Millions of federal student loan borrowers have received “Final Notice” warnings. These notices appear as the government phases out the SAVE repayment plan. Borrowers are granted an additional 30 days to choose a different repayment plan. If they don’t act, loans will be switched to a fixed-payment plan.
Transition from SAVE Plan
The Department of Education is transitioning borrowers from the Saving on a Valuable Education (SAVE) plan. This transition follows a federal court order in March. Servicers started sending notices on July 1. They gave borrowers 90 days to pick a new repayment option. Those who did not act in that period are getting a final notice. This notice allows another 30 days, as stated by Federal Student Aid.
Michael Ryan, a finance expert, explains this final notice means borrowers must choose their repayment plan. If they don’t, the government will select one, which may not be favorable. The fixed-payment plan often results in higher monthly payments than the SAVE plan.
Impact of Automatic Enrollment
Failure to select a repayment plan leads to automatic enrollment in a fixed-payment plan. This switch can result in significantly higher monthly costs. More than 7 million borrowers were part of the SAVE plan. The payments under this plan depended on income and family size. The Education Department noted in March that guidance concerning this transition would reach 7.5 million borrowers. Monthly payments might increase under the Standard or Tiered Standard plans compared to income-driven repayment options.
“For nearly two years, borrowers under the SAVE plan had their accounts in forbearance.” — Alex Beene, Financial Literacy Instructor
Understanding the Final Notice
The final notice is effectively a second warning. After the SAVE plan ended, servicers started notifying borrowers in waves starting July 1. Borrowers were given 90 days to choose another eligible repayment plan. For some, this deadline marked another chance to act.
According to Mohela, those who don’t opt for a new plan will enter either the Standard or Tiered Standard Plan, based on their loan disbursement dates. Beene warns that ignoring loans poses a risk to credit scores, making it essential for borrowers to act swiftly.
Actions for Borrowers
Ryan advises not to ignore the final notice. Use the time to check for qualifying repayment plans before the final deadline. The automatic plan may not be the best or cheapest. Consider loan forgiveness when existing plans change.
Borrowers can access Federal Student Aid’s online Repayment Calculator. It helps identify eligible plans and estimates monthly payments and total costs. Ryan warns that ignoring the situation leads to higher bills under a fixed-payment plan. This increase could force borrowers already struggling financially to fall behind.
Available Repayment Options
Borrowers’ options vary based on their loans and circumstances. Eligible borrowers can apply for Income-Based, Income-Contingent, and Pay As You Earn repayment plans. The Repayment Assistance Plan, introduced on July 1, presents another option. Fixed-payment plans, including the Standard Plan, are also available. These plans generally span 10 years but can extend to 30 years for Direct Consolidation Loans. The Tiered Standard Plan adjusts based on the borrowed amount, ranging from 10 to 25 years.
Kevin Thompson, CEO of 9i Capital Group, highlights the risk of higher monthly payments and potential defaults if borrowers fail to act.
Affordability Concerns
Borrowers unable to afford new payment plans have options. Income-based plans may reduce payments, especially for lower incomes or larger families. The National Consumer Law Center advises contacting loan servicers to explore options such as temporary forbearance or deferment.
“This has been one of the most confusing situations borrowers have had to navigate.” — Kevin Thompson
Consulting a professional can help determine the best action to take.
The Path Forward
Not selecting a repayment plan by the deadline does not cause immediate loan default. However, automatic enrollment in a fixed-payment plan occurs. Borrowers then face a monthly payment obligation under that plan.