Understanding the “SAVE” Plan: A New Income-Driven Repayment Plan for Student Loans

After widespread student loan forgiveness fell through in the Supreme Court, the Biden-Harris Administration has unveiled a transformative new income-driven repayment (IDR) plan for student loans, titled the “Saving on a Valuable Education (SAVE)” plan. This new income-driven student loan repayment plan aims to provide a more affordable path for borrowers, ensuring they are not bogged down by unmanageable debt. Let’s dive into the details of this new plan.

Key points of the “SAVE” Plan

A Path to More Affordable Payments: The primary objective of the SAVE plan is to make student loan repayments more affordable. To achieve this, the plan increases the amount of income that’s protected from payments from 150% of the Federal poverty guidelines (FPL) to 225%. This ensures that borrowers retain more of their earnings for essential needs. Moreover, the SAVE plan reduces the minimum payment from 10% of discretionary income to just 5%. Using the official 2024 federal poverty guidelines for the contiguous states and D.C. as a reference, a single borrower would not need to make any payments until they earn more than $33,885 a year. For a family of four, this threshold is $70,200.

Understanding Payment Calculation: An Example

For a clearer understanding of how the payment calculations work under the SAVE plan, let’s take an example. Consider a family of four with a household income of $80,000 annually. Using the new 225% of the 2024 poverty guidelines, the income protected from payments for this family would be $70,200.

Now, the discretionary income is calculated by subtracting this protected amount from their total income: $80,000 (total income) – $70,200 (protected income) = $9,800.

From this $9,800, only 5% is required to be paid annually towards the student loans. This equates to an annual payment of $490. When broken down monthly, this family would pay roughly $40.83 per month under the SAVE plan.

For comparison, using the same calculation under the old REPAYE system, they would have been paying approximately $291.67 monthly. The difference in savings is evident.

Automatic Transition from REPAYE: Borrowers currently on the REPAYE plan will be automatically transitioned to the SAVE plan without any action required on their end.

No More Growing Balances: One of the standout features of the SAVE plan is its approach to handling interest accumulation. Let’s say a borrower’s interest accumulates at $250 monthly, yet their total SAVE plan payments are only $195 per month. Under SAVE, the remaining $55 of interest is completely erased. This mechanism ensures borrowers, even when paying consistently, won’t see their loan balances grow due to outpacing interest.

Married Borrowers Get a Break: For those married borrowers filing taxes separately, the SAVE plan does not necessitate including their spouse’s income in the payment calculation. This change simplifies repayment decisions for these borrowers.

More Forgiveness Opportunities: The SAVE plan introduces a more nuanced forgiveness structure. Borrowers with original principal balances of $12,000 or less will receive forgiveness after making 120 payments. This forgiveness duration increases by 12 payments for every additional $1,000 borrowed, but the maximum duration remains capped at 20 or 25 years.

Additional Borrower-Friendly Provisions: The plan also offers various provisions that aid borrowers. These include automatic enrollment in the SAVE plan after 75 days without payment, credit toward forgiveness during specific deferments and forbearances, and protection for borrowers in default.

Other Estimated Impacts of the SAVE Plan

The SAVE plan is poised to bring tangible benefits to student loan borrowers:

• Payments per dollar borrowed are projected to fall by 40% on average.
• Graduates of a four-year public university can expect an annual savings of nearly $2,000.
• For public service workers like a first-year teacher, the reduction in total payments could be as much as two-thirds, resulting in savings above $17,000.
• An impressive 85% of community college borrowers will be debt-free within a decade.
• Borrowers from marginalized communities, including Black, Hispanic, American Indian, and Alaska Native borrowers, are expected to see their total lifetime payments per dollar borrowed halved.

Concluding Thoughts

The introduction of the SAVE plan underscores the Biden-Harris Administration’s commitment to making education beyond high school a ladder to opportunity, not a financial burden. By reducing loan payments, stopping the accrual of unpaid interest, and providing pathways to quicker loan forgiveness, the plan stands as a testament to a reimagined approach to student loan repayment. It’s not the widespread loan forgiveness that was proposed previously from this administration, but it still offers borrowers major savings opportunities.

Borrowers can look forward to a more forgiving and navigable student loan landscape, ensuring that their educational pursuits don’t impede and cripple their financial futures.