These Borrowers Could See Student Loan Payments Skyrocket Next Year

Millions of borrowers may see big increases to their monthly student loan payments next year, as several key Biden administration initiatives are imperiled or will expire in 2025.

Many borrowers with federal student loans have been in income-driven repayment, or IDR, plans. IDR plans use formulas applied to a borrower’s income and family size to calculate their payment amount, with annual adjustments. Typically, a borrower may qualify for student loan forgiveness after 20 or 25 years in repayment.

However, many borrowers in IDR plans may be in for an unexpected jump in their monthly payments next year. And for some, the increase could be very substantial.

Student Loan Payments Could Jump As IDR Student Loan Forgiveness And Lower Payments Imperiled

At least eight million borrowers enrolled in the SAVE plan or were converted automatically from an earlier IDR plan called Revised Pay As You Earn, REPAYE. SAVE is the newest IDR option, created by the Biden administration to be the most affordable repayment plan ever, with a far more favorable formula used to calculate monthly payments.

But SAVE is currently blocked following a legal challenge brought by a group of Republican-led states. And it appears increasingly likely that SAVE will not survive these legal challenges. Even if the 8th Circuit Court of Appeals does not strike down the plan — which it seems poised to do — the incoming Trump administration could take steps to repeal it.

In addition, the 8th Circuit is considering striking down student loan forgiveness at the end of 20 or 25 years under the ICR and PAYE plans, as well. While these plans are not being directly targeted in the SAVE plan litigation, they were created using the same authority. And despite 30 years of governing regulations and bipartisan guidance provided to borrowers, the appeals court could rule that loan forgiveness under these plans is not allowable.

Taken together, that means that millions of borrowers may need to eventually switch to a different IDR plan, called Income-Based Repayment, if they want to maintain progress toward eventual student loan forgiveness. IBR was created by Congress through a separate process, and is not currently being targeted by legal challenges. IBR also uses a formula based on income, and does allow for student loan forgiveness after 20 or 25 years. But IBR may be significantly more expensive than the SAVE plan. Here are some examples:

• An undergraduate borrower with an annual income of $60,000 and who took out loans prior to July 2014 would have a SAVE payment of around $220 per month. If she switches to IBR, her payments would increase to around $470 per month.
• A graduate school borrower with an annual income of $85,000 and who took out loans prior to July 2014 would have a SAVE payment of around $520 per month. If she switches to IBR, her payments would increase to around $780 per month.

Delayed Income Recertification Could Lead To Dramatic Increase In Student Loan Payments

Normally, borrowers must recertify their income for IDR plans every 12 months. But borrowers didn’t have to do this during the lengthy Covid-19 forbearance period, which lasted for more than three and a half years. And the Biden administration subsequently extended most IDR income recertification deadlines well into 2025 as a result of the SAVE plan litigation and related impacts on IDR processing. As a result, there are some borrowers whose IDR payments are based on income information from several years ago.

It’s unlikely that the incoming Trump administration will extend income recertification requirements yet again. And borrowers who have to recertify their income next year may be in for a rude awakening, particularly if they have experienced a significant increase in income since their last income recertification. This problem may be further compounded if they also have to switch to a more expensive IDR plan, like IBR. Here are some examples:

• A borrower whose PAYE payment is $230 per month based on annual income of $50,000 from 2019 now has an annual income of $75,000. Their payment would jump to around $440 per month.
• An undergraduate SAVE borrower with a payment of $135 per month based on a 2019 income of $50,000 would see a dramatic increase in monthly payments to around $655 per month if they also have to switch to the IBR plan and they now have an annual income of $75,000, assuming they borrowed prior to July 2014.

Some Parent PLUS Borrowers Could See A Big Jump In Student Loan Payments

Generally speaking, Parent PLUS loans — which are loans issued to the parent of an undergraduate child — cannot access IDR plans. However, there have been two exceptions to this general rule. Historically, borrowers who consolidate their Parent PLUS loans into a Direct consolidation loan have been able to repay that loan under the ICR plan, which is the oldest and most expensive IDR option. More recently, some Parent PLUS borrowers have been able to utilize the so-called “double consolidation loophole” to access the SAVE plan. The Education Department is working to close that loophole next year.

If SAVE gets struck down or repealed, Parent PLUS borrowers who successfully relied on the double consolidation loophole could be in for an extraordinary increase in their monthly student loan payments under ICR. A Parent PLUS borrower with an annual income of $100,000 would have a SAVE payment of around $645 per month. If SAVE disappears and they have to switch to the ICR plan, their payments would increase to over $1,400 per month.