The student loan crisis in the United States is a topic that seems never to go away. After a payment pause that stretched over three years, a student loan cancellation package struck down by the U.S. Supreme Court, and new regulations designed to make the system more effective, we are left with more confusion than ever before.
The U.S. Department of Education unveiled the Saving on a Valuable Education (SAVE) Plan in response to the need for borrower relief. This new federal student loan repayment plan aims to provide relief to borrowers. Let’s talk about the SAVE Plan, including how to qualify, apply, and how payments are calculated.
What is the SAVE Plan?
The SAVE Plan is a new income-driven repayment (IDR) plan proposed by the U.S. Department of Education in 2021 and set to roll out beginning in late 2023. Designed to provide federal student loan borrowers with a more affordable repayment plan than currently available, the SAVE Plan cuts payments on undergraduate loans in half compared to other IDR plans.
In a departure from existing plans, SAVE prevents loan balances from increasing so long as borrowers keep up with their required payments.
Qualifying for the SAVE Plan and Application Process
All Direct Loan borrowers in good standing will qualify for the SAVE Plan. This means that your loan should not be in default, and you should be up-to-date with your current repayment plan. If you’re unsure about your loan status, you can check it on the Federal Student Aid website.
Applying for the SAVE Plan is a straightforward process. If you’re already on the REPAYE plan, you will be automatically enrolled in the SAVE Plan, and your payments will adjust automatically with no action on your part. Borrowers not already on REPAYE can sign up for the SAVE Plan by visiting the Federal Student Aid website.
It’s important to note that while the SAVE Plan regulations will go fully into effect on July 1, 2024, the Department of Education will implement three critical benefits before September 1, 2023, when the federal student loan payment pause ends. These include an increase in the amount of income protected from payments, stopping the charging of any monthly interest not covered by the borrower’s payment, and changes to the inclusion of spousal income and family size for married borrowers.
How Payments Are Calculated on the SAVE Plan
The SAVE Plan calculates payments based on your discretionary income and family size, with discretionary income calculated as the difference between your taxable income and 225% of the poverty guideline for your family size. The plan requires you to pay 5% of your discretionary income for undergraduate and 10% for graduate loans. Borrowers with undergraduate and graduate loans will see payment calculated as a weighted average of these percentages.
For example, let’s say you’re unmarried, have a taxable income of $75,000 a year, and are a one-person family. Here’s how your federal student loan payment would be calculated under the SAVE Plan (assuming your student loans were taken for undergraduate education only):
Taxable Income = $75,000
Poverty Guideline ($14,580) x 225% = $32,805
Discretionary Income = $42,195
Annual Amount Under SAVE Plan = $2,109.75
Monthly Federal Student Loan Payment Under SAVE Plan = $175.81
Concerns for Married Borrowers: One of the significant changes in the SAVE Plan is how it treats married borrowers. Previously, married borrowers who filed their taxes separately and were enrolled in REPAYE had to include their spouse’s income in their payment calculation. This often resulted in higher payments, effectively creating a greater financial burden for borrowers who decided to get married.
Under the SAVE Plan, married borrowers who file their federal income tax returns separately will no longer be required to include their spouse’s income in their payment calculation. However, those who choose to omit spousal income won’t be allowed to include their spouse from their family size when calculating IDR payments.
Student Loan Forgiveness under the SAVE Plan
Under the SAVE Plan, the duration of payments and the point at which loan forgiveness occurs depends on the original principal balance of your loans.
Borrowers whose original principal balances were $12,000 or less will see their unpaid loan balance forgiven after 120 payments. For each additional $1,000 borrowed above that level, an additional 12 payments are added, up to a maximum of 20 or 25 years.
Payments made under SAVE will qualify for Public Service Loan Forgiveness (PSLF).
Compare the SAVE Plan With Other Options Before Choosing
The SAVE Plan isn’t the only IDR plan available – and it may not be right for you. Other plans include Revised Pay As You Earn (REPAYE), Pay As You Earn (PAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR). Each of these plans has its own set of rules and benefits.
PAYE and IBR plans require younger borrowers to pay 10% of discretionary income for 20 years, regardless of the level of education. The plans allow borrowers to count their spouses to calculate their family size, even if they file separate federal income tax returns. PAYE and IBR also cap the payment amount.
ICR calculates payments as the lesser of 20% of discretionary income or what you would pay on a repayment plan with a fixed payment over 12 years. Though this results in a higher payment than any other IDR plan, it’s the only one available to parents who borrow federal funds for their child’s education.
The SAVE Plan is a significant step forward in making student loan repayment more manageable for many borrowers. However, choosing a federal student loan payment option is not a one-size-fits-all approach. Consider your circumstances and explore all available options before choosing a repayment plan. Doing so can ensure that you’re making the best decision for your financial future.