Over 40% of federal student loan borrowers don’t know if they’re eligible for an income-driven repayment plan, an awareness gap that could lead to both budget turmoil and increased susceptibility to financial scams for millions when payments resume next month.
Federal student loan payments have been paused since the start of the COVID-19 pandemic in 2020. Student loan interest began accruing on Sept. 1, 2023, and payments will resume in October. Since most borrowers haven’t made payments in over 40 months, many are uncertain about how they’ll fit this additional expense into their budgets. One in 5 borrowers will be staring down a monthly payment of over $500.
Scammers have ramped up outreach efforts in recent weeks to try and capitalize on the confusion. More than 350,000 student loan payoff robocalls were placed in a two-week period in September, the same volume as the nine weeks prior, according to comments from Transaction Network Services, a company that monitors calls across multiple networks for robocalls.
CNET Money conducted an exclusive survey to assess borrower awareness and sentiment. Our survey found that 70% of borrowers expect to adjust their spending habits in order to afford essential purchases once payments resume this October. Overall, 41% will cut back on leisure activities, 37% will make fewer impulse purchases and 30% plan to spend less during upcoming holiday shopping. Of the respondents who reported an income of less than $50,000, 1 in 5 said they don’t know where or how they’ll be able to adjust their spending habits.
Many borrowers remain unaware of their repayment options, with 43% of respondents saying they didn’t know whether they were eligible for an income-driven repayment plan, or IDR. The survey results arrive on the heels of an Aug. 22 press release from the Biden administration formally announcing its Saving on A Valuable Education program, or SAVE, which promises to alleviate payment burdens for an estimated 20 million Americans.
The CNET Money survey was conducted by YouGov between Aug. 18 and 23, 2023. Respondents could choose multiple answers.
Student loan repayment schedule threatens financial well-being, holiday spending
The return of student loan payments adds to the financial challenges brought on by inflation and a year of increased layoffs, conditions that could result in “a tougher holiday season for a lot of millennials,” said Eric Dunn, CEO of Quicken, a personal finance software company. A separate survey from Quicken found that two in five Americans with credit cards were “more dependent on their credit cards than ever before” -- particularly millennials (53%) and Generation Z (41%) -- and that 35% of Americans who use credit cards said they would most likely max out at least one card before the end of the year.
In CNET’s survey, pullback on leisure spending was the most-selected budgeting strategy across all age and income demographics. The strategy was more acute for high earners; of the respondents who reported incomes of $100,000 or more, half said they planned to adjust by spending less on leisure activities.
Over 43 million borrowers carry a combined $1.64 trillion in federal debt, for an average burden of just over $37,700 per borrower, according to data aggregated by the Education Data Initiative.
How Biden’s SAVE program redefines IDR
A month after the Supreme Court declared President Joe Biden’s $10,000-per-borrower student loan forgiveness plan unconstitutional, his administration announced SAVE, a new income-driven repayment program designed to make student loan payments more affordable. The SAVE program has four notable components:
- Lowering a borrower’s maximum monthly payment from 10% to 5% of discretionary income.
- Increasing the benchmark for essential expenses, which will give more low-income workers access to a $0 payment.
- Waiving interest accrual not covered by monthly IDR payments, ensuring borrowers’ balances don’t grow as long as they continue to pay on time.
- Shortening the forgiveness timeline for borrowers who had lower principal balances.
Federal borrowers can sign up for the SAVE program by visiting StudentAid.gov/SAVE. Additionally, borrowers who fall 75 days behind in their payments will automatically be enrolled in the SAVE program, as long as the Department of Education has access to their tax information.
Borrowers who know about SAVE are excited, said Michael Lux, founder of Student Loan Sherpa, a website dedicated to student loan education, strategy and borrower advocacy. “A lot of people are going to have much lower payments, and student loan forgiveness is going to make sense for a lot more people,” he said.
An updated definition of ‘essential expenses’
The previous IDR program, Revised Pay As You Earn, aka REPAYE, capped federal payments at 10% of discretionary income and calculated discretionary income as earnings minus essential expenses, which were defined as 150% of the federal poverty line, a benchmark maintained by the Department of Health and Human Services.
In the new SAVE program, payments on undergraduate loans are capped at 5% of discretionary income, effectively halving minimum payments for many borrowers. The definition of essential expenses will now be calculated as 225% of the federal poverty line, rather than 150%, resulting in a lower minimum monthly payment for low- and middle-income borrowers.
The new 5% discretionary income cap applies to undergraduate federal loans only. Graduate federal loan payments will remain capped at 10% of discretionary income. If borrowers have both undergraduate and graduate loans, the threshold will be weighted between 5% and 10%, based on the ratio of undergraduate-to-graduate federal loan balances.
Better options for low-income borrowers
SAVE’s higher essential expenses threshold means that some borrowers will be eligible for a $0 payment with no accruing interest. For example, 225% of the federal poverty line would be $32,805 in annual income for a single-person household and $67,500 for a family of four. Qualifying borrowers who make less than these amounts would have a monthly payment of $0. Your IDR payment is recalculated each year.
Note that Hawaii and Alaska have higher poverty lines, per HHS, meaning their benchmarks for essential expenses are also higher.
Protection against interest accrual death spirals
There’s no shortage of horror stories involving borrowers who enrolled in IDR plans and diligently made their monthly payments, only to watch their student loan balances balloon over time because the loan’s monthly accruing interest was greater than the monthly IDR payment.
The SAVE program ends these interest accrual traps by forgiving any residual accumulated interest not covered by the IDR payment amount, effectively working like a subsidy. This is “a huge step forward” over the REPAYE plan, under which unpaid interest was capitalized (added to the loan principal), Lux said.
“The subsidy is a game changer,” Lux told CNET.
Shorter forgiveness timelines, designed to support community college borrowers
If a borrower’s initial federal loan balance was less than $12,000, they will be eligible for forgiveness after 10 years of timely payments, an improvement over the current 20- to 25-year forgiveness requirement. For each additional $1,000 borrowed beyond that amount, the plan will add an additional year of payments, up to a maximum of either 20 or 25 years, per the White House press release.
The provision is intended to help small-balance borrowers, such as those who didn’t finish school or attended community college and haven’t yet seen an income boost from their higher education investment. “I’ll talk to a borrower who has like a $6,000 loan balance and is waiting 25 years for forgiveness,” Lux said. “That’s pretty unreasonable.”
You must be enrolled in an IDR program to be eligible for the forgiveness.
Loan repayments resume amid record-high consumer debt balances
Student loan repayments resume at a financially tumultuous time, as borrowers grapple with “a long-running trend of obliviousness to finances and [consumers being] sideswiped by very sharply rising credit card interest rates,” Dunn said.
The spike in APRs will impact consumers who have relied more heavily on credit card financing in recent years. A report released last month by the Federal Reserve of New York found that total credit card debt in the US had passed $1 trillion for the first time. Additionally, the average credit card rate reached 20.65% at the end of August, according to Bankrate, as most banks increased interest rates on their financial products in response to the Federal Reserve’s continued efforts to combat inflation. The one-two punch of increasing balances alongside increasing APRs threatens to knock down consumers’ spending power ahead of the holiday season.
“It all starts with education,” said Stacey Black, lead financial educator at BECU, a leading nonprofit credit union. “I go into high schools to teach, and some of the seniors in class don’t even know what a credit card is or what it really entails. It used to surprise me, but not anymore.”
Borrowers should be wary of repayment scams, which target confused consumers and are expected to rise in coming months, according to the National Association of Student Financial Aid Administrators. They should also refrain from leaning too heavily on social media or outdated sources for financial advice, experts said. “There’s so much misinformation on social media,” Black said.
Lux agreed. “There are misconceptions out there. You’re going to sometimes get inconsistent information from your servicer, or read an article online that’s out of date, or hear something from a friend or a relative that maybe was accurate at one time, but isn’t anymore.”
For many graduates, the end of the student loan payment moratorium will stress-test their financial well-being. “A majority of young people pay little attention to their finances,” Dunn said. “It’s only when they get complexity in their lives -- starting a family, getting married, buying a home or saving for important future events like their children’s college -- that they start to pay attention.”
With many borrowers’ payments likely to be hundreds of dollars per month, student loan repayment likely qualifies as one of those complexities.
Should you enroll in an income-driven repayment program?
Research has found that enrollment in an IDR program reduces student loan default and increases household liquidity, which can be used to save and/or receive financing for other large purchases, such as a car or home. But according to our survey, many borrowers are uncertain of whether they’re eligible for SAVE and other repayment relief opportunities.
If you have federal student loan debt, take the time to learn about SAVE so you can potentially free up money in your current budget and enjoy a better quality of life.
Methodology: CNET commissioned YouGov Plc to conduct the survey. All figures, unless otherwise stated, are from YouGov. The total sample size was 3,696 adults, among whom 589 were currently carrying federal student loan debt. Fieldwork was undertaken between Aug. 18-23, 2023. The survey was carried out online. The figures have been weighted and are representative of all US adults (aged 18 and over).
