Biden’s SAVE Student Loan Payment Plan To Lower Borrower’s Bills

Last Friday, the Supreme Court dashed hopes of student loan forgiveness for now. Still, the Biden administration announced it would take another swing at the process, using authority from the Higher Education Act to create a debt Forgiveness regulation. The so-called plan B is going to be slower going due to how the Department of Education must go about writing new regulations. At the same time, the administration also released the final details of its new income-driven repayment (IDR) plan, called Saving on a Valuable Education (SAVE), as a way to provide relief to borrowers when repayments restart.

IDR plans are designed to adjust payments based on income, helping protect those with low earnings from unaffordable student loan bills. The new SAVE plan is intended to be more generous than prior IDR options, particularly for those with only undergraduate debt. It will also eliminate negative amortization to prevent balances from growing even when borrowers make payments and make it easier to reach loan forgiveness after years of payments. These new provisions have been long sought by advocates. The regulations creating the new plan do fully go into effect until July 1, 2024, but the Biden administration plans to implement parts of it early.

What’s In The Plan?

The elements that will go into effect early are:

The income amounts protected from the payment calculations on the SAVE plan will increase. This will go up to 225% of the federal poverty guidelines. The change means borrowers with relatively low incomes—single people earning less than $32,805 ($67,500 for a family of four) will have their payment amount set to zero if they enroll in the plan. The administration estimates that over 1 million more borrowers will be eligible for a $0 payment. Borrowers currently enrolled in the Revised Pay-As-You-Earn plan (REPAYE) will see this change applied to them automatically as the SAVE plan will replace REPAYE and all borrowers currently enrolled in it will be moved to SAVE. REPAYE is presently the most generous IDR option available.
Borrowers not eligible for a $0 payment should expect to save $1,000 a year compared to the current REPAYE plan. A single borrower would save $91 a month on payments ($1,080 a year), with a family of four saving $187, or $2,244 a year.
Borrowers who have a payment that does not cover all of the interest that accrues on their loans each month will no longer have the remaining interest added to their balance. The elimination of negative amortization means borrowers with low or $0 payments will no longer see their total loan balance constantly grow due to unpaid interest. The administration says that around 70% of borrowers enrolled in an IDR plan before the payment pause will benefit from this change.
Married borrowers who file their taxes separately will no longer be required to include their spouse’s income in their payment calculation for SAVE. Spouses will also be excluded from household size if they are enrolled in SAVE and file their taxes separately.

Once fully implemented, next July, borrowers will see additional benefits from the new payment plan. Payments on undergraduate loans will be cut in half (from 10% to 5% of income above 225% of the poverty guidelines). Borrowers who have undergraduate and graduate loans will pay a weighted average of between 5% and 10% of their income based on the original principal balances of their loans—borrowers who have more undergraduate debt than graduate debt will see their payment closer to 5% and vice-versa for those who have more debt from graduate school.

For example, a single undergraduate borrower making $50,000 a year would see their payments fall a further $72 a month, bringing their total reduction on the SAVE plan to $163 a month.

How Does The New Plan Effect Debt Forgiveness?

The new plan also shortens the loan forgiveness timeframe for borrowers with relatively small loan balances. Borrowers who originally borrowed $12,000 or less will receive forgiveness after 120 payments (ten years of making payments). Borrowers with more than $12,000 on their original loan balance will need to make payments for an additional year for each $1,000 they borrowed over $12,000. The maximum timeframe to receive debt forgiveness will be 20 or 25 years of payments.

Shortening the time to debt forgiveness for lower-balance borrowers in repayment is a significant change from the current IDR plans. The goal for this change is to provide additional assistance to borrowers who took out small loans, particularly to directly help those who took out loans but never completed their degree. Borrowers with some debt and no degree generally have the worst outcomes of any borrowers; they have the burden of student loans without the benefit of the additional earning power that a degree provides.

The SAVE plan has been in the works for over a year now. By implementing some elements early, the Biden administration is trying to alleviate the concerns of borrowers about to enter repayment after three years with their payments set to zero.