's recap the IDR waiver, what it did, and what's going to happen after the IDR waiver ends. So the IDR waiver specifically, if you want to think about it right, is a way to sort of make everything count. So if you have forbearance longer than 12 months, if you have a forbearance an aggregate longer than 36 months, that can count towards forgiveness. If you have anything besides in-school deferment, pretty much most of that can count. If you have COVID forbearance, that can count. And if you've made any kind of payment whatsoever, that can count as well. And then the IDR waiver, the account adjustment, what it did is you take the loan with the oldest amount of credit, and that means deferment, consolidation, or, you know, forbearances, payments, etc., where you consolidate and put all your loans in the meat grinder on studentaid.gov and you mix them all up together and you make a new consolidated loan, that new consolidated loan has got credit based off of the loan that's the oldest. Now a lot of people took out a loan that was very old from the 90s, it's a $3,000 loan, and for whatever reason, because of going back to school or taking out additional Parent PLUS loans, you know, they never paid it off. It just sort of stuck around and they consolidated and they got credit for all their more recent loans based off of that loan that's the oldest. Now that has been so powerful for so many people, especially people in their 30s, 40s, and 50s, and 60s, people that are, you know, older than the typical, you know, 22 fresh college grad, right? That treatment of oldest loan under the IDR account adjustment has been transformational for our clients. It's gotten people, in some cases we have had clients with 300,000 of Parent PLUS loans that had one loan from their own undergraduate, you know, in the 1990s, it's $3,000 that consolidated everything together and the whole thing got forgiven. So we have had success stories beyond your wildest dreams during the IDR account adjustment, but a lot of that is going to slow down and then the brakes are going to be hit hard. And so what's going to happen is, and this is, you know, as I recorded this, right, so this could be changing very quickly, it usually does get announced at the very last second, so I apologize if it does, but think about the IDR account adjustment as April 30th, this whole oldest loan treatment for consolidating ends, July of 2024, July 1, the new weighted average consolidation rules apply, where if you consolidate loans, you get the credit based off of the loan with the weighted average interest rate. So weighted average interest, or sorry, weighted average interest rate always happens, I meant weighted average time in repayment, right? So let's say you have that one $3,000 loan that's 20 years old and the rest of your stuff is, you know, one year old and you consolidate. Well under, after the IDR account adjustment's over with in July, the consolidation would get essentially that loan might be 1% or 2% of the whole loan amount, and so you might get 1% times 20 years plus 99% times one year. So the consolidation would be credited with the weighted average time in repayment, which is terrible for people that have a loan that's very old, it's not, it's been around forever and it has tons of repayment credit on it. So one of the things that's going to absolutely stink, like to high heaven, is just doing consults after the IDR account adjustment's over with and having to tell people, hey, if you consolidated before April 30th or, you know, if they extend it June 30th, you know, you could have gotten the whole thing forgiven or you could have gotten an extra 10 years towards forgiveness and that's going to change and it's going to stink. But there's, you know, there's something to, there is some positivity to the weighted average rule. The weighted average rule is better than what it used to be, which is no credit at all after a consolidation, right? It totally resets the payment count. So if you think about, you know, let's say you've got, you know, some of your loans, you've got five years in repayment, some of your loans have zero. If you used to be, if you consolidate, you have zero credit. Now, if you consolidate and each loan amount is like 50-50 of the total amount of loans you have, well then you get, you know, two and a half years of credit on the new consolidated loan. So that's probably a fair way to do it in terms of, you know, giving credit to people who've taken out a bunch of loans recently that have one tiny loan from a long time ago, you know, they haven't been in repayment for 20 years on most of their loans, right? Even though theoretically they've been in repayment for 20 years based off of like how much to how many years they have had some kind of student loan debt balance. So this is just a massive change. It's going to cause a lot of stress to borrowers, just being honest, right? It's going to cause a lot of stress to us because we're going to have to help people sort through the mess. Now there is some positive things going on where, you know, the forbearance counting, the deferment counting, those payment updates will be made on loans and then, you know, those loans will have more credit when you put loans with more credit into a consolidation meat grinder and make the consolidated loan have the weighted average time in repayment. So that will increase the total time in repayment just by virtue of the loans having benefited from the IDR account adjustment that you put into the consolidation in the first place. Now there's some things to think about for this May and June I would call it a very high risk period because it's not just the IDR account adjustment not being around, it's also the Pay As You Earn program getting blocked. And this bothers me a lot. So I think if you look at the Biden administration, what they've done with student loans, there's some major policy things that I think are going to come back to bite, you know, folks that want to see loan relief in the butt. And I'm going to tell you why, right? So specifically the Pay As You Earn program, this is the first time ever that a program has been blocked to people that want to sign up for something. So think about what that means, right? If you can block someone from signing up for a income driven repayment plan that's not currently on it, that means any payment plan that was created from the ICR statute authority, which is the one that President Obama used to create repay and pay and the one President Biden used to create save, that authority essentially is essentially what he's claiming is that a future Republican president could block access for new borrowers, not people that are already on it, but for new borrowers, you can block access to a generous plan that's been created by a prior administration. That's the precedent that's being set. And so, you know, in terms of people that need to worry about this, if you took out your first loan from 2007 to 2014, that means you're eligible for pay, but not eligible for new IBR, which is the same thing. If you borrow your first loan in 2014 or after, then that means you're eligible for new IBR, which is, like I said, the same thing as pay so you don't have to worry about it going away. But the pay program, if you can get access to that, that's really powerful for people that have six figures of income. It's rapidly increasing income and people that really want to get that 20 years until forgiveness instead of 25, because you're on a non-PSLF type of forgiveness program, like 20 and 25 year forgiveness in the private sector. So pay as you earn going away, in my view, is this big unforced error by the administration, because what's going to happen is the future administration that's not a democratic administration is going to use that example and saying, hey, look, Biden did it. Nobody sued to block it. We should be able to do it too. So anybody who's a new entry into student loan payment, anybody who hasn't already signed up for an IBR plan, that means we can stop somebody from signing up from something like the SAVE plan, for example. So that's one issue that I've got with it. Another issue that I've got with what they did is they're taking the repay plan instead of leaving that around for people to sign up for if they wanted to, or instead of like moving everybody from repay to save, they replaced the repay plan with SAVE. Now you might say, well, if the plan is better in every circumstance, that's not setting a precedent that you can't, you know, reform an existing plan. I disagree. I disagree entirely. And the reason is, is it wasn't better for everyone. There were some people on the repay plan that were paying lower amounts, specifically people who filed separately for taxes that one spouse could use repay because it's based off of joint spousal income, no matter what. And then one spouse could use pay and have a married filing separate calculation. So that's kind of a technical nuance. So you might say, well, that's a technical nuance, but I'll tell you what Republican administration is going to argue. If Trump wins in 2024, and you have a Republican department of education, what they could simply say is, well, you know, Biden moved everybody off of the repay plan to save and the Republican plan for changing IDR is essentially to turn in student loans, IDR into like a match program. So essentially you make a payment on IDR and you get a match towards your principal balance. And you might say, wow, that sounds great. And it kind of is great. It's probably kind of similar to the save plan for high income earners, to be honest, the math that I've run on this. So I've built a spreadsheet already for the GOP's IDR plan. I don't necessarily want to share it yet because I think, you know, there's no point in sharing something until you know who's going to win, honestly, because it's like a moot point. If Biden wins, the save plans are just going to keep being around. And then if Trump wins, then I think that they'll probably replace by 2026 or 2027 Biden's save plan with, you know, excuse my joking, but, you know, this big, beautiful, gorgeous IDR plan. It's the best plan ever. It's huge. Everyone's going to sign up for it. I mean, sorry, guys, I'm not that funny. But, you know, basically the College Cost Reduction Act, it's like the CCRA, that shows essentially what Republicans are thinking for forgiveness and what they're thinking is that their IDR plan, which probably would also be derived from ICR statute authority, is probably going to be a lot less generous for people with small debt and people with low income than the save plan is. For people with high income, it could potentially be more generous. The big question there is, would you allow marriage filing separately or not? Probably not. They probably wouldn't. And by the way, if you can't get, like, if you have Trump win, I don't think you're getting any kind of higher ed reform bill through Congress, right? So what that means is, is they'd have to make the ICR statute authority the way they do it. So they'd have to have negotiated rulemaking. They'd have to come out with a new plan. The new plan would be, you know, probably based off of the similar rules to repay with no filing separate, you know, 150% of the poverty line, right? But then they were going to change that math behind the formula where you similar subsidy to the save plan, but that you also get matches towards your principal until you pay down, you know, at least some amount of the balance. So it's sort of like a very odd plan, a very strange IDR payment plan that they're thinking about doing, but I think that they might do it if they win. So it's like, so if I'm a borrower and I'm concerned about this, it's like, well, what you did Biden by a lot, you know, taking everybody off of repay and putting them on to save is essentially saying that, that that's allowed. And so a future Republican administration could simply say, well, we're going to take everyone who's in save and we're going to move them all from save into our plan, which is more generous or as generous as save for like higher income individuals and a lot less generous for lower income individuals. So that's a precedent that can now be done. And then you might say, well, I don't know. I don't think Republicans are as creative on student loans as Democrats for the most part, from what I've seen in the eight years I've been doing this. So I think that that's what you would see happen. And then, you know, in terms of what does that mean for like income-based repayment and stuff? Well, remember that income-based repayment, IBR, new IBR, it's in statute. It's got 60 votes in the Senate. If you don't have the filibuster going away, you gotta have 60 votes in the Senate to eliminate the IBR program. And there's two kinds of IBR. There's a kind for before 2014, and there's a kind after 2014. The kind before 2014, it's 25 years until repayment, 15% of income. The kind after 2014 is 20 years until repayment, 10% of income. So it's the same thing as pay as you earn. We always would put people on pay as you earn instead of IBR back in the day, just to avoid any errors and mistakes, right? If you know somebody's on pay, then you know for sure it's 20 years, you know for sure it's 10% of income. Whereas IBR, it doesn't say old IBR or new IBR in your payment statements. It just says income-based repayment, right? So we're going to have to help people figure that out a lot in the future. Can you sign up for the more generous version of income-based repayment? And if you can, how exactly do you go about doing that? When should you do that? So remember too, that there's a provision in the SAVE plan that stops anybody from switching out of SAVE starting in 2029. Now that's something that's not really thought of that much either, but that's another precedent the Biden administration has set that you can lock people into an income-based repayment plan. You can say, once you've been in repayment a certain number of years, you're stuck in this. Too bad that you can't get out of it, right? Unless you pay off the loan. So that's another troubling precedent, to be honest with you. And so you've got all these changes happening. And by the way, there's another big change happening in early July as well. You're taking the payment percentage for loans for undergrad, you're taking that from 10 to 5%. So pretty soon, people will be able to pay 5% discretionary income. And remember on the SAVE plan, that's a huge deduction. Like if you have a family size of four and you've got a couple of kids, and let's say you file separately for tax, let's say you make 70,000 and you claim the two kids. So you're writing off about $56,000 before you pay anything. That's the deduction for a family size of three on SAVE. One spouse and two kids, you exclude the spouse when you file separate. So if you're doing 70K minus 56, it's 14 grand difference, right? 14 times 10% is $1,400. Half of that, which is 5%, is $700. So divide that by 12, you're looking at like $60 a month. So somebody making 70 grand a year, 70 grand a year, that's more than the average family income in America that's filing separately could pay $60 a month on their student loans. So that's $700 a year times 20, it's 14 grand. The vast majority of people borrow more than that for college, right? So things are going to get so complicated after July. I'm just telling you honestly, right? You're going to have to figure out, does it make sense to incur tax consequences of filing separate for 20 years to get forgiveness on my 30K of undergrad loans? People are going to have a hard time figuring that out because it's confusing as all get out. And then what's going to happen again is if Trump wins, then suddenly all this other stuff shifts in a different direction. And like, do I still go for forgiveness? So it's just going to, I mean, I kind of sometimes want to sit down and cry because it's just like, I mean, yeah, I guess it benefits us to have complexity in the system, but it's also just like kind of dumb, right? Like we could do other things with our time. We could like, just be regular financial planners or something, or just, I don't know, just make funny Excel spreadsheets or fun Excel spreadsheets of financial independence calculations or something. Like we could do other things, but instead, like it's got to be this really ridiculous, complicated system with all these like confusing incentives of what people should do and not do. But anyways, that's just me complaining, I guess. So I think the main thing you need to think about as a borrower is IDR account adjustment going away as of this recording, as of April 30th. And given there's this like death valley of consolidation in May and June, where if you consolidate, I'm not sure actually if you get any credit in May and June, I'm sorry, in May and June before the new weighted average time and repayment rules go into place in July, you might really want to avoid consolidating in May and June unless you're going for something like the double consolidation loophole or something where it doesn't really matter, or you're a new grad where you're just needing to consolidate and it doesn't really matter. But just know that there's that risk. And then in July, the new payment rules go into effect. And theoretically, you're supposed to give weighted average, you know, undergrad grad, like percentage calculations in the IDR. So if you have 50% undergrad, 50% grad loans, it's supposed to be 7.5% of income instead of 10 or 5, because you have 50-50 of each. But will they do that, right? I mean, look at the freaking FAFSA. It's a nightmare. It's a disaster, right? Department of Ed, you know, effectively, two things are true. They're drastically underfunded compared to what they should be. And they also spend their money doing other things based off of other priorities the administration has, right? So you don't have money for FAFSA because, you know, you could argue Republicans are, you know, depending on your political views, right? You'd either say Republicans are to blame because they spent all this effort stopping cancellation, which caused the Department of Ed to spend all this resources trying to protect it. And then, you know, if you're on the other side of the political spectrum, you'd say, well, you know, Democrats wasted all this money and, you know, trying to cancel debt when they could have implemented FAFSA and implemented this, you know, these save plan rules and things like that. So ultimately, I think, you know, you just have to remember, you're never going to see accountability and ownership from Department of Ed. They're never going to admit that they screwed up. I mean, it's just not something that government officials typically like to do, right? You know, so I think that you just have to buckle in for a long journey, a long ride. You're going to see a lot of stuff happen over the coming months and you just got to be patient, got to put those patient pants on, got to get ready for weird calculation problems and having to defend them and having to appeal to FSA ombudsman and all that kind of stuff. If I sound tired, it's because I am. Just because all these policy changes are exhausting to try to navigate, but that's our job and we're glad to do it. It's fun to do these for you. I enjoy student loans. I still do after eight years of doing it. I don't know what that says about me, but like, I like helping you guys. I like talking to our regulars on the pod, like the voicemails you all submit. They're so rewarding. They're so fun. If you, by the way, if you want to ask a question about all these chaotic things happening, studentloanplanner.com slash voicemail, you can visit that URL and leave a little voicemail on your phone. We'll try to answer your question on the show. And then I've got other podcasts coming for you too, about just stuff we've learned in business and things that I think will help people that are thinking about being a business owner or already a business owner. I might do some stuff about taxes and just what we have learned doing taxes in our first season of tax planning and prep. Just a lot of lessons learned on that to share that can maybe help you guys in the future. But I really appreciate you and our regular listeners, people that have gotten value out of this pod. It's very rewarding to do it for you. If you want to leave a voicemail, studentloanplanner.com slash voicemail. If you know you need help before a lot of these programs expire, like pay and the IDR account adjustment, post-IDR account adjustment, double consolidation, filing status. If you're a recent grad, you need to figure out if you should capitalize your interest or not by consolidating to see if that makes sense or not. You can go to studentloanplanner.com slash book and schedule a time with one of our expert consultants to review your situation and have you get expert advice and go into your situation specifically instead of just having it be one size fits all kind of stuff. So thank you all for listening to the student loan planner podcast. I look forward to hearing from you for questions and yeah, I hope you have a great rest of your week.