How the SAVE Student Loan Repayment Plan Can Lower Your Freelance Tax Bill

If you are a freelancer with significant student loan debt, the new SAVE (Saving on a Valuable Education) loan repayment plan put in place by the Biden administration may reduce your outgoing loan payments and make it easier to qualify for loan repayment plans.

In regard to making qualification easier for you, the new SAVE plan makes it easier for deciding bodies to access your freelance tax information (with your permission) to determine the amount and other obligations related to income-based debt repayment decisions. .

Read on for some other Frequently Asked Questions about the SAVE Student Loan Program for Freelancers:

What is the SAVE Loan Repayment Program?

Eligible borrowers can now enroll in a new income-driven repayment plan that could lower monthly bills and reduce the pay back amount over the lifetime of their loans.

If borrowers apply this summer, the changes to their bills are expected to take effect before payments resume in October after the pandemic pause on repayments ends.

What is the SAVE Loan Repayment Program?

Once the plan is fully phased in next year, some people will see their monthly bills cut in half and remaining debt canceled after making at least 10 years of payments.

When will the SAVE Plan be implemented?

Some parts of the SAVE plan will be implemented this summer and others will take effect in July 2024. Here’s what borrowers need to know.

How does the SAVE income-driven repayment plan affect freelancers with student loans?

Currently, there are several different kinds of income-driven repayment plans for borrowers with federal student loans. The new SAVE plan will essentially replace one of those, known as REPAYE (Revised Pay As You Earn), while the others are phased out for new borrowers.

Under these plans, payments are based on a borrower’s income and family size, regardless of how much outstanding student debt is owed.

There is also a forgiveness component. After making at least 10 years of payments, a borrower’s remaining balance is wiped away.

Who qualifies for SAVE?

To qualify, you must have federally held student loans  which encompass direct subsidized, unsubsidized and consolidated loans, as well as PLUS loans made to graduate students. Private student loans do not qualify for the new SAVE repayment plan or any other federal repayment plan.

How can a freelancer apply for SAVE program loan forgiveness?

The application to apply for loan forgiveness under the SAVE program was officially launched on August 22, 2023. If you already enrolled in the REPAYE repayment plan, you will be automatically switched to the SAVE plan.

Not sure which student loan plan you are enrolled in? Visit StudentAid.gov Be sure to enroll in SAVE before payments resume and expect applications to be processed by servicers in about four weeks.

If you don’t have your application approved before the repayments start again in the post-covid collection cycle, servicers are expected to place you in a forbearance status for the upcoming billing cycle so you would not be obligated to pay more than would be required under the SAVE plan.

What type of student loan repayment reduction on a monthly basis does the SAVE plan offer for student debt?

Under the SAVE plan the qualifying threshold for smaller payments is lowered. For example, a single borrower earning $32,800 or less or a borrower with a family of four earning $67,500 or less will see their payments set at $0 if enrolled in SAVE.

What other SAVE-related changes are happening now?

1. Under the SAVE plan , there is an increase in the protected income threshold which means if you owe on your student loan, your discretionary income (the amount left after paying for necessities) is shielded from student loan payments.

The SAVE plan recalculates discretionary income so that it’s equal to the difference between a borrower’s adjusted gross income and 225% of the poverty level. Existing income-driven plans calculate discretionary income as the difference between income and 150% of the poverty level.

This change will result in lower payments for you, which may raise your taxable income.

1. Interest limit: Under the new payment plan, unpaid interest will not accrue if a borrower makes a full monthly payment.

That means that a borrower’s balance won’t increase even if the monthly payment doesn’t cover the monthly interest. For example: If $50 in interest accumulates each month and a borrower has a $30 payment, the remaining $20 would not be charged.

1. Married borrowers who file their taxes separately will no longer be required to include their spouse’s income in their payment calculation for SAVE. This could lower monthly payments for two-income households.
2. Automatic recertification which means you will now be able to provide the Department of Education to access your latest tax return. This will make the application process easier because borrowers won’t have to manually provide income or family size information. It will also allow the department to automatically recertify borrowers for the payment plan on an annual basis.

What changes are coming in 2024 under the SAVE program?

Starting in July 2024, the following changes are expected as part of the SAVE plan:

1. Payments on loans borrowed for undergraduate school will be reduced from 10% to 5% of discretionary income.
2. Borrowers who have loans from both undergraduate and graduate school will pay a weighted average of between 5% and 10% of their income based upon the original principal balances of their loans.
3. A borrower with $20,000 from their undergraduate education and $60,000 from graduate school will pay 8.75% of their income, according to a fact sheet provided by the Biden administration.
   
4. Reduction in the period prior to forgiveness of student loans.  Currently, borrowers who pay for 20 or 25 years under an income-driven repayment plan will see their remaining balance wiped away. If your debt is $12, 000 or less,you may see it forgiven after paying for just 10 years. Every additional $1,000 borrowed above that amount would add one year of monthly payments to the required time a borrower must pay.
   
5. Borrowers who consolidate their loans will receive partial credit for their previous payments. The SAVE plan offers a new, 10-year forgiveness program for borrowers with original loan balances below $12,000. If you are one of these borrowers you may be eligible for at least 10 years of back credit. You can learn more on the federal student aid website.

As you can see, there are many new implications of the SAVE plan for student loan repayment that is being instituted now. Be sure to apply as soon as possible for repayment reductions or complete forgiveness before the pause in student loan payments that was implemented during Covid ends. This will ensure that your freelance income situation is not negatively impacted. If you are unsure of the implications on your freelance income and taxes, contact a qualified tax professional who can help you determine how the SAVE program may impact your taxes.

How Does CARES Act Employer Student Loan Repayment Assistance Impact Freelance Taxes?

Another student loan assistance program  made possible under the CARES Act expansion of IRC Section 127, allowed employers to give employees $5,250 in tax-free student loan repayment assistance during a tax year. The question may arise if self-employed freelancers can provide this tax credit to themselves. The short answer is no, because of the eligibility requirements set forth by the IRS detailed below.

To qualify, you first must have a separate written plan that provides educational assistance for the CARES Act benefit of tax-free student loan repayments, your employees and these payments are only available if all of the following tests are met, according to the IRS:

• The program benefits employees who qualify under rules set up by you that don't favor highly compensated employees. To determine whether your program meets this test, don't consider employees excluded from your program who are covered by a collective bargaining agreement if there is evidence that educational assistance was a subject of good-faith bargaining.
• The program doesn't provide more than 5% of its benefits during the year for shareholders or owners (or their spouses or dependents). A shareholder or owner is someone who owns (on any day of the year) more than 5% of the stock or of the capital or profits interest of your business.
• The program doesn't allow employees to choose to receive cash or other benefits that must be included in gross income instead of educational assistance.
• You give reasonable notice of the program to eligible employees.
• Your program can cover former employees if their employment is the reason for the coverage.
  

For this exclusion, a highly compensated employee for 2023 is an employee who meets either of the following tests.

1. The employee was a 5% owner at any time during the year or the preceding year.
2. The employee received more than $135,000 in pay for the preceding year.

You can choose to ignore test (2) if the employee wasn't also in the top 20% of employees when ranked by pay for the preceding year.

For this exclusion to apply you must treat the following individuals as employees.

• A current employee.
• A former employee who retired, left on disability, or was laid off.
• A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control.
• Yourself (if you are the sole proprietor).
• A partner who performs services for a partnership.

You can exclude up to $5,250 of educational assistance you provide to an employee under an educational assistance program from the employee's wages each year.

If you don't have an educational assistance plan, or you provide an employee with assistance exceeding $5,250, you must include the value of these benefits as wages, unless the benefits are working condition benefits.

If you are unsure of the implications of student loan forgiveness or repayments on your freelance income and taxes, contact a qualified tax professional who can help you determine how the SAVE program may impact your taxes.