#saveplan

A 2023 survey revealed a notable shift in public opinion over the past decade about the value of a college degree: 56% of Americans think a four-year college degree isn’t worth the cost due to students graduating with significant debt and a lack of specific job skills vs. 42% who believe college is worth it. The survey numbers have almost reversed from ten years ago, while college enrollment has declined by about 15% over the same period. (1,2)

A big reason many Americans are foregoing college is the cost. For the 2022-2023 year (most recent data available), the average one-year cost for tuition, fees, room, and board was $23,250 for in-state students at a four-year public college, $40,550 for out-of-state students, and $53,430 at a four-year private college. (3) But many schools, especially “elite” private colleges, cost substantially more, with some over the $80,000 mark. (4)

Causes and Consequences

Public misgivings about college intensified during the pandemic, when academic instruction moved online, and students had to pay large tuition bills despite missing out on the positive aspects of campus life. During the 2022-2023 school year, 62% of high school graduates enrolled in college, down from 66.2% in 2019-2020. (5)

Sky-high costs and growing skepticism are not the only factors playing into enrollment declines. A hot job market and higher earnings for less-educated workers has made it easier for high school graduates to justify skipping college and head straight into the workforce. At the same time, alternative forms of job training, such as apprenticeships and certificate programs, have become more prevalent and are increasingly seen as viable educational paths toward a good job. (6)

There has been a surge of interest in public colleges, particularly state flagship universities, many of which offer robust academic and student life opportunities comparable to their private counterparts at a lower cost. Conversely, lower student enrollment is putting financial pressure on many small schools and forcing some to close their doors. (7)

FAFSA Changes Coming Soon

The Free Application for Federal Student Aid (FAFSA) typically opens every year on October 1 for high school seniors planning to attend college in the following year and for returning college students. However, due to an extensive redesign of the FAFSA, the filing season for the 2024-2025 school year will be delayed until December.

The simplified FAFSA will have fewer questions — 46 compared to 108 previously — and the direct transfer of financial information from the IRS to the FAFSA will now be mandatory. A new student aid index (SAI) will replace the current expected family contribution (EFC) terminology, and a raft of changes to the formula could impact the amount of need-based aid offered to students.

For example, the simplified FAFSA will expand Pell Grants to more low-income students and will link eligibility to family size and the federal poverty level. The income protection allowance for parents will increase by 20%, and the income protection allowance for most students will increase by 35%, which will shield more income from the needs analysis formula.

The new FAFSA will no longer provide an advantage to parents with multiple children in college at the same time. The current FAFSA divides the EFC by the number of children in college, but the new FAFSA does not. This could decrease aid eligibility significantly for middle- and high-income students.

Cash support and other money paid on a student’s behalf by grandparents or other relatives will not need to be reported on the new FAFSA, so they can help with college expenses without affecting the student’s eligibility for financial aid based on the FAFSA. (Grandparent gifts will likely continue to be counted by the CSS Profile, an additional aid application typically used by private colleges when distributing their own institutional aid.)

The Specter of Student Loans

Even with a discount on the sticker price, many students need to take out federal, and sometimes private, loans to cover college expenses. About 54% of the class of 2021 graduated with student debt averaging $29,100. (8)

Interest rates on federal student loans are based on the rate for the 10-year U.S. Treasury note and reset each year. For the 2023-2024 school year, rates have increased again and are now the highest in a decade.

In August 2022, an executive order cancelled up to $10,000 in federal student loans ($20,000 for Pell Grant recipients) for borrowers with incomes below certain limits, but the order was struck down by the U.S. Supreme Court in June 2023. (9)

As a result of the action from SCOTUS, The Department of Education recently launched the most generous federal student loan income-driven repayment (IDR) plan to date — the Saving on a Valuable Education (SAVE) Plan. The SAVE Plan includes multiple new benefits for borrowers, some of which take effect now and others that will take effect in July 2024 when the plan is fully implemented. Learn more here and here.

Nine repayment pauses have been in effect since the pandemic began in March 2020, but payments will soon start again in October — a sobering reality for millions of borrowers after three-and-a-half years of reprieve.

Will College Pay Off?

Many people go to college because they want to pursue a lucrative career and/or qualify for a specific occupation that requires a bachelor’s degree or higher. One smart approach is to treat college choices like any other business decision — by considering the potential return on investment (ROI).

A Georgetown University analysis of public data from the U.S. Department of Education’s College Scorecard found wide disparity in lifetime earnings among college graduates. The average difference between a high school and college graduate’s lifetime wages is about $1 million, but the difference between the lowest- and the highest-paying majors is $3.4 million. Degrees in science, technology, engineering, and mathematics (STEM) had the highest ROI, followed by business and health majors. (10)

Whether a student aspires to be an engineer or a teacher, it’s important to take a hard look at earning potential when assessing the value of any academic program. Students who plan to enter lower-paying fields may fare better if they can keep their costs down and hold borrowing to a minimum.

Tips for Managing Costs

To help avoid overborrowing, here are some ways for students to reduce college costs: pick a college with a lower net price (use the net price calculator on every college’s website); focus on in-state colleges and/or attend community college for one or two years and then transfer to a four-year college; aggressively seek out need-based and merit aid; live at home or become a resident assistant to get free housing; work part time throughout college and budget earnings wisely; and if possible, use college credits earned in high school to graduate from college early.

Sources:

1-2, 5-6) The Wall Street Journal, March 31, 2023, and March 29, 2023

3, 8) The College Board, 2022

4) Harvard University, 2023; Stanford University, 2023

7) CNBC, June 17, 2023

9) The New York Times, June 30, 2023

10) Georgetown University, 2015 (most current data)

Prepared by Broadridge. Edited by BFSG. Copyright 2023.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

The Department of Education recently launched the most generous federal student loan income-driven repayment (IDR) plan to date — the Saving on a Valuable Education (SAVE) Plan. The SAVE Plan comes after the U.S. Supreme Court blocked federal student loan cancellation in June and before payments are set to restart in October after   more than three years of payment pauses. The SAVE Plan will be implemented in phases, but eligible borrowers can sign up online now with a “beta version” of the application.

What should I know about the SAVE Plan?

The SAVE Plan is an income-driven repayment plan that calculates a borrower’s monthly payment based on income and family size. It replaces the current Revised Pay As You Earn (REPAYE) Plan (which, before SAVE, was the most generous IDR plan).

The SAVE Plan includes multiple new benefits for borrowers, some of which take effect now and others that will take effect in July 2024 when the plan is fully implemented.1

Benefits that take effect now:

• The amount of income protected from loan payments under SAVE will increase from 150% of the federal poverty level to 225%. For a single borrower, this equates to earning less than $32,800 a year ($67,500 for a family of four). Borrowers under the threshold will have their loan payments set to $0.
• Unpaid monthly interest outside of a borrower’s monthly payment will no longer accrue, so loan balances won’t increase if borrowers make their monthly payments as required under SAVE (even in cases where a borrower’s monthly payment is set to $0).
• Married borrowers who file their taxes separately will no longer be required to include their spouse’s income in their payment calculation for SAVE. These borrowers will also have their spouse excluded from their family size when calculating payments.

Benefits that will take effect in July 2024:

• For undergraduate loans, monthly payments will be capped at 5% of discretionary income (compared to 10% of discretionary income under REPAYE), and graduate loans will be capped at 10% of discretionary income. Borrowers who have both undergraduate and graduate loans will pay a weighted average of between 5% and 10% of their income based on the original principal balances of their loans.
• For borrowers with original principal  balances of $12,000 or less, remaining loan balances will be forgiven after 10 years of payments. For original loan balances over $12,000, the maximum repayment period will increase by one year for every additional $1,000 borrowed. For example, a $13,000 loan will be forgiven after 11 years of payments, a $14,000 loan will be forgiven after 12 years, and so on. (Under REPAYE, loan balances were forgiven after 20 years of payments.)

How do I enroll in SAVE?

There are different ways to enroll in the SAVE Plan.

• Borrowers who are already enrolled in the REPAYE plan will be automatically enrolled in the SAVE plan, and their monthly payments will be adjusted automatically with no action needed on their part.
• Borrowers who want to enroll in SAVE (or switch from another plan besides REPAYE) will need to log in to the federal student aid website to fill out an application. The application is estimated to take less than 10 minutes to complete, and borrowers will need their FSA ID, financial information, personal information, and spouse’s information (if applicable). The current SAVE application is a beta version, but according to the Department of Education, borrowers who apply using the beta version will have their applications processed and will not need to resubmit another application later.
• Borrowers who are in default on their federal student loans will need to get their loans back in “good standing” before being eligible for SAVE.  Default borrowers can do this through the government’s Fresh Start Program.
• Borrowers who are enrolled in the Public Service Loan Forgiveness Program will have their remaining loan balances forgiven after 10 years, regardless of which IDR plan they are enrolled in.

For more information about the new SAVE Plan, and to see estimated monthly payments based on income and family size, visit the federal student aid website.

Prepared by Broadridge. Edited by BFSG. Copyright 2023.

Sources:

1) U.S. Department of Education, 2023

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By: Henry VanBuskirk, CFP®, Wealth Manager

On August 24, 2022, President Biden signed an executive order that would cancel up to $10,000 of federal student debt or $20,000 for Pell Grant recipients for borrowers with income below $125,000 for single filers and $250,000 for married filers. Like most decisions made in Washington D.C., this divided politicians and voters alike with Republicans ardently fighting to repeal this executive order and Democrats aggressively standing by the President’s actions. Fast forward a year later and the moratorium on student loan repayments in effect since 2020 will expire on August 31, 2023, and President Biden’s executive order on student loan cancelation was struck down by the conservative US Supreme Court on June 30, 2023, with a 6-3 vote. The student loans are not forgiven, and unpaid interest will start to accrue on the outstanding balance of the loans after August 31, 2023.

According to The Brookings Institute, one out of six people with a federal student loan are unprepared to make their student loan debt repayments. My job is not to debate whether that is morally right or wrong. That debate is better served from the musings between your favorite right-wing cousin and your favorite liberal friend who’ve each had a few too many at the Thanksgiving dinner table (I’ll let you decide whether or not I’m speaking from personal experience). All kidding aside, my job is to illustrate the facts as they stand today and what you can do about it.

Options Available for Borrowers:

Income-Driven Repayment Plans

The Department of Education (DOE) approved forgiveness for some borrowers through income-driven repayment plans, with some borrowers able to make $0 payments if income is below certain thresholds. Even if you are in the $0 repayment bracket, this still is considered a repayment of the student loan and can help with your credit score. To get this one-time adjustment, the DOE looks at items like long-term forbearances, economic hardships, military duty, or if you have been in repayment for longer than 20 years. Here are the details of the one-time payment count adjustments for eligible borrowers, as taken from the www.studentaid.gov.

The DOE will automatically take what is the most generous restructuring repayment plan to the borrower. Loan consolidation may also be an option for the borrower.

SAVE Plan

Another recent revamp towards student loan repayment options is the SAVE (Saving on a Valuable Education) Plan. The income limits have increased from 150% to 225% and starting in July 2024, undergrad loans will have a 5% discretionary income threshold (down from 10% prior to the SAVE plan), and there will no longer be any negative amortization on the loan. Eliminating negative amortization is a big deal in the SAVE plan. It is the culprit to why many borrowers feel like their student loan debt never goes away and just keeps growing (this is because if your monthly payment is less than the interest accrued on the loan, your loan balance will increase, and this compounding effect can be dire for your student loan balance).

What does this change mean for you and how much are you able to save under the SAVE plan? The DOE has a helpful table on its website to estimate what your monthly payment could be.

An example of what this new payment could be is illustrated here:

Please check with your loan servicer to have them calculate what the actual monthly payment could be under the SAVE plan.

PSLF (Public Student Loan Forgiveness)

For those borrowers who work for a government or non-profit organization, it is possible that you may be entitled to student loan forgiveness if you are working full-time for an eligible employer and you’ve made the equivalent of 120 qualifying monthly payments under an accepted repayment plan (repayment plans that are not accepted by PSLF are Standard Repayment Plan for Direct Consolidation Loans, Graduated Repayment Plans, or Extended Repayment Plans). Some examples of qualifying employment are if you:

• Are working full-time (30+ hours a week)
• Are a government employee (including military)
• Are part of a 501(c)(3) non-profit organization
• Work in Law Enforcement or Public Health

A tool to help you determine whether or not your employer qualifies for PSLF can be found here.

Conclusions:

For aspiring college students, why is this important to you? Well, it is better to be prepared about how utilizing student loans to help fund post-secondary education means for you over the long term. Interest rates on federal student loans have increased for the 2023-2024 school year because the rate increases or decreases are influenced by the 10-year treasury yield, which is up to 4.05% today and was at 2.74% a year ago today. Here are the updates to the interest rates on Direct Loans:

Here is a graph of the 10-year Treasury Yield to illustrate why these changes occurred.

The rise in client questions about paying down existing student loans also has a very similar trajectory to the graph above. Since it now looks like the moratorium on student loan repayments will be expiring, it is now more important than ever to develop a comprehensive financial plan to tackle this issue head-on. If you’re burdened by student loan debt, reach out to us for help with coordinating discussions with your loan servicer and developing a debt payoff plan where you can get that student loan debt monkey off of your back without having to eat Top Ramen every day (and if you want to eat Top Ramen every day, more power to you). We’re all about making sure that “future you” isn’t mad at “current you” for not dealing with your student loan debt now. Our team of Certified Financial Planner™ professionals are ready to help you with the next steps and schedule time for a free consultation. Please give us a call at 714-282-1566 or email us at financialplanning@bfsg.com to get the conversation started.

Sources:

1. https://www.brookings.edu/articles/student-loan-pause-has-benefitted-affluent-borrowers-the-most-others-may-struggle-when-payments-resume/
2. https://www.brookings.edu/articles/the-long-path-forward-for-student-loan-forgiveness/
3. https://studentaid.gov/manage-loans/forgiveness-cancellation/debt-relief-info
4. UCLA Student Loan Repayments Webinar ‘Understanding Your Student Loan Repayment Options’.
5. https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/24/fact-sheet-president-biden-announces-student-loan-relief-for-borrowers-who-need-it-most/
6. https://www.scotusblog.com/2023/06/supreme-court-strikes-down-biden-student-loan-forgiveness-program/#:~:text=Supreme%20Court%20strikes%20down%20Biden%20student%2Dloan%20forgiveness%20program,-By%20Amy%20Howe&text=By%20a%20vote%20of%206,%24400%20billion%20in%20student%20loans.
7. https://studentaid.gov/announcements-events/save-plan

Prepared by Broadridge. Edited by BFSG. Copyright 2023.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.