Many students who go to university in the U.S. take out federal student loans. After graduation, they have to repay these loans and this can be difficult. The Biden Administration tried to cancel billions in student loan debt last year but the initiative was struck down by the Supreme Court. In its place, Biden announced the Saving on a Valuable Education (SAVE) plan. The plan helps to reduce costs for a significant number of federal loan borrowers.
SAVE: An income-driven repayment (IDR) plan
The Saving on a Valuable Education (SAVE) plan is an income-driven repayment plan. It calculates a monthly payment amount according to income and family size. For borrowers on low incomes compared to their loan balances, the SAVE plan can lower their monthly payments. Borrowers whose student loan debt is at least half their annual income may also benefit, depending on the type of debt they have.
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Benefits of the SAVE plan
Payment calculation
The SAVE plan took the place of REPAYE in 2023. From July 2024 undergraduate borrowers will pay 5% of their discretionary income. Graduate borrowers will still pay 10% of their discretionary income. A weighted average between 5% and 10% applies if a borrower has undergraduate and graduate loans. Discretionary income is the difference between adjusted gross income (AGI) and the poverty guideline which is 225% for this plan. It means that if discretionary income is $0, payment is also $0.
Interest Subsidy
The SAVE plan will cover unpaid interest after borrowers make payment toward an unsubsidized or subsidized loan. If borrowers make full monthly payments but it isn’t enough to cover the accrued monthly interest, the government covers the rest of the interest. This helps to stop loan balances from reaching unmanageable levels. For example, on accrued interest of $60 and a monthly payment of $40, the remaining $20 is eliminated.
Spousal income
For married couples who file their incomes separately, the monthly payment amount on this plan is based on only the income of the filer. Under the REPAYE Plan, tax filing status didn’t matter. Both incomes were included to determine the monthly payment amount.
Early forgiveness
With the SAVE plan student loans of $12,000 or less are eligible for forgiveness after as few as 10 years of monthly payments. The repayment term increases for every $1,000 borrowed above $12,000. Even borrowers who borrowed over $12,000 could be eligible to receive forgiveness in fewer than 20 years. For those who have undergraduate loans, the repayment terms are different from those who have graduate loans or a combination of both.
How to apply for the SAVE plan
Borrowers who want to apply need to log in to StudentAid.gov using their StudentAid.gov account username and password combination. They must go to the IDR application at StudentAid.gov/idr. and fill out personal and financial information. They must also grant consent for access to their federal tax information for auto-certification of their IDR plan every year.
Using the Loan Simulator tool on the platform can help borrowers decide which repayment plan is best for their situation. When they’ve chosen a plan, they can click Submit and will receive an email confirmation. Other ways to apply are to do so through a loan servicer’s online portal or by submitting a paper application.
Eligibility for enrolment
Current borrowers on REPAYE were automatically enrolled in SAVE. For others who want to know whether they are eligible, it is crucial to do your homework. Not every type of loan is eligible for repayment under this plan. Private loans, Parent Plus, and Parent FFEL loans aren’t eligible. If federal loans are in default, they aren’t eligible for enrollment. Borrowers must work towards getting their loans out of default.
Loans that are eligible include direct subsidized and unsubsidized loans. Direct PLUS loans made to graduate students or professionals are eligible. Direct Consolidation loans are eligible if they didn’t repay parent PLUS loans. For some loans that aren’t eligible, consolidating them into a Direct Consolidation loan can make them eligible.
Comparing IDR plans
The SAVE plan may be the best option for some borrowers. However, it doesn’t give all borrowers a reduced monthly payment. Other IDR plans borrowers can consider include PAYE, IBR, and ICR.
Pay-as-you-earn (PAYE) payments are 10% of income with a limit up to the Standard Repayment Plan amount. The payment term is 20 years.
Income-based repayment (IBR) is 10% of income for loans borrowed after 2014. They are capped at the 10-year amount of the Standard Repayment Plan and the repayment term is 20 years. For loans before 2014, borrowers pay 15% of income and the payment term is 25 years.
Income-contingent repayment (ICR) is 20% of income, or what the borrower would pay with a fixed payment over 12 years (based on income) — whichever is less. The payment term is 25 years.
Conclusion
Individual borrowers and families with low to middle incomes will benefit from lower monthly payments on the SAVE plan. Another benefit is the interest subsidy that will help to stop loan balances from getting out of hand. A number of borrowers will also benefit from a drop in the time of loan forgiveness. For those who borrowed $12,000 or less, the time drops to 10 years. Many federal loan borrowers have already been benefiting from the SAVE plan since February this year and some will experience additional benefits from July.
Author’s Bio
Helen Birk writes seamlessly when she receives a new order from a student and delivers on time. This confidence to write in a flow comes from years of experience and a zeal to help students who lack the necessary writing skills to succeed in their educational journey. On the side, she’s currently writing a book on the role of AI in developing education systems.
