In the last few weeks, I’ve heard from hundreds of borrowers with questions and concerns about the federal student loan restart. One of the big lessons from reading your emails and article comments is that middle-income families will struggle the most when payments resume.
There is a lot of justifiable excitement over the new SAVE plan. Unfortunately, the relative benefit of the SAVE plan is dependent on your tax bracket and zip code.
SAVE is a game changer for families earning 225% of the federal poverty level or less. Borrowers in this category can qualify for $0 per month payments and make progress toward student loan forgiveness.
On the other extreme, the high-earners have plenty of options. They can choose SAVE and make payments based on 10% of their discretionary income. If that monthly bill is too high, their larger salaries often mean that balance-based plans like graduated or extended repayment are more affordable. If these borrowers decide to knock out their debt quickly, they can also refinance at a lower interest rate.
The people stuck in the middle will be the ones who seemingly have the fewest options. They won’t qualify for $0 per month payments, and their income often isn’t large enough for balance-based plans or refinancing to make sense.
To see how the restart hits middle-class families the hardest, let’s look at a very average couple: They have two kids, and they both earn about $60,000 per year. This family isn’t wealthy, and they are not poor.
When student loan repayment resumes, a simple SAVE calculation shows this couple will have to pay over $400 per month toward their federal student loans. If their student student loan balance is $60,000 or more, the balance-based plans are unlikely to offer any relief.
The problem is that most families solidly in the middle can’t easily find $400 per month in their budget.
For the three years of the Covid-19 pause, that $400 has helped pay for rent, healthcare, daycare, and food. Diverting that money to student loans could be a significant hardship.
IDR plans are great because they are set up so student loan payments are always affordable. In many cases, this goal is achieved. Borrowers make payments they can afford, and in time, either the balance is forgiven, or the loan gets paid in full.
The problem is that the IDR formula is designed to be relatively simple. The more money you earn, the more you pay. The only adjustments are made for family size and the state you reside — payments are the same across the 48 contiguous states, and people in Alaska and Hawaii qualify for slightly lower monthly payments.
To see this in action, take a look at the SAVE calculator. Now, think about all the missing factors that might impact payment affordability.
This is the flaw in IDR payment.
A borrower living in San Francisco pays the same amount as a borrower in a low-cost-of-living area as long as their income is the same. A parent with kids who require expensive specialized care pays the same as a parent who gets free daycare from grandma and grandpa. A borrower with extensive health issues pays the same as a healthy borrower.
The list goes on and on.
The problem here is that equal incomes do not mean equal circumstances. Adding a student loan payment, even under the new and improved SAVE plan, is a major hardship in many households.
We’ve seen how individual circumstances can make things harder for some borrowers than others.
However, the problems with IDR repayment go beyond these issues.
For example, IDR payments don’t move nearly as quickly as inflation. When groceries or gas get more expensive, you pay the higher bill immediately.
IDR payments get adjusted for inflation, but it happens very slowly. The government only updates the poverty guidelines once per year, so the discretionary income levels are only adjusted for inflation once per year. Additionally, borrowers don’t benefit from the inflation adjustment until they recertify their income.
This means that inflationary expenses can hit borrowers right away, but inflationary relief in the form of adjusted payments can take an extended period.
The federal student loan restart happens to fall during a time of high inflation.
Further Reading: The slow adjustments to inflation are just one of the many reasons that IDR calculations are unfair.
The “you borrowed it, you pay it back” crowd probably won’t have much sympathy for the people struggling with the restart.
A dentist might sing a different tune when he learns that people wait longer between cleanings because their budget is tight. A factory worker might feel differently after getting laid off due to low car sales.
Over 40 million Americans have federal student loans, and when they are all forced to tighten their belts simultaneously, it will become everyone’s problem.
When describing student loan policy issues, I usually like to end things by covering the steps necessary to fix the problem.
Sadly, there isn’t an easy fix.
If we adjust student loan payments based on rent and other cost of living factors, an already complicated system becomes even more confusing.
The reality is that college is too expensive. High earners can handle the bill. Lower earners have resources available. The people in the middle are stuck.
The post Middle-Income Families Hit Hardest by Federal Student Loan Restart appeared first on The Student Loan Sherpa.
There is a lot of justifiable excitement over the new SAVE plan. Unfortunately, the relative benefit of the SAVE plan is dependent on your tax bracket and zip code.
Caught in the Middle
SAVE is a game changer for families earning 225% of the federal poverty level or less. Borrowers in this category can qualify for $0 per month payments and make progress toward student loan forgiveness.
On the other extreme, the high-earners have plenty of options. They can choose SAVE and make payments based on 10% of their discretionary income. If that monthly bill is too high, their larger salaries often mean that balance-based plans like graduated or extended repayment are more affordable. If these borrowers decide to knock out their debt quickly, they can also refinance at a lower interest rate.
The people stuck in the middle will be the ones who seemingly have the fewest options. They won’t qualify for $0 per month payments, and their income often isn’t large enough for balance-based plans or refinancing to make sense.
Middle-Class Math for Student Loans
To see how the restart hits middle-class families the hardest, let’s look at a very average couple: They have two kids, and they both earn about $60,000 per year. This family isn’t wealthy, and they are not poor.
When student loan repayment resumes, a simple SAVE calculation shows this couple will have to pay over $400 per month toward their federal student loans. If their student student loan balance is $60,000 or more, the balance-based plans are unlikely to offer any relief.
The problem is that most families solidly in the middle can’t easily find $400 per month in their budget.
For the three years of the Covid-19 pause, that $400 has helped pay for rent, healthcare, daycare, and food. Diverting that money to student loans could be a significant hardship.
The Flaw in Income-Driven Repayment
IDR plans are great because they are set up so student loan payments are always affordable. In many cases, this goal is achieved. Borrowers make payments they can afford, and in time, either the balance is forgiven, or the loan gets paid in full.
The problem is that the IDR formula is designed to be relatively simple. The more money you earn, the more you pay. The only adjustments are made for family size and the state you reside — payments are the same across the 48 contiguous states, and people in Alaska and Hawaii qualify for slightly lower monthly payments.
To see this in action, take a look at the SAVE calculator. Now, think about all the missing factors that might impact payment affordability.
This is the flaw in IDR payment.
A borrower living in San Francisco pays the same amount as a borrower in a low-cost-of-living area as long as their income is the same. A parent with kids who require expensive specialized care pays the same as a parent who gets free daycare from grandma and grandpa. A borrower with extensive health issues pays the same as a healthy borrower.
The list goes on and on.
The problem here is that equal incomes do not mean equal circumstances. Adding a student loan payment, even under the new and improved SAVE plan, is a major hardship in many households.
Issues that Impact All Borrowers
We’ve seen how individual circumstances can make things harder for some borrowers than others.
However, the problems with IDR repayment go beyond these issues.
For example, IDR payments don’t move nearly as quickly as inflation. When groceries or gas get more expensive, you pay the higher bill immediately.
IDR payments get adjusted for inflation, but it happens very slowly. The government only updates the poverty guidelines once per year, so the discretionary income levels are only adjusted for inflation once per year. Additionally, borrowers don’t benefit from the inflation adjustment until they recertify their income.
This means that inflationary expenses can hit borrowers right away, but inflationary relief in the form of adjusted payments can take an extended period.
The federal student loan restart happens to fall during a time of high inflation.
Further Reading: The slow adjustments to inflation are just one of the many reasons that IDR calculations are unfair.
This Student Loan Issue Hurts Everyone
The “you borrowed it, you pay it back” crowd probably won’t have much sympathy for the people struggling with the restart.
A dentist might sing a different tune when he learns that people wait longer between cleanings because their budget is tight. A factory worker might feel differently after getting laid off due to low car sales.
Over 40 million Americans have federal student loans, and when they are all forced to tighten their belts simultaneously, it will become everyone’s problem.
Fixing the Problem
When describing student loan policy issues, I usually like to end things by covering the steps necessary to fix the problem.
Sadly, there isn’t an easy fix.
If we adjust student loan payments based on rent and other cost of living factors, an already complicated system becomes even more confusing.
The reality is that college is too expensive. High earners can handle the bill. Lower earners have resources available. The people in the middle are stuck.
The post Middle-Income Families Hit Hardest by Federal Student Loan Restart appeared first on The Student Loan Sherpa.