The Secure 2.0 Act: A New Era for Student Loan Repayment

Introduction to the Secure 2.0 Act

The Secure 2.0 Act, also known as the Securing a Strong Retirement Act of 2022, was passed by Congress as part of the Consolidated Appropriations Act of 2023 in December 2022. The legislation aims to expand and strengthen retirement savings options for Americans. It makes significant changes to 401(k) plans, IRAs, and other retirement accounts.

The Secure Act was originally passed in 2019 to address concerns about Americans having inadequate retirement savings. The Secure 2.0 Act builds on the original law by further enhancing retirement security. The goal is to help more people save more for retirement and preserve their savings.

Some of the major changes related to student loan repayments include modifying income-driven repayment plans to provide loan forgiveness after 10 years for borrowers with lower balances. It also changes the interest subsidy structure. The Secure 2.0 Act expands access to retirement plans, increases contribution limits, and allows employers to match student loan payments. Overall, it aims to incentivize and facilitate increased retirement contributions.

Changes to Income-Driven Repayment Plans

The Secure 2.0 Act makes significant changes to income-driven repayment (IDR) plans for federal student loans. Under the new law, the standard IDR plan term will be shortened from 20 to 10 years for undergraduate loans, though it remains at 20 years for graduate loans ([1]).

This change will lower monthly payments for many borrowers on IDR plans. Previously, payments under IDR were set at 10% of discretionary income and stretched over 20 years. Now, payments will be set at 5% of discretionary income over 10 years for undergraduate loans. This effectively cuts monthly payments in half for eligible borrowers [2].

However, the tradeoff is that borrowers will accrue interest for 10 years instead of 20 years before qualifying for loan forgiveness. Some experts argue this provides less benefit than expanding existing IDR plans and keeping the 20-year term [3]. Nonetheless, the revamped IDR structure under Secure 2.0 offers more affordable monthly payments as an option for struggling borrowers.

[1] https://www.kiplinger.com/personal-finance/student-loans-secure-2-act-helps-lighten-burden

[2] https://vinfoundation.org/secure-act-2-0-retirement-plan-contributions-tied-to-your-student-loan-payments/

[3] https://www.lordabbett.com/en-us/financial-advisor/insights/retirement-planning/secure-act-2-0-student-loan-match--how-it-works.html

Forgiveness After 10 Years for Lower Balances

The Secure 2.0 Act introduces a new loan forgiveness option for borrowers with lower student loan balances. Under this provision, borrowers with eligible federal student loans can qualify for loan forgiveness after making 120 qualifying monthly payments over 10 years [1].

To be eligible, a borrower's total loan balance when they first entered repayment must have been below the following thresholds:

• $12,000 for undergraduate loans
• $36,000 for graduate loans

These maximum initial loan balance amounts apply to Direct Loans and FFEL Program loans held by ED. Perkins Loans and commercially held FFEL loans do not qualify [2].

Borrowers must make 120 monthly payments under an income-driven repayment plan or the standard 10-year repayment plan. Payments made under extended or graduated repayment plans do not count. Any months spent in deferment or forbearance are also excluded.

This new 10-year forgiveness option allows eligible borrowers with modest loan debts to obtain forgiveness much sooner than the 20 or 25 years required under existing income-driven plans [1]. However, borrowers will need to carefully weigh the pros and cons, as opting for 10-year forgiveness may result in a larger tax bill compared to forgiveness under an income-driven plan after 20 or 25 years [3].

[1] https://www.kiplinger.com/retirement/bipartisan-retirement-savings-package-in-massive-budget-bill

[2] https://www.irs.gov/pub/irs-utl/2023ntf-28-retirement-plan-distributions-after-secure.pdf

[3] https://www.finance.senate.gov/download/retirement-section-by-section-

Interest Subsidy Changes

The SECURE 2.0 Act introduces new interest subsidy provisions for certain borrowers that differ from previous subsidy rules. Under the new law, borrowers with income-driven repayment plans can receive a subsidy for any unpaid interest that accrues on their loans [1]. This allows the unpaid interest to not be capitalized onto the principal balance.

Previously, borrowers were only eligible for interest subsidies if they were on specific repayment plans - namely the Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), and Income-Based Repayment (IBR) plans prior to July 1, 2014 [2]. The new provisions expand eligibility to all income-driven plans.

The subsidy also now applies for a longer period. Before, it was limited to the first 3 years of repayment for undergraduate loans and the first 5 years for graduate loans. Now, borrowers can receive the interest subsidy until they have paid off their loan or for half the time they were enrolled, whichever is less.

Overall, the changes allow more borrowers to benefit from unpaid interest not capitalizing and accruing additional interest. This can help them pay down principal faster once payments resume. However, some experts note paying extra during the subsidy period could negate its effects.

[1] https://www.irs.gov/pub/irs-drop/n-24-02.pdf

[2] https://vinfoundation.org/secure-act-2-0-retirement-plan-contributions-tied-to-your-student-loan-payments/

Impact on Public Service Loan Forgiveness

The Secure 2.0 Act makes several changes that will impact borrowers seeking Public Service Loan Forgiveness (PSLF)[1]. Under the existing PSLF program, borrowers working for qualifying public service employers can have their federal student loans forgiven after making 120 qualifying payments.

With the Secure 2.0 Act, borrowers will now only need to make 96 monthly payments before becoming eligible for forgiveness, reducing the overall repayment term by two years[2]. This provides faster relief for borrowers pursuing PSLF.

Borrowers will need to be strategic in qualifying for PSLF under the new rules. The first key is ensuring employment with a qualifying public service employer. Eligible employers include government organizations, 501(c)(3) non-profits, and other not-for-profit organizations providing qualifying public services[3].

The second key is making sure all loan payments made are qualifying payments under the PSLF program rules. This means making full, on-time, monthly payments under an income-driven repayment plan. Under Secure 2.0, existing income-driven plans have been consolidated into one new plan. Borrowers must enroll in this new plan to qualify for PSLF under the revised terms[1].

Overall, Secure 2.0 provides a faster path to forgiveness for dedicated public service workers. Careful planning and execution will be required for borrowers to maximize the revised PSLF benefits.

[1] https://www.forbes.com/sites/adamminsky/2024/01/04/if-you-work-and-have-student-loans-these-new-benefits-could-help/

[2] https://www.plansponsor.com/large-plan-sponsors-seek-irs-clarification-on-secure-2-0-provisions/

[3] https://www.bysavi.com/assets/secure-report2.0.pdf

Changes to Parent PLUS and Graduate Loans

The Secure 2.0 Act makes several notable changes to PLUS loans taken out by parents and graduate students [1]. One of the biggest changes is that new PLUS loan borrowers will have access to income-driven repayment plans that were previously only available for other federal student loans. This means parents and graduate students will have the option to cap their monthly payments at 10% of discretionary income and receive loan forgiveness after 20 years of payments, or 10 years if working in public service [2].

Previously, PLUS loans had very limited repayment options beyond the standard 10-year repayment plan. This change provides more flexibility and affordability for PLUS loan borrowers struggling to manage their payments [3].

Another important change pertains to interest capitalization on PLUS loans. Currently, any unpaid interest gets added to the principal balance when a PLUS loan enters repayment. The Secure 2.0 Act eliminates this interest capitalization, preventing balances from growing larger due to unpaid interest [1]. This will help keep PLUS loan debt from snowballing for borrowers who can't afford to pay the interest as it accrues.

Overall, these changes will make Parent PLUS and Grad PLUS loans more manageable and affordable for borrowers. The added repayment flexibility and elimination of capitalized interest will help reduce the burden of PLUS loan debt.

[1] https://www.foley.com/insights/publications/2023/04/secure-2-student-loans-401k-plan-matching/

[2] https://youbenefited.com/resource/how-secure-act-2-0-will-help-you-and-your-employees/

[3] https://www.lordabbett.com/en-us/financial-advisor/insights/retirement-planning/secure-act-2-0-student-loan-match--how-it-works.html

Implementation Timeline

The Secure 2.0 Act will be implemented in phases over the next several years. Most provisions will take effect starting January 1, 2024 [1].

Some key implementation dates include:

• July 2023 - Lower interest rates for undergraduate loans will take effect for new borrowers [2].

• January 2024 - The $57,500 forgiveness threshold, revised income-driven repayment plans, and changes to Parent PLUS loans take effect. Interest subsidy changes also begin.

• January 2025 - The public service loan forgiveness waiver expires. Borrowers will need to have submitted an employment certification form by 10/31/2024 to qualify [3].

For current borrowers, the Department of Education is expected to provide guidance on how and when they can transition to the new income-driven repayment plans. This includes potentially allowing borrowers to get credit under the new plans for payments made under old plans.

The law does not automatically enroll borrowers into the new plans. Current borrowers will need to opt-in through an application process that will be clarified in the coming months.

Borrower Considerations

The Secure 2.0 Act will impact federal student loan borrowers in different ways depending on their individual situations. Some of the key considerations for borrowers include:

• Recent graduates with lower loan balances will benefit the most from the new 10-year forgiveness eligibility for balances under $12,000. This provides an accelerated path to loan forgiveness for those with smaller debts [1].

• Borrowers seeking Public Service Loan Forgiveness will need to factor in the new limits on $57,500 of forgiveness being tax-free. Any amount above that forgiven will be considered taxable income [2]. Those pursuing PSLF may want to focus on maximizing other retirement savings to offset potential taxes.

• Parents taking out PLUS loans and graduate students should be aware of the new limits on interest capitalization and accruing interest while enrolled. This will help reduce overall repayment costs in some cases [1].

• All borrowers will benefit from the expanded income-driven repayment options that cap monthly payments at 5% of discretionary income. This provides more affordable payments, especially for those earning lower incomes early in their careers [2].

• Borrowers may want to strategically time new loan consolidation requests until after July 2023 when the new IDR plans take effect. This allows them to take advantage of the lower 5% monthly payment caps.

• Tracking implementation timelines will be key so borrowers can proactively enroll in the new IDR plans when available to maximize savings. Consulting with financial aid advisors can help with navigating the changes.

[1] https://www.kiplinger.com/retirement/bipartisan-retirement-savings-package-in-massive-budget-bill

[2] https://www.nerdwallet.com/article/investing/secure-act

Criticisms and Concerns

The Secure 2.0 Act has received some criticism from experts for not going far enough to help lower-income Americans save for retirement. Some of the major concerns include:

• The Act mostly benefits higher-income individuals who don't necessarily need more help saving for retirement (fuoco.cpa). The increased caps on 401(k) contributions and IRA limits favor those with higher incomes.

• It does little to enhance retirement security for lower-income workers (insurancenewsnet.com). More could have been done to make saving easier for those struggling financially.

• The Act does not address the pension crisis facing many Americans (cnbc.com). Multi-employer pension plans are underfunded and could lead to cuts.

• More incentives or automatic enrollment could help increase retirement plan participation for lower-income workers and small businesses.

• Matching contributions for student loan payments into retirement accounts were not included. This could have encouraged younger generations to save.

Overall, while the Secure 2.0 Act takes some steps to update retirement saving policies, it lacks meaningful enhancements to help those most in need of retirement security. There are concerns it does too little for lower-income individuals and ignores major problems like the pension crisis.

Significant Overhaul to the Federal Student Loan System in Over a Decade

The Secure 2.0 Act represents the most significant overhaul to the federal student loan system in over a decade. By expanding income-driven repayment plans, adding faster loan forgiveness options, and capping interest for lower-balance loans, the act aims to provide more affordable repayment and debt relief for student loan borrowers.

The key changes include:

• Expanded access to income-driven repayment plans that cap payments at 5% of discretionary income and offer forgiveness after 10 years for loan balances under $12,000 or after 20 years for higher balances. This will reduce monthly payments for many.

• Automatic enrollment into income-driven repayment for borrowers who are behind on payments or have balances over $12,000. This makes accessing affordable plans easier.

• Capping interest rates for lower-balance undergraduate loans to prevent balances from ballooning. Interest will not capitalize as long as payments are made.

• Allowing some borrowers to have up to $20,000 in debt forgiven after 10 years of payments. This provides faster relief for those with lower balances.

• Continuing the pause on student loan payments and interest until 60 days after enactment. This gives time for implementation.

Overall, these changes will make student loan repayment more manageable and provide pathways to forgiveness for many borrowers. However, some criticize the act for not going far enough and argue for broader debt cancellation. The future outlook depends on successful implementation and whether further reforms are pursued. But the Secure 2.0 Act reflects meaningful progress in reforming student debt.

Imagine using the weight of your student loan to lift you up towards your retirement goals. Seems impossible? Think again! With Paidly, you could turn your loan payments into retirement contributions thanks to the Secure 2.0 Act. Want to know how to make it a reality? Talk to us, and let’s turn your worrying into dreaming again. Act now and let your student debt be the propulsion you need for a secure future!