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📂 Category: Government News,News
✅ Here’s what you’ll learn:
Key takeaways
- Thousands of high-income student loan borrowers have been blocked from switching to an income-based repayment (IBR) plan, preventing them from qualifying for tax-free loan forgiveness.
- If the processing delay is not corrected, these borrowers may not be able to repay their loans before the tax-free deadline expires at the end of the year.
Some student loan borrowers are being prevented from switching to a federal repayment plan that would help them get loan tax relief before the end of the year.
Many borrowers seek to move to an income-based repayment plan, as they may be eligible for student loan forgiveness before the end of the year. Those who become eligible for loan forgiveness in 2025, usually after making 20 or 25 years of qualifying payments, do not have to pay taxes on their loan forgiveness.
The problem is that the Department of Education is servicing the loans Some borrowers’ IBR conversion applications are being held rather than processed, making it impossible for many to become eligible for relief this year. The forgiveness for those who reach eligibility after 2025 will be treated as taxable income.
Scrambling to switch plans
Millions of borrowers in the Savings for a Valuable Education repayment plan remain in forbearance, preventing them from making payments that would qualify for loan forgiveness.
Some of these borrowers have already met the payment requirements for forgiveness or are a payment or two away from doing so. However, borrowers who use SAVE are not eligible for forgiveness, so they must convert to IBR, Pay As You Earn, or Repay Income Contingent to finish their payments.
The IBR has been the primary plan that SAVE borrowers have transitioned to, as it generally offers more affordable payments than other plans and is the most stable option for the future, as other plans will be phased out.
However, there are significant barriers preventing many SAVE plan borrowers from switching to an IBR plan: The income requirements scheduled to be phased out have not yet been removed.
Why is this important to borrowers?
Millions of student loan borrowers could face a large tax bill in the next two years if their loans are not paid off before the end of 2025, when the tax break expires.
Why some borrowers cannot access IBR
The partial financial hardship requirement in an IBR plan requires that an applicant’s payments be less than they would be under a standard 10-year repayment plan. This means that borrowers with high incomes or low loan amounts are typically denied IBR.
A provision in the “Big, Beautiful Bill” would require the Education Department to allow borrowers to switch to an income-based repayment plan starting July 4, even if they do not meet partial financial hardship requirements.
However, student loan servicers continued to reject applicants who did not meet this requirement for months afterward.
In October, the Department of Education asserted in a lawsuit that it would not reject borrowers who did not meet partial financial distress requirements. It also said that borrowers who applied for IBR on or after July 4 but were denied due to the requirements will be invited to reapply.
However, the department did not provide any updates on when it will begin processing applications for these borrowers. When Investopedia reached out to Department of Education spokespersons, it directed borrowers to its website, which says system changes to implement updates to the IBR will be completed in the winter of 2025.
Why is it important to access this payment plan?
The IBR remains the most affordable income-based repayment plan for many SAVE borrowers seeking to make progress toward loan forgiveness.
Borrowers who do not meet the partial financial distress requirements are not eligible to enter a PAYE plan. The ICR plan does not require partial hardship and provides loan forgiveness to borrowers after 25 years of qualifying payments. However, payments under an ICR plan are generally more expensive than those under an IBR plan.
| Differences between IBR and ICR plan | ||
|---|---|---|
| Payment plan | %l Discretionary income Used to calculate payment amounts | The time until loan forgiveness is granted |
| IBR plan (for borrowers who took out loans for the first time after July 1, 2014) | 10% | 20 years |
| IBR plan (for borrowers who borrowed before July 1, 2014) | 15% | 25 years old |
| ICR plan | 20% | 25 years old |
IBR payments are capped at what a borrower would pay under a standard 10-year plan. This is especially important for borrowers who do not meet the criteria for partial financial distress, as their payments, calculated based on their income, will generally be very high.
SAVE borrowers who do not meet the partial financial hardship requirements and are looking to complete their payments before the loan forgiveness tax rule expires will either have to make high payments on the ICR or hope to be accepted into the IBR in time.
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