The Supreme Court recently rejected President Joe Biden’s student loan forgiveness program. However, there is still good news for borrowers as a new income-driven repayment plan is on its way, which could reduce monthly bills and overall loan amounts.
By next year, once fully implemented, this plan, called SAVE (Saving on a Valuable Education), will cut some people’s monthly bills in half and cancel the remaining debt after making at least 10 years of payments.
Unlike the blocked one-time forgiveness program, the new repayment plan will benefit both current and future borrowers who enroll in it.
While the benefits of the SAVE plan are great, it comes with a cost to the government. Estimates range from $138 billion to $361 billion over 10 years, depending on how many borrowers sign up for the plan. In comparison, Biden’s student loan forgiveness program was projected to cost around $400 billion.
The SAVE repayment plan has undergone a formal rulemaking process at the Department of Education. The agency has previously established several other income-driven repayment plans in the same manner, successfully avoiding legal challenges.
Implementation of the SAVE plan will occur in stages, with some parts taking effect this summer and others starting in July 2024. Here’s what borrowers need to know.
Understanding Income-Driven Repayment Plans
Currently, there are several types of income-driven repayment plans available for borrowers with federal student loans. The new SAVE plan will essentially replace one of these plans called REPAYE (Revised Pay As You Earn), while the others will be phased out for new borrowers.
These plans calculate payments based on a borrower’s income and family size, irrespective of the amount of outstanding student debt. After making at least 10 years of payments, borrowers become eligible for loan forgiveness, wiping away their remaining balance.
Qualifications for the SAVE Plan
To be eligible for the SAVE repayment plan, borrowers must have federally held student loans. This includes Direct subsidized, unsubsidized, and consolidated loans, as well as PLUS loans given to graduate students.
Parents who took out a federal PLUS loan to assist their child’s college education are not eligible for the new repayment plan.
Borrowers with Federal Family Education Loans (FFEL) or Perkins Loans held by a commercial lender need to consolidate them into a Direct loan to qualify.
Private student loans are not eligible for the SAVE repayment plan or any other federal repayment plan.
Applying Student Loan for the SAVE Plan
Borrowers already enrolled in the REPAYE plan will be automatically switched to the SAVE plan once it becomes available this summer. They can check their current repayment plan by logging into StudentAid.gov and accessing their My Aid page.
Borrowers not currently enrolled in REPAYE can switch to it now to be automatically enrolled in SAVE later this summer. They can contact their loan servicer or submit a request through their Federal Student Aid account.
Alternatively, borrowers can wait until the application for the new SAVE plan becomes available later this summer.
Enrolling in SAVE Before Payments Resume
The Department of Education will process applications submitted this summer before payments resume in October. Loan servicers may take a few weeks to process requests as they will need to verify income and family size information.
Payment Amounts Can Be $0
Under the SAVE plan, borrowers may have monthly payments as low as $0. While other income-driven repayment plans already offer a $0 monthly payment for some borrowers, the SAVE plan lowers the qualifying threshold.
For example, a single borrower earning $32,800 or less or a borrower with a family of four earning $67,500 or less will have their payments set at $0 if enrolled in SAVE.
Estimated Monthly Payment Under SAVE Plan
The new SAVE plan will reduce monthly payments for many student loan borrowers. The amounts will be calculated based on income and family size, with payments potentially as low as $0.
Changes Coming This Summer
Increase in Protected Income Threshold:
Like existing income-driven repayment plans, a borrower’s discretionary income (the amount left after essential expenses) will be protected from student loan payments.
The SAVE plan recalculates discretionary income based on a borrower’s adjusted gross income and 225% of the poverty level, resulting in lower payments.
Interest Limit:
With the new plan, unpaid interest will not accumulate if a borrower makes a full monthly payment. This means the borrower’s balance won’t increase even if the payment doesn’t cover the monthly interest.
Lower Payments for Married Borrowers:
Married borrowers who file taxes separately will no longer need to include their spouse’s income when calculating payments under SAVE. This change can lower monthly payments for households with two incomes.
Automatic Recertification: Borrowers can allow the Department of Education to access their latest tax returns, simplifying the application process. The department can then automatically recertify borrowers for the payment plan each year.
Changes Coming in July 2024
Cutting Payments in Half:
Payments for undergraduate loans will be reduced from 10% to 5% of discretionary income. Borrowers with loans from both undergraduate and graduate school will pay a weighted average between 5% and 10% of their income based on the original loan balances.
Shorter Time to Forgiveness:
Currently, borrowers who make payments for 20 or 25 years under an income-driven repayment plan can have their remaining balance forgiven. Under the new SAVE plan, borrowers who owe $12,000 or less will see their debt forgiven after only 10 years of payments.
For every additional $1,000 borrowed above that amount, one extra year of monthly payments will be required for forgiveness. Borrowers who consolidate their loans will receive credit for previous payments made towards forgiveness.
Automatic Enrollment for Struggling Borrowers:
Borrowers who are 75 days late on their payments will be automatically enrolled in the best income-driven plan for them, as long as they have consented to allow the Department of Education to securely access their tax information.
Summary:
While President Biden’s student loan forgiveness program was struck down, there is still hope for borrowers through the new SAVE repayment plan. By enrolling in this income-driven plan, borrowers can lower their monthly payments, reduce their overall loan amounts, and even have their remaining debt canceled after 10 years of payments.
The plan will benefit both current and future borrowers with federally held student loans. However, it’s important to note that private student loans are not eligible for the SAVE plan.
Borrowers can switch to the SAVE plan if they are already enrolled in the REPAYE plan or wait for the application to become available later this summer. These changes will bring relief to borrowers struggling with student loan repayment and provide a path toward financial stability.
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