Federal student loans are set to restart after the Covid-19 pause, along with the introduction of the SAVE Plan, an income-driven repayment option. This article discusses the loan resumption, eligibility for the SAVE Plan, and its potential impact on...
Troy D. Hanson
September 01, 2023
After more than three years since the government paused federal student loans during the Covid-19 pandemic, there is news of their resumption. Let's take a closer look at what is happening with student loans and learn about the new SAVE Plan.
What is Going on with Student Loans?
During the onset of the Covid-19 pandemic, the federal government announced a national emergency and halted student loan payments. Additionally, eligible federal student loans were given a 0% interest rate. However, with the end of the national emergency on May 11 and the recent passing of a law by Congress, the payment pause is no longer in effect.
Starting from September 1, interest on student loans will begin to accumulate again, and payments are set to restart in October. The Education Department will notify borrowers before payments resume, and loan services should send billing statements or notices at least 21 days prior to the first payment due date, as confirmed by the attorney general for the District of Columbia.
Introducing the New SAVE Plan
On August 22, the White House announced the SAVE Plan, which is an income-driven repayment plan designed for certain federal loans. This plan calculates payments based on the borrower's discretionary income and family size. Notably, if borrowers consistently make their payments according to this plan, they will see their loans no longer grow due to unpaid interest.
Jodi Letkiewicz, an associate professor at York University, believes that the interest aspect of the SAVE Plan could greatly benefit students in paying off their debt. She refers to a behavioral economics principle called the goal-gradient hypothesis, which suggests that people tend to increase their efforts as they get closer to achieving a goal.
Letkiewicz explained, "One of the problems that we’d heard from students is like, 'I’m making these massive payments, my balance is going up, I’m never, I’m never getting out of this hole.' And that can be really deeply discouraging." However, with the SAVE Plan, this discouraging narrative shifts.
"In the context of paying off student loans, as the balance decreases, the goal of becoming debt-free becomes more achievable and tangible," Letkiewicz mentioned in an email.
Eligibility for the SAVE Plan
According to the U.S. Department of Education website, the following loans are eligible for the SAVE Plan:
Student Loans Update: What to Expect
In a recent development, the Biden administration has announced the resumption of student loan repayments after an extended pause due to the pandemic. This decision is expected to have an impact on various stocks and lending institutions. Here's what you need to know.
The following types of loans will now require repayment:
Direct subsidized loans
Direct unsubsidized loans
Direct PLUS loans made to graduate or professional students
Direct consolidation loans that didn't repay any PLUS loans made to parents
Impact on Stocks
Several stocks are predicted to be affected by this decision, according to industry analysts. These include:
Affirm Holdings (AFRM)
SoFi Technologies (SOFI)
Discover Financial Services (DFS)
Pressure on Digital Lenders
Companies such as Affirm, which provide 'buy now, pay later' services to lower or middle-income individuals, may experience some pressure as loan repayments resume. During a recent earnings call, Affirm's management noted that repayments could pose a challenge in the upcoming fiscal year. Eugene Simuni, Managing Director at MoffettNathanson, raised concerns about consumers' ability to repay loans and maintain their spending habits, which are crucial for Affirm's volume.
Benefits for Student Lenders
On the other hand, student lenders are expected to benefit from the resumption of loan repayments and the normalization of the lending environment. SoFi, Discover, and Navient are among the stocks that Jefferies rates as a Buy in this arena. As loan payments restart, individuals may consider refinancing their loans. Although there have been recent shifts in the interest rate environment, there is still potential for refinancing activity to resume. Additionally, there is a likelihood that general loan demand in the private markets will gradually recover.
Looking for More Information?
If you have questions about federal student loan repayment plans, you can find more information here.
For explanatory videos on student loans, visit this page.