Millions of Americans are paying down their student loans for the first time in years but with more repayment options than before.
Chief among them is President Biden’s new income-driven repayment plan - Saving on a Valuable Education plan, commonly known as SAVE - which ties monthly payments to earnings and family size. The White House estimates the plan could save the typical borrower $1,000 a year on payments because it reduces the amount of income used to calculate monthly bills. And some people enrolled in the plan will have their balances forgiven starting in February.
So how does it work? Here’s some information that could help you decide whether SAVE is right for you.
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What is the SAVE plan?
It is an amended version of an existing income-driven repayment plan known as Revised Pay as You Earn, or REPAYE.
A little background: Income-driven plans cap monthly bills at a percentage of a borrower’s earnings and extend repayment periods from the standard 10 years to as long as 25 years, with the promise of forgiving the balance at the end of that term. Payments are based on a percentage of discretionary income, typically whatever a person earns above 150 percent of the federal poverty line.
SAVE differs from the existing four IDR plans in a few key ways.
It raises the amount of income shielded from the calculation of your payments from 150 percent to 225 percent of the federal poverty line. The plan also caps payments for undergraduate loans to 5 percent of income above that 225 percent threshold, instead of 10 percent. People with debt from undergraduate and graduate studies will pay a weighted average between 5 percent and 10 percent.
What’s more, you can skip having to manually recertify your income under SAVE if you give approval for the department to automatically access your latest tax return from the Internal Revenue Service.
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Will SAVE affect the interest on my loans?
Under other income-driven plans, if your monthly loan payment was not sufficient to cover the interest that had accrued on your debt, the unpaid portion would be added on to your remaining balance. But that would end under the SAVE plan.
This is the only IDR plan that prevents negative amortization, one of the reasons borrowers can see their balances balloon over time.
“As long as you pay what you owe under this plan, you’ll no longer see your loan balance grow because of unpaid interest,” Biden has said about the SAVE plan.
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How does loan forgiveness work in the SAVE plan?
The loan forgiveness component of SAVE is most generous for people who didn’t borrow much. If you borrowed $12,000 or less for undergrad or graduate school, you will receive loan forgiveness after making 10 years’ worth of payments, instead of 20 or 25 years’ worth.
Every additional $1,000 borrowed above $12,000 would add one year of monthly payments to the time a borrower must pay before their debt is forgiven. So if you borrowed $14,000, it would take 12 years of payments before your balance is forgiven. Owe a whole lot more than that? The plan still caps the number of years to forgiveness at 20 years for undergrad loans and 25 years for grad debt.
Starting in February, the Education Department will begin forgiving the outstanding balance of enrollees who borrowed less than $12,000 and have been paying down the debt for at least a decade.
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How much will I pay on SAVE?
Because of the higher income exemption, a single borrower earning under $32,800 or a family of four earning under $67,500 would not have to make payments under the SAVE plan, while still getting credit toward loan forgiveness.
The Biden administration says people who earn more could save $1,000 a year compared with other IDR plans. Say you owe $25,000 in student loans and earn $38,000 a year. Under the old REPAYE plan, your monthly payment would have been $134 a month, but with SAVE it would be $43 a month. That amounts to an annual savings of $1,092.
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Who is eligible for SAVE?
People with federal loans made directly by the government for their own education are eligible for the plan, as well as those who consolidate their loans from the defunct Federal Family Education Loan Program.
However, people with Parent Plus loans are shut out of the new plan. Parents who have taken on federal debt for their children’s education can only enroll in what’s known as income-contingent repayment, which caps monthly bills at 20 percent of disposable income and forgives the remaining balance after 25 years.
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How do I apply for SAVE?
You can apply on the Education Department’s website at: studentaid.gov/idr. People who are already enrolled in the REPAYE plan will be automatically switched to SAVE.
The Education Department said it will take about 10 minutes to complete the application and roughly four weeks for student loan servicers to process it.
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How soon could my payments drop?
The SAVE plan takes full effect in 2024, but borrowers can enroll now and some components are currently being implemented.
Chief among them is raising the income exemption from 150 to 225 percent of the poverty line. The Education Department will also stop charging monthly interest not covered by your payment on SAVE. Married borrowers who file their taxes separately will no longer be required to include their spouse’s income in their payment calculation for the plan. And everyone who opts in to having their tax data pulled won’t have to submit documents to recertify their income annually.
Borrowers with undergrad debt will have to wait until next year to see their payments cut in half from 10 to 5 percent of income above 225 percent, or the weighted average between 5 percent and 10 percent for those who also have graduate loans.