Despite the Biden administration's efforts to forgive student loan balances for federal borrowers, the Supreme Court has decided that that plan won't fly. As a result, millions of borrowers must now gear up to begin repaying their student debt this fall after a multiyear pause.
If you're worried about making those payments, that's understandable. Inflation is still driving living costs upward these days, and you may have racked up other debt over the past couple of years just to stay afloat. Adding student loans to your list of monthly payments could result in a major financial crunch.
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The problem, however, is that falling behind on student loan debt could have serious consequences. Not only might it damage your credit score to a large degree, making it difficult to borrow money the next time you need to, but it might also result in wage garnishment.
The good news, however, is that President Biden has introduced a new student loan repayment plan that many federal borrowers should be eligible for. And it could be just the thing that helps you avoid defaulting on your debt once your payments begin coming due.
A true lifeline for borrowers
Biden may not have succeeded in forgiving student loan debt. But he's introduced a new repayment plan that could be a lifeline for struggling borrowers.
It's called the Saving on a Valuable Education, or SAVE, plan. And the beauty of it is that it's designed to cut borrowers' monthly payments in half.
SAVE is an income-driven repayment plan, and that's not a new concept for federal student loan borrowers. But what is new is that under the SAVE program, borrowers will have their loan payments calculated as 5% of their discretionary income, not 10% like it's been in the past.
The SAVE program also raises the amount of income that's considered non-discretionary. Non-discretionary income is not factored in when calculating monthly payments under income-driven repayment plans. All told, it's expected that minimum-wage earners will not have to make monthly payments under the SAVE plan.
The SAVE plan also shortens the amount of time it takes for student loan balances to be forgiven from 20 years to 10 years for borrowers with original loan balances of $12,000 or less. Thanks to this, those who took out loans to attend community college are expected to largely be debt-free within 10 years.
Finally, under the SAVE plan, borrowers who pay what they owe will no longer see their loans grow due to unpaid interest. Some borrowers will be eligible for $0 monthly payments under the SAVE plan due to their income, but this provision also guarantees that interest won't accrue on their balances.
A positive development
Many student loan borrowers are no doubt worried about seeing their payments resume. But thanks to the SAVE repayment plan, that burden may be minimized.
Borrowers who sign up or are already signed up for the current Revised Pay as You Earn, or REPAYE, plan will be automatically enrolled in the SAVE plan once it's implemented. It pays to contact your loan servicer to see if you're eligible for the SAVE plan, as it could be just the thing that spares you from defaulting on your debt.
