With student loan payments set to resume in weeks, the Biden administration is rolling out a new repayment plan that will be based on borrowers’ income.
The Education Department announced earlier this month that elements of the new payment plan will be available in time for the student loan pause ending later this summer. Other aspects of the repayment plan will be phased in next year.
Here are key details.
Biden’s New Plan Will Lower Student Loan Payments Through Larger Poverty Exemption
The new repayment plan, called the Saving on a Valuable Education (SAVE) plan, will lower monthly payments for most federal student loan borrowers in two key ways.
First, SAVE will exempt more of a borrower’s income from the program’s repayment formula. All Income-Driven Repayment plans have a poverty exemption, where the plan’s formula only kicks in above a certain income threshold. This exemption limit is typically 100% to 150% of the federal poverty limit based on a borrower’s family size, depending on the IDR plan. But SAVE will increase that exemption limit to 225%. That means the plan will result in monthly payments to $0 per month for single borrowers making $32,800 or less per year, or $67,500 for a family of four.
SAVE Plan Will Lower Student Loan Payments Further Through Updated Repayment Formula
In addition to the larger poverty exemption, the SAVE plan will feature a more affordable payment formula as compared to current IDR plans.
The existing IDR plans calculate a borrower’s monthly payment based on a percentage of their Adjusted Gross Income, or AGI, above the plan’s poverty exemption. Depending on the specific IDR plan, this is between 10% and 20% of the borrower’s so-called discretionary income. But SAVE’s repayment formula will be between 5% and 10%, depending on the borrower’s specific mix of undergraduate and graduate school loans.
SAVE Plan Is Separate From Biden’s Other Student Loan Forgiveness Programs
Importantly, the new SAVE program is entirely distinct from other federal student loan forgiveness and debt relief initiatives by the Biden administration. The program is not impacted by the recent Supreme Court ruling striking down Biden’s one-time student loan forgiveness plan, and it is separate from Biden’s latest efforts to create a new loan forgiveness program. SAVE is also distinct from the IDR Account Adjustment, a separate loan forgiveness initiative that is ongoing.
Biden’s New Repayment Plan Will Accelerate Student Loan Forgiveness For Some Borrowers
All current IDR plans allow for any remaining student loan balance to be forgiven after 20 or 25 years, depending on the specific program.
The SAVE plan will accelerate student loan forgiveness to as little as 10 years for borrowers with low initial starting balances of $12,000 or less, with the maximum repayment period before loan forgiveness rising by one year for every additional $1,000. The program will maintain a 25-year student loan forgiveness term for all other borrowers.
SAVE Plan Will Forgive Excess Student Loan Interest
Under existing IDR plans, there is no requirement that a borrower’s monthly payment be sufficient to cover outstanding monthly interest accrual. As a result, many borrowers have seen their balances increase over time, even while they have made consistent payments. This process of balance growth during repayment is called negative amortization.
The SAVE plan will eliminate negative amortization. Under the plan, any interest that would normally accrue in excess of a borrower’s monthly payment will be waived.
Several Other Benefits Of Biden’s New Student Loan Repayment Plan
The SAVE plan will have several other features that may benefit borrowers. Married borrowers will be able to exclude spousal income from consideration by filing taxes separately, bringing the plan in line with several other existing IDR options. Filing separately can have tax consequences, however, which borrowers should evaluate with a qualified tax advisor.
The Education Department has also indicated that it intends on implementing a streamlined application and automatic annual income recertification, which will make it easier for borrowers to apply for and renew the plan.
SAVE Will Replace Other Student Loan Payment Plans
The SAVE plan is intended to replace the Revised Pay As You Earn (REPAYE) plan. The Biden administration had originally described the new plan as an overhaul of the REPAYE plan when the details were first announced earlier this year. However, the Education Department has rebranded the changes into an entirely new plan that will effectively replace REPAYE.
While other IDR plans will remain, the Education Department plans on effectively blocking access to some other IDR programs for borrowers who choose to enroll in the SAVE plan. Borrowers who were previously in the Income Contingent Repayment (ICR) or Pay As You Earn (PAYE) plan and switch to SAVE will not be able to return to ICR or PAYE after July 1, 2024.
Biden Administration Will Implement SAVE In Stages
The Biden administration will be phasing in elements of the SAVE plan over time. The Education Department indicates that the larger poverty exemption, excess interest waiver, and marital tax filing flexibilities will be in place by the time student loan payments resume later this summer. The student loan pause officially ends after August, and the first student loan payments will likely be due sometime in October.
Other elements of the SAVE plan, including the more favorable repayment formula and accelerated student loan forgiveness, as well as a streamlined application and income recertification process, will not be available until July 1, 2024.
How To Apply For Biden’s New Student Loan Payment Plan
Since the SAVE plan is effectively replacing REPAYE, borrowers who are already enrolled in the REPAYE plan don’t need to do anything to benefit from the new features. “Borrowers on the REPAYE Plan will automatically get the benefits of the new SAVE Plan,” according to new Education Department guidance.
Borrowers who are not currently in an IDR plan, or who are in a different IDR plan such as Income Based Repayment (IBR) or PAYE, can apply for the REPAYE plan so that they can receive the SAVE benefits when they become available. Borrowers can apply online via StudentAid.gov. However, borrowers should be aware of some of the pitfalls of switching IDR plans (such as interest capitalization), and should consider whether changing plans would be prudent in light of the July 2024 cutoff, when re-accessing older IDR plans may not longer be an option for borrowers enrolled in SAVE.
Further Student Loan Forgiveness Reading
7 Student Loan Forgiveness Routes Still Around After ‘Wrong’ Supreme Court Ruling
Biden Officials Take First Step To Create New Student Loan Forgiveness Plan
4 Big Student Loan Updates When Payments Resume (And They Resume Soon)
6 Key Student Loan Forgiveness And Repayment Dates To Write Down Now
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