The Supreme Court recently ruled that President Biden's plan to forgive as much as $20,000 in federal student debt per borrower isn't allowed to proceed. Although this particular relief measure might be dead, Biden announced several other ways his administration plans to make student loan repayment affordable.
Most notably, the president announced a new income-driven repayment plan, known as the Saving on a Valuable Education, or SAVE plan. And the short explanation is that this could make monthly student loan payments far lower -- or even zero -- for millions of borrowers.
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The SAVE plan
The SAVE plan is an income-driven repayment plan. This means that required monthly student loan payments are determined by the borrower's family size and income.
There are four key provisions of the SAVE plan that student loan borrowers should know
Discretionary income
Only a borrower's discretionary income will be considered for repayment. Discretionary income is defined as 225% of the federal poverty level, which is $14,580 for individuals in 2023. If your tax filing status is single and you have no children, only income above $32,805 will be considered when determining your required monthly payment.
For borrowers who are married or have children, the federal poverty level (and therefore discretionary income) is higher. If your income is below the corresponding discretionary income as defined by the SAVE plan, your required student loan payment will be zero.
Maximum monthly payment
The maximum monthly payment is capped at 5% of discretionary income for undergraduate loans and 10% for graduate loans (the percentage is blended if you have both). As an example, if you earn $5,000 per month and are single, you'd have $2,266 in monthly discretionary income, based on the definition discussed earlier. If you have only undergraduate loans, your monthly payment would be capped at $113.
Loan forgiveness
The SAVE plan forgives any remaining balance after 20 years of repayment under qualified income-driven repayment plans (25 for graduate loans), even if the required minimum payments were zero. For loans with an original balance of $12,000 or less, the repayment period is just 10 years.
Unpaid interest is forgiven
Let's say that you have $60,000 in federal student loans at an average interest rate of 5%. This means that your interest accumulates at a rate of $250 per month. If your required monthly payment under the SAVE plan is $150 per month, the additional $100 in interest is simply forgiven -- it isn't added to your loan balance.
In other words, as long as you make your required payments under the SAVE plan (even if it is zero), your student loan balance will never increase.
How does the SAVE plan compare to other income-driven repayment plans?
Income-driven repayment plans have existed for years, but the SAVE plan is the most favorable for borrowers. Here's how its four key provisions compare to the pay-as-you-earn (PAYE) and revised pay-as-you-earn (REPAYE) plans that are currently the most popular. For both the PAYE and REPAYE plans:
- Discretionary income is defined as 150% of the federal poverty level, not 225%.
- Payments are capped at 10% of discretionary income for both undergraduate and graduate loans.
- Loans are forgiven after 20 or 25 years of repayment, regardless of the original balance.
- Unpaid interest is added to the loan's principal balance.
How to enroll in the SAVE plan
Borrowers already enrolled in the REPAYE plan will be automatically enrolled in the SAVE plan, as the latter plan is replacing the former. Borrowers who aren't currently enrolled in REPAYE can sign up automatically at StudentAid.gov/IDR.
With student loan interest set to start accumulating again on Sept. 1 and payments scheduled to become due in October, borrowers who could benefit from the SAVE plan should act quickly.
