Americans with student loan debt have gotten an almost three-year reprieve on their loan payments. As part of the pandemic relief measure, the government paused student loan payments eight times since March 2020. This pause will end August 30, 2023.
In 2022, the President announced that the federal government would cancel up to $20k worth of federal student loans per person. The Education Department subsequently began accepting applications, but court battles later halted the government from discharging any debt. On June 30, the Supreme Court rejected Biden’s plan, saying that the president had overstepped his authority.
Now borrowers who are buckling under the pressure of their federal student loans have a new option to significantly cut their payments, eventually by as much as half.
The Biden administration’s new income-driven repayment plan, known as SAVE, opened for enrollment today (8/22), providing millions of borrowers with a more affordable way to pay their monthly student loan bills, which will become due again in October after a three-year pause.
With the SAVE plan, loan payments will be affordable. In the coming days, more than 30 million borrowers will be invited to enroll in the plan, which was initially proposed in January and bases monthly payments on income and family size.
Borrowers who want to sign up for the SAVE — or Saving on a Valuable Education — plan should move quickly: You can expect to wait roughly four weeks for your application to be processed. By enrolling now, you can have your paperwork processed with enough time before your first payment becomes due.
Borrowers won’t receive the full benefits of the plan until next summer because some features won’t immediately take effect.
Here’s an overview of the plan
Who is eligible for the new repayment plan?
Those with federal undergraduate or graduate loans. Borrowers with undergraduate debt are eligible for lower payments than graduate borrowers.
Income-driven repayment. In 2023, the Education Department released details on proposed rule changes that would revised one of its existing income-driven repayment plans – known as REPAYE – in which borrowers’ monthly payments are tied to their income and family size. It would enable millions of borrowers to cut their monthly federal payments by more than half.
Targeted relief. The Biden administration has wiped out debts for eligible public service workers, permanently disabled borrowers, defrauded students and people whose schools abruptly closed while they were enrolled.
Who is excluded?
Parents who borrowed to pay for their children’s schooling using Parent PLUS loans cannot enroll in the new plan.
If parent borrowers cannot afford to make their payments, they generally have access to only the most expensive income-driven repayment plan — known as income-contingent repayment — which requires borrowers to pay 20% of their discretionary income for 25 years; anything remaining is forgiven.
How does the new SAVE plan work?
Payments are based on your earnings and household size, and are readjusted each year. After monthly payments are made for a set number of years, usually 20, any remaining balance is forgiven. (The balance is taxable as income, though a temporary tax rule exempts balances forgiven through 2025 from federal income taxes.)
The SAVE plan would reduce payments on undergraduate loans to 5% of discretionary income. Graduate debt is also eligible, but borrowers would pay 10% of discretionary income on that portion. If you hold both undergraduate and graduate debt, your payment will be weighted accordingly.
What is discretionary income?
Once you pay for basic needs like food and rent, any leftover income is considered discretionary; income-driven repayment plans require borrowers to pay a percentage of that discretionary income.
The SAVE plan tweaks the payment formula so that more income is shielded for those basic needs, generating less discretionary income and a lower payment. SAVE increases the amount of income protected from repayment to 225% of the federal poverty guidelines, roughly equivalent to $15 an hour for a single borrower. If you earn less than that, you won’t have to make a monthly payment.
Put another way, a single person who makes less than $32,805 a year would make $0 monthly payments. The same goes for someone in a household of four with an income below $67,500. That should help an additional one million low-income borrowers qualify for a zero-dollar payment, the Education Department said.
Will the way interest is treated change?
Yes. This is one of the most attractive features of the new plan. If a borrower’s monthly payment does not cover the interest owed, the Education Department will cancel the uncovered portion.
In other words, if a borrower owes $50 in interest each month but the payment covers only $30, the remaining $20 will disappear as long as the payment is made. And monthly interest will be canceled for those who are not required to make payments because their income is too low.
This new rule will provide relief to those who made payments but saw their balances balloon because they didn’t pay enough to cover the interest owed.
Does the plan go into effect right away?
Three big components of the plan are available now, including shielding more income from the repayment formula, which will reduce more borrowers’ payments to zero. The new treatment of unpaid interest is also in effect. Lastly, married borrowers who file their taxes separately will no longer be required to include their spouse’s income in their monthly payment calculation. (They will also have their spouse excluded from their family size.)
But other benefits — including cutting payments to 5% from 10% of discretionary income on undergraduate loans — won’t take effect until July 2024.
Once the plan is in full swing next summer, many borrowers’ monthly bills, will drop 40%. But the lowest earners may see their payments fall 83%, while the highest earners would receive only a 5% reduction.
Are there any changes for borrowers with small loan balances?
Yes, but this feature takes effect next summer as well. People who took out smaller loans — or those with original balances of $12,000 or less — would make monthly payments for 10 years before cancellation, instead of the more typical 20-year repayment period in other income-driven repayment plans. Every $1,000 borrowed above the $12,000 amount would add one year of monthly payments before the balance was forgiven, up to a maximum of 20 or 25 years.
Will the new plan always be the best option?
The SAVE plan is expected to provide the lowest payment for most borrowers and will probably be the best option for most. The loan simulator tool at StudentAid.gov can help you analyze which repayment plan makes the most sense given your circumstances and goals.
When you sign in, it should automatically use your loans in its calculations. (You can add other federal loans if any are missing.) You can also compare plans side by side — how much they’ll cost over time, both monthly and in total, and if any debt would be forgiven.
How do I sign up?
You can sign up online at StudentAid.gov/SAVE; borrowers will be able to see their payment amount before signing up. Administration officials said the process shouldn’t take more than 10 minutes. After applying, you can check the status of your application by visiting your account dashboard.
Those who were already enrolled in REPAYE don’t have to do anything — they will be automatically transferred into SAVE, and their payment amounts will be adjusted.