Episode Transcript
[00:00:00] Speaker A: There's a whole lot going on with student loans right now, and a lot of it seems terrifying. So in this episode, we go through what's real, what you should pay attention to, and most importantly, what to do next. Let's get started.
[00:00:11] Speaker B: Let's get some money from New Money, New Problems. It's the New Money New Problems podcast, a show for successful professionals searching for the tools they need to navigate financial opportunities and obstacles they've never seen.
Negotiating compensation, Purchasing your first investment property. Helping your family with money. The highs and lows of, uh, entrepreneurship. New Money brings new problems that require new solutions. Join us as we work through them together.
I'm Brenton Harrison, and this is the New Money New Problems podcast.
[00:00:49] Speaker A: Hello, my name is Brenton Harrison of New Money, New Problems and your host for the New Money New Problems podcast. Hope that you all are having as good a week as you can in light of all the craziness that we're seeing in the news today. And if you are in our New Money New Problems community and have been paying attention the last few weeks, you know that we were in the middle of a series where we were talking about people who had reached a certain level of success in their career and decided to pivot for various reasons into entrepreneurship. So we've had, uh, in my opinion, some really high quality, valuable episodes for people who are considering that change. But I gave you the disclaimer that if people weren't responding, and they are, or something came up that necessitated us taking a pause, we would do so. Well, the latter has occurred. There have been things that have popped up in the past couple of weeks that necessitate us taking a pause and focusing on something that's been in the news that impacts a great number of our listeners. And that is all of the craziness that's been going on with federal student loans in the past two weeks or so. So if you came here for a part four in our series on entrepreneurship, we will be back at that next week. But for the time being, we need to talk about what's occurred and what to do next if you're impacted by federal student loans. So what I'm going to do in this episode or attempt to do is go through each event that has occurred in the last couple of weeks, talk about its importance and also what the results of it is for people who have federal student loans. And we're going to start with the 8th Circuit Court of Appeals. If you are a person who also listens to our Escape Student Loan Debt podcast, which is not Affiliated with New Money, New Problems. But on that podcast, we talk about more detailed information for federal and private student loans. You're already aware of this, but two weeks ago, the 8th Circuit Court of Appeals issued an order regarding the Save Plan. As a quick recap, the Save plan was a payment plan under the Income Driven repayment plan umbrella that was introduced during the Biden administration. It has been contested in the courts since it was released, and since then, payments and the plan applications for that plan have been paused. So as a result of that ongoing pause, the 8th Circuit Court of Appeals received the case and they were asked to issue a judgment. And what they essentially said is, we agree with the logic of the lower courts. And the logic of the lower courts was that the Save plan illegal because the amount of money they would forgive, at least the projected forgiveness under the plan, in terms of student loan balances, is an amount that cannot be spent without going through Congress. And the Department of Education did not go through Congress to start the Save plan. Now, there is an unfortunate addendum to that, and that is that there are two other payment plans under the Income Driven repayment plan umbrella, those plans being the Income contingent repayment plan and the pay as you earn plan, which also were created by the Department of and did not go through congressional approval before it was issued to borrowers. So the court said, not only do we think it's highly likely that the department overstepped when creating these three payment plans, but also for all three, there's a possibility that they're not legally allowed to offer forgiveness under those plans. So they kicked it back down to the lower court and asked them to make a final ruling. So that was the initial salvo or event in our timeline as it pertains to today's episode. What was the response? Well, the Department of Education is now under a new administration. The Trump administration, prior to this go round, has expressed disdain for student loan forgiveness. Republicans in the past have tried to do away with public service loan forgiveness. Um, so it's not a surprise that they are not keen on, like, fighting for the Save plan, and that they think that many of the things that have been offered to those under Income driven repayment is too generous. So what they did in response was they flat out took down the applications for not just the save Plan, not just pay as you earn, not just income contingent repayment, but also the income based repayment plan. They took down the online application for all payments under the Income Driven repayment plan umbrella. Which is interesting, because while the court did cast doubt on the three plans that we mentioned, there is a payment plan under that umbrella, the income based repayment plan, that was created by Congress and whose legality is almost cemented in stone. So the fact that they are just pulling down all the applications, including for that plan, that seems punitive. Right? They know that that plan is legally sound, but they are against the student loan forgiveness process. They're trying to cut costs wherever they can. So they're just going to essentially take everything down and see what happens and force people to press the issue. So the IDR applications are down. They also took down the applications for consolidating student loans. And while they do still allow you to access and download or print off the paper application for a consolidated student loan, the online versions of each of these applications has been pulled down. So that's the second little stop in the timeline as it relates to today's episode. Next up, and this is the big update, or I should say, I think it's the most actionable update. So we're going to talk about what occurred before the break and then we're going to talk about the fallout after the break. So what occurred this weekend? A memo that the Department of Education sent to a few federal student loan servicers was leaked. And in that memo, the Department of Education instructed those servicers to not only stop processing new applications for forgiveness, meaning for someone who had met their 20 or 25 year obligation, the department is telling those servicers to not process those forgiven loans and wipe the balance away. They also told them to stop processing new applications for income driven repayment plans completely. So for someone who is trying to get onto an income driven repayment plan, they're telling them to stop the processing of those applications. They also are telling them to not allow borrowers to recertify. So if I am in a position where I'm on the pay as you earn plan, it's the anniversary of my plan and I'm, um, required to give my tax returns my pay stubs to update my income. They're telling them to not process those recertification applications. They also told them to stop processing all pending applications for consolidating loans. So for people who may have in the past couple of months tried to consolidate their loans, maybe they did it online or via paper application. The Department of Education told those servicers to stop the processing of all those pending applications. They did instruct them to continue processing paper applications for consolidated loans. But for those applications, they are telling them to not allow anyone to sign up for an income driven repayment plan. The only plans that would be available are standard plans, graduated plans and extended plans. So they did all that. No new IDR applications, no processing of IDR forgiveness, no processing of pending consolidation applications that were online or paper. For any new applications that are received via paper application, they can consolidate the loans, but they can't allow the people to choose an income driven repayment plan. And for all of those things, they gave that order for the next three months. Now, if you read news stories or stay tapped in with people who kind of stay closer to the updates and when things occur in the student loan space than I do, they will will tell you that this order isn't likely to stand for the entirety of those three months. They're saying it could be a month, it could be a few weeks. So we don't know how long it will occur. But the very fact that it's where we are right now is a huge deal. And after the break, we're going to go step by step through the different types of people who could be impacted by this order and what you should do if you find yourself in that number.
[00:08:31] Speaker C: This is the New Money New Problems podcast, a show for successful professionals searching for the tools they need need to navigate financial opportunities and obstacles they've never seen. We'll be right back.
[00:08:49] Speaker B: Are you wondering what new money problems you might be overlooking in your financial life? If so, we've got great news. We've crafted the New Money New Problems gap finder to identify potential weaknesses in your finances in areas ranging from budgeting, investments, insurance, and even the threat your extended family's finances could pose to your household. Please head to newmoney newproblems.com Gapfinder to complete it today. Again, that's newmoney newproblems.com gapfinder to take the assessment.
[00:09:28] Speaker C: You're listening to the New Money New Problems podcast. Subscribe now at new money, new problems.com welcome back.
[00:09:39] Speaker A: All right, welcome back from the break. Now let's go through this mess and figure out what's the best course of action depending on the camp in which you find yourself. And I've kind of laid out like different avatars of people who could be impacted by this work order where they're saying you can't process forgiveness, can't do IDR applications, and so on and so forth. We're going to start with people who are close to having their student loans forgiven but are on a plan that's not the income based repayment plan. So this could be someone who was on the save plan and has been in forbearance because that plan is no longer allowed, or I should say, as it stands now, it's likely to not be allowed. It could be a person on pay as you earn and you are close to the either 20 or 25 years of uh, payments that are required to be or have your loans forgiven under these options. Well, even prior to the most recent 8th Circuit Court of appeals order, they had already placed a pause on student loan forgiven forgiveness for any plan that was an income based repayment. So all the plans that I just mentioned. So if you are close to having your student loans forgiven, you do have an option. The option in regular times would be any payment that you make on any income driven repayment plan counts towards another payment forgiveness plan. So for example, if I have 15 years worth of credit on pay as you earn and I switch my plan over to income based repayment, I uh, still am um, in my 15th year. I don't lose that credit when I switch from one plan to another. So even if they don't allow you to process forgiveness under those options in regular times, you would have the option of just getting to your 20th or 25th year, switching over to income based repayment and just having your loans forgiven under that plan. That did exist in normal times. The reason I keep saying in normal times is right now, if you do that same process, you get to your 20th or 25th year, you're eligible forgiveness under income based repayment. You try to switch from your current plan on to income based repayment. They're not processing applications for income generated payment plans right now in any circumstance. So what would you do? Well, I would tell you if you're on a plan that's still allowing you to make payments and those payments are affordable, you know, affordable is a relative term to keep making them, keep getting your progress towards the months that are going to be needed to qualify for forgiveness. And when you get to that period of time where you've reached the last month that's needed, you have the option of putting your student loans into forbearance at that time. So that's how I would go about on a plan that's making payments, keep making them, and then put your loans in forbearance if you reach forgiveness. If you're on the save plan where you're not allowed to make payments right now, you really can't switch to an income driven repayment plan until all of this is resolved. So unfortunately you have to stay put. The next group are people who are close to having Their student loans forgiven who are already on income based repayment plan. This is an important group because income based repayment is the plan that we know is almost certain to stick around. That plan requires you to make 20 years worth of payments if you have undergrad loans, 25 years worth of payments if you have grad loans. If you're on that plan and you reach the point where you are eligible for forgiveness, remember they're not going to process that forgiveness right now because of this work order. So you could also again put uh, your loans into forbearance after you have made that last payment that's required under the plan and wait for this all to shake out. Even though in forbearance if you have interest that's unsubsidized, it will grow on your loans while it's in forbearance. If you have met the requirements for forgiveness, there's not a limit on how much can be forgiven. That added amount that's added to your balance will be inconsequential, especially right now where forgiven loans are not treated as taxable income. And that will continue to be the case through the end of 2025 and potentially longer if that current rule is extended by Congress. The next group are people who are far from having their loans forgiven on income driven repayment plans and they also don't have a required date to recertify their loans around the corner, right? So it's like, hey, I'm uh, making a payment towards these plans and it was going to be the end of this year or early year before I had to recertify my loans anyways. And for you, I would just tell you if you're already making payments to just keep making payments, right? There's nothing in this order that impacts you. You're not in a position where you needed to switch plans or consolidate your loans anyways. So it's really about just continuing to rack up that credit towards forgiveness while we wait for all of this to settle out. So no news is good news. Matter of fact, the longer you have, especially if you've had an increase in income since the last time you recertified, the longer you have before you have to do it again, the better. So keep on benefiting from that lower payment and don't do anything that's going to stop your progression towards the 20 or 25 years that's required under these plans. Next up, we have people who are far from income driven repayment plan forgiveness, but their income recertification date is around the corner, potentially within that three month window where they're telling them not to allow the recertification. And this is a group that's in real danger depending on how the Department of Education and loan service choose to go about this work order. The reason they're in danger is because on the payment plans that remain right, pay as you earn income, contingent repayment, income based repayment, you are required to recertify your income every year and the consequence to not recertifying your income is that they drop your payment down to what would be required under a 10 year standard payment plan. Now, uh, the hope is because the Department of Education is not allowing people to recertify, that the student loan servicer would not follow through. Right. Instead of saying hey, you didn't recertify, we're just going to put you on a 10 year standard plan. The hope is that they say hey, because you're not allowed to recertify, we're just going to let you keep paying what you were paying. Because the alternative, actually making people just default to the 10 year standard would be a potentially disastrous scenario for some people who owe a lot of money and don't have enough income to service that debt. As an example, if you're looking on screen, we have pulled up our Escape student loan debt guide to income driven repayment plans. Let's assume that we have a person who their total adjusted gross income for the household for the year is $100,000. We're going to assume that they have a family size of four and we're going to give them a student loan balance of $100,000. So they have $100,000 adjusted gross income, $100,000 student loan balance at a rate of 6.5%. And their anniversary where they're required to update or recertify their income is coming up next month. Month. Well, right now based on that income, they would pay under pay as you earn $443.33 a month. Well, in normal times, if their month to recertify their income was coming up next month, they would simply give their student loan servicer their most recent tax return or pay stubs. And if their income hadn't changed, their payment will remain at the approximately $400 a month. Well now that is paused. Right. These servicers have been instructed to not accept anyone who's trying to recertify their income for the next 90 days and hopefully just allow them to maintain that payment. But the rules of uh, pay as you earn state that if you fail to recertify your income that your Payment will change to whatever's required to pay off your student loan balance under the 10 year standard repayment plan. Well, you can see at the bottom of this spreadsheet that instead of $443 a month, that would cause their monthly payment to go up to $1,135 per month. And we don't know what these student loan services would do. It's almost impossible to get these people on the phone. It's uh, very difficult to get any communication and response from them. So is it an automated system that bumps your payment up to the ten year standard plan? Do you have the ability to, you know, say, hey, I just can't pay this? If you are in a position where you just see your payment jump to that 10 year standard plan and you can't afford it, which most people can't, otherwise you wouldn't be on an income driven repayment plan in the first place, I would tell you you likely need to go into forbearance, right? This would be a time where you say, I just need to wait until some of this stuff resol. I can't make this payment. I'm going to put my loans in forbearance, even though for an unsubsidized loan my balance is going to increase. But what is the alternative? The alternative is for something that we don't know how long this is going to last, making a payment that you simply can't make. And I don't know if that, that's feasible for most people. So that's a really dangerous group. People who want to recertify but are not allowed to recertify because the fear is that their payment would jump to that 10 year standard payment. The next group are people who have put in an application to consolidate their loans or switch to an income driven repayment plan. And that process is pending, right? Or it's still in flux. And for you, you have to wait, right? If you are like the people who I've counseled to consolidate their loans in recent months or to switch to a new payment plan in recent months, the Department of Education is telling these loan servicers to just sit on the application and we don't know if once it resumes they're going to go back through the pile and start to process them or are they going to require you to start the process over? We just don't know. So unfortunately for this group, you have to just sit and wait. And then lastly, people pursuing public service loan forgiveness, oddly enough, with all this stuff going on, public service Loan forgiveness seems to be chugging along. Um, this is something where we're seeing people even who are on plans that are not income based repayment have their student loans forgiven once they've met their 10 year requirement. For all the things that we just discussed, I would let the leading decision maker be can you afford your payment? Right. Um, but if you have the ability to either be close to public service loan forgiveness, or you're far from public service loan forgiveness, but you're on a payment plan that's allowing you to keep paying and earning those credits, I would just keep going, keep paying and earning those credits. Because public service loan forgiveness is also something that was created by Congress and would need a super majority to be taken away. So that is something that I also see as damn near cemented into law and not something that you should be concerned about. Now, we spent a whole lot of time on the update that I mentioned before the break, but it wasn't the most recent update. By the time that you listen to this, it is highly possible that Trump has or will later today issue an order to abolish the Department of Education. And I left that to the end because that even though I don't think it's going to stand, it's going to take a while for it to be undone. I don't think that that has an outsized effect on student loan borrowers. It has a potentially terrible effect on people who are still in primary or secondary school and things of that nature, which is not what this podcast is about. But the fact of the matter is, when it comes to student loans, they can't just undo student loans. If the Department of Education is abolished, then the things that the loan servicers would do and the department does, they would just shift to a different department in the federal government because those tasks are required to be carried out. So I don't want to go through a lot of if, ands and buts about it, but I also want you to be aware that this is something that could occur or could have already occurred. Based on the time that I'm recording this episode, I would not get swept up in it, at least in terms of the impact on student loans. To me, the more impactful thing is the one that we just spent the last 15 minutes or however long we did going through. So a lot of scary news stories out there, a lot of stuff that can get you up in arms. So I would say in this time, control what you can control. It's a very, very crazy time, not just with student loans, but with a whole lot of stuff going on in our economy. And we're trying to do the best we can to give you this information as it comes and sift through the things that are actionable versus the things that you just need to kind of keep your head in the sand and not let it impact you, or at least try to not let it impact you as best you can. We'll be back with our series next week on Pivoting into Entrepreneurship. We're going to keep that ball rolling downhill, and we hope that it's providing value and that this episode provided value. And I, uh, will see you next week.
[00:21:33] Speaker B: From New Money, New Problems. This was the New Money, New Problems podcast, a show for successful professionals searching for the tools they need to navigate financial opportunities and obstacles they've never seen.
