The SAVE Plan: New Student Loan Repayment Program

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Yesterday, the administration of President Joe Biden launched a student loan repayment plan called Saving on A Valuable Education (SAVE) that could provide relief to borrowers of federal student loans who will have to resume payments in September 2023.

The plan is a type of income-driven repayment that could lower some borrowers’ student loan payments to $0, while others could see their payments cut in half.

Here’s how the SAVE plan works, and how to tell if it’s the right fit for you.

How the SAVE Plan Works

The SAVE plan provides multiple benefits for borrowers, but here are three ways it currently stands out from other income-driven repayment (IDR) plans: 

• It increases the amount of your income that’s protected from payments. On an income-driven repayment plan, payment amounts are based on a percentage of your discretionary income. So, the more discretionary income you have, the higher your payments. With the SAVE plan, your discretionary income is calculated using 225% of the federal poverty amount instead of the 150% used by most IDR plans. This means less income is considered discretionary, and therefore there are lower payments.
• If you make a monthly payment, your loan won’t grow due to unpaid interest. The Biden Administration estimates that about 70% of borrowers who were on IDR plans before the pandemic could benefit from this. 
• Married couples who file separately won’t be required to include their spouse’s income in their payment calculation. Couples filing separately will also have their spouse excluded from their family size in the calculation, which will help lower monthly payments.

The SAVE plan has some additional benefits that aren’t in effect just yet. Some of them will start in July 2024, including:

• Payments will be cut in half for undergraduate-only borrowers. Payments on undergraduate loans will be reduced from 10% of income above 225% of the poverty line to 5% of income above that threshold, which should cut monthly payments in half. 
• Payments will be lowered for borrowers with both graduate and undergraduate loans. The administration states that those with both graduate and undergraduate loans will pay a weighted average between 5-10% of their income, based on their original loan balances, which should bring down monthly payments for these borrowers.
• Borrowers with small balances could reach forgiveness faster than on other plans. Current IDR plans require 20 or 25 years of payments before forgiveness for all principal balances. With SAVE, borrowers who had original balances of $12,000 or less will receive forgiveness after 120 payments (the equivalent of 10 years’ worth). The borrower will need to make an additional 12 payments for each $1,000 borrowed over $12,000, capping at 20 or 25 years of payments before forgiveness.

Additionally, starting in July 2024, borrowers who consolidate loans within the federal student loan system won’t lose progress toward forgiveness and will receive credit toward forgiveness for certain periods of deferment and forbearance. For other periods of deferment and forbearance, borrowers can make catch-up payments to get credit toward forgiveness. 

Who the SAVE Plan Is Best Suited For

The SAVE plan is available to student borrowers with a federal direct student loan in good standing. And, it could be a useful tool in several scenarios. 

Here are a few signs that it might be the right move for you: 

• You’ll have trouble making your payments. As with all IDR plans, the SAVE plan will limit your payments to a percentage of your discretionary income. It could reduce the amount you owe, and the Biden administration estimates that borrowers will see their total payments per dollar borrowed drop by 40%. 
• You’re on another IDR plan. If you’re already on REPAYE, you’ll be automatically enrolled in the SAVE plan. The SAVE plan could lower your payment further — it’s estimated that this plan will cut payments on undergraduate loans in half compared to other IDR plans. So, it could be worth switching. 
• You earn less than $15 an hour. Under the SAVE plan, a single borrower earning less than $15 won’t have to make any payments. 
• You have a small amount of student loans that you can’t afford. If you’re struggling with a small amount of student loan debt, this plan could help. Since it shortens the forgiveness period from more than 20 years to 10 years for those with original balances of $12,000 or less when compared to current plans, it could be a smart move for those in this situation. 

How to Sign Up for the SAVE Plan

Borrowers can begin enrolling at StudentAid.gov/SAVE. The site recommends choosing the option for your loan servicer to choose the lowest monthly payment plan.

Those who participated in the Revised Pay As You Earn (REPAYE) Plan, the previous iteration of this option that generally capped payments at 10% of borrowers’ monthly discretionary income, will be automatically enrolled. 

If you have questions about student loan repayment, you’re welcome to schedule a complimentary consultation with our team of expert financial advisors using the link below.