In the wake of the Supreme Court ruling that deemed that the Biden Administration could not forgive $10,000-$20,000 worth of student loans, a new payment plan was officially announced that could significantly change student loan repayments.
The new plan is called Saving on a Valuable Education (or SAVE), and some provisions go into effect immediately, while others will take effect in a year. Rather than creating an entirely new plan, the plan will replace (and amend some aspects of) the REPAYE (Revised Pay as You Earn) plan.
The goals of the SAVE plan are to:
- Reduce the complexity of the income-driven repayment plans available.
- Provide affordable payments to lower and middle-income borrowers.
- Stop negative amortization of loans.
- Decrease the number of loans in delinquency or default.
The Department of Education estimates that:
- Borrowers will see their payments fall about 40%. Those with the lowest incomes will see their payments fall the most (83%), while those at the top will see the smallest reductions (about 5%).
- A typical graduate earning $50,000 per year after graduation will see their payments go down by about $2,000 per year.
- 85% of community college borrowers will be debt-free within 10 years.
What are the basic details of the SAVE plan?
These will be explained in more detail below, but three main things happen now, while several other provisions will start in 2024.
- More income is protected to pay for basic necessities. Most current Income-Driven Repayment (IDR) plans use 150% of the poverty level to determine discretionary income and the payment. SAVE increases that to 225%.
- Interest that is not covered under a repayment plan will no accrue, or add to, the loan balance.
- Married borrowers who file taxes Married Filing Separately will only count the borrower’s income instead of being required to use their household income, and their spouse will be excluded from the family size when calculating payments.
For one year, payments will be 10% of discretionary income.
Available July 1, 2024
- Payments will be cut in half, from 10% to 5%, of discretionary income.
- Borrowers with original loan balances that were $12,000 or less will receive forgiveness after 120 months (10 years) of payments.
- Borrowers who go 75 days without making a payment will be automatically enrolled in the SAVE plan.
- Borrowers will receive credit for payments made prior to consolidation.
The new provisions also ends new enrollments in Pay As You Earn (PAYE), reduces who can use Income-Based Repayment (IBR), and does not allow students to enroll in Income-Contingent Repayment (ICR).
How much will my payment be?
To understand payments, you need to know how the Department of Education calculates Discretionary Income (DI).
The traditional formula for most IDR plans was:
- Adjusted Gross Income (AGI) minus 150% of the poverty level for your family size.
You can find the Poverty Levels here.
So, for example, if a person has an AGI of $30,000 and they are single, the calculation was:
- $30,000 – ($14,580 x 150%)
- $30,000 – $21,870 = $8,130
$8,130 is this borrower’s Discretionary Income.
Under the SAVE plan, the excluded amount increases to 225%, so the new formula is:
AGI – 225% of the poverty level.
Using the same numbers as before, the borrower’s new DI would be:
- $30,000 – ($14,580 x 225%)
- $30,000 – $32,805 = $0 (NOTE: You can’t go below $0 in DI)
So this borrower under the SAVE plan has a DI of $0.
Payments for one year will be 10% of DI, then starting in July of 2024 payments will drop to 5%.
For this borrower with $30,000 in AGI, their payment will be $0.
Let’s run a another scenario through:
- Married borrower filing Married Filing Jointly with 2 children (family size 4), AGI of $75,000
- $75,000 – ($30,000 x 225%)
- $75,000 – $67,500
- DI = $7,500
- Payment at 10%: $750 per year, or $62.50 per month
- Payment at 5%: $375 per year, or $31.25 per month
There is no payment cap on payments, so not all borrowers will benefit from this plan:
- Single borrower with an AGI of $250,000:
- $250,000 – ($14,580 x 225%)
- $250,000 – $32,805
- DI: $217,195
- Payment at 10%: $21,720 per year, or $1,810 per month
- Payment at 5%: $10,860 per year, or $905 per month
This borrower would need to run scenarios to see if this plan or another plan, such as the Standard Plan that gets their loan paid off in 10 years, makes more sense.
The 5% reduction only applies to undergraduate loans. If a borrower ONLY has graduate loans they will remain at 10%, and if a borrower has a mix of undergraduate and graduate loans, they will pay somewhere between 5 and 10%. The calculation will be clearly laid out by the servicer.
A single person can earn up to $32,800 and have a payment of $0, while a family of 4 can earn up to $67,500 and have a payment of $0.
How long will payments last?
Obviously some borrowers will not have a payment or will have such a low payment that their loans will never get paid off.
If a borrower only has undergraduate loans, any remaining balance is forgiven after 20 years of payments.
If a borrower has any graduate loans, any remaining balance is forgiven after 25 years of payments.
Credit will be given for prior payments, including the 3-year pandemic pause.
If your original principal balance was $12,000 or less, your loan will be forgiven after 10 years. For each additional $1,000 borrowed, the number of years increases by one:
Is the forgiven amount taxable or tax-free?
Any amount forgiven is fully taxable as ordinary income in the year it is forgiven. If a borrower has $25,000 forgiven, $25,000 is added to their income and they will owe taxes on that amount. The borrower will get a 1099-C that states the forgiven amount that will be added to their gross income. The Department of Education specifically stated that, “The Department does not have the authority to change the income tax laws relating to the amount of any loan that is forgiven.” Congress would need to pass a law to make this tax-free, and that is unlikely to happen.
What happens to interest if my payment is low?
This is one of the biggest benefits of the SAVE plan. If your payment doesn’t cover the interest, the interest does NOT accrue, causing negative amortization (your balance goes up).
So if your payment is $30 per month but the interest is $50 per month, the extra $20 in interest does not add to your loan. If is simply wiped out.
In addition, starting now, interest will no longer be capitalized (added to the principal balance) when you switch from one IDR to another. The only exception to this is IBR, where capitalization is required by law. This means you can switch from PAYE or ICR to REPAYE (which will then convert to SAVE automatically).
What if I still can’t make my payment?
The Department of Education is offering a one-year “on ramp” to help borrowers who are struggling to make their payments. Missed, partial, or late payments will no lead to a negative credit rating, default, or referral to a collection agency.
Payments are still due, and interest may accrue during the on ramp.
Do I have to recertify each year?
You will need to recertify your income and family size this year, but starting in July of 2024 you can connect your Department of Education account with the IRS, and your income and family size will be automatically added and your new payment will also be calculated. If your family size changes (you have a child, for example), you can recertify during the year.
Will this affect Public Service Loan Forgiveness (PSLF)?
Payments made under the SAVE plan (including $0 payments) will qualify for the 120 payments under PSLF.
Who can use the new SAVE plan?
The SAVE plan is available for borrowers with a Direct Loan in good standing. It is not available to Parent PLUS borrowers.
Borrowers who still have FFEL loans do not qualify unless they consolidate their loans.
Borrowers do NOT need to have a “partial financial hardship” to qualify for this plan.
When will payments be due?
Interest will start to accrue September 1, 2023, and payments will be due in October. This cannot change as it was part of the Debt Ceiling negotiations.
You will get a bill in September or October – at least 21 days before your payment is due.
Will there be court challenges?
Because this plan was created by executive action, it is vulnerable to challenges.
So far no threats have been made, and the Biden Administration is confident that they have followed the law in creating this (although they felt, and still feel, that they followed the law when they announced the $10,000-$20,000 forgiveness). In addition, the plan has been approved by the Office of Management and Budget.
The administration was careful to not take things too far. There was talk of making the income exemption 400%, and giving all borrowers under a certain income level $20,000 of forgiveness after 10 years, but those were not included in the final plan.
A private lender, such as SoFi or Laurel Road could argue that this will hurt their businesses, and they could sue and say the statute doesn’t give the administration the authority to transform IDR, but it has been done before (PAYE and REPAYE were created this same way), so it is unlikely that this will happen.
Will we see $10,000-$20,000 worth of forgiveness through the Higher Education Act (HEA)?
The Biden Administration said they are pursuing forgiveness through the HEA instead of the HEROES Act. I think they will go through the process (which will take about a year), announce forgiveness, then it will be blocked by the court again. Democrats will be able to paint the courts and Republicans as the ones who weren’t willing to help out people in debt, hoping that it will bolster their chances in the 2024 election.
I would not count on forgiveness through the HEA.
What should I do now? How do I sign up?
I encourage you to take the following action:
- Know who your servicer is. During the pandemic 44% of borrowers got a new servicer, so check your account at https://studentaid.gov/ and make sure you watch for mailings and email from your servicer or the Department of Education.
- Make sure your contact information (e-mail, phone number, and address) are up-to-date.
- Check your repayment plan. If you want to use the new SAVE plan, switch your payment plan to REPAYE. If you are on IBR, understand that your accrued interest will be added to your principal balance. Those on REPAYE will automatically switch to SAVE before payments are due in October.
- If you pay on auto-debit, make sure your bank account is still active.
- Be patient – this is a major change for the servicers, and they have to act quickly to update their systems.
As additional updates/changes are made I will update this page. Join my e-mail list to get updates: