The student-loan repayment pause that has been in effect for nearly three and a half years is coming to an end. Payments are set to resume in October for the millions of Americans who owe a collective $1.7 billion in federal student-loan debt.
However, the Biden administration is taking steps to make the transition back to repayment easier, and the most significant way they're doing that is by introducing the Saving on a Valuable Education, or SAVE Plan. This income-driven repayment (IDR) plan could end up being a student-loan borrower's best friend, so here are six major components of the plan that you need to know about before the payment pause ends.
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1. Your loan payments could go down -- or even be $0
First, the most notable feature of the SAVE Plan is that it could dramatically reduce borrowers' required monthly payments on their student loans.
Specifically, the SAVE Plan reduces the percentage of discretionary income that can be used toward loan repayment to 5% from 10% for undergraduate loans (graduate loan payments are still capped at 10%). Plus, the plan increases the definition of what "discretionary income" is in the first place from income above 175% to 225% of the federal poverty level.
This will cut payments significantly for millions of borrowers, and many middle-income borrowers could even see their required monthly payments fall to zero.
It's worth noting that some of the benefits of the SAVE Plan aren't scheduled to go into effect until July 2024, and that includes the reduced payments for undergraduate loans. However, the Biden administration recently announced a 12-month "on-ramp" to repayment intended for those whose current student-loan payments are a major financial burden. While the Department of Education suggests that those who can afford to restart payments in October should do so, there will be no penalties or adverse effects for missed payments through September 2024.
2. Don't worry about interest accumulating on your account
We've all heard student-loan horror stories that sound something like this: "I graduated with my master's degree 10 years ago with $80,000 in student debt. I enrolled in income-driven repayment and have made my required monthly payments for 10 years. And now I owe $90,000."
The reason stories like this exist is because under the current IDR plans, unpaid interest is added to the principal. For example, if you have $80,000 in student loans at 6% interest, your monthly interest is $400. If your monthly payment under an income-driven plan is set at $300 based on your income and family size, this means that you'll have $100 in unpaid interest every month that would be tacked on to the principal.
The SAVE Plan changes this. Unpaid interest will no longer be added to loans; it will be removed by the Department of Education. In other words, no borrower who makes their required payments will see their loan balance grow even if their required payment is $0.
3. Some married couples could get a big break
In the past, spousal income was included when determining a borrower's monthly payment under IDR regardless of tax filing status. In other words, if one spouse made $300,000 per year and the other made $30,000, the lower-earning spouse would have their required payment calculated based on their joint income of $330,000 -- even if they filed a separate tax return.
Under the SAVE Plan, married couples who file separately can exclude spousal income. In examples like this one, this could make the lower-earning spouse's required loan payment much smaller.
4. Loan forgiveness could be closer than you think
Just like the REPAYE Plan that the SAVE Plan is set to replace, any remaining loan balance is forgiven after 20 years (undergraduate loans) or 25 years (if you have any graduate school loans). But there are two things that are different:
- First, for loans with original balances of $12,000 or less, forgiveness will now happen after 10 years of repayment.
- This isn't a part of the SAVE Plan, but the Department of Education is in the process of conducting a one-time adjustment to the payment counts for borrowers, aiming to give credit for things like deferment periods. Millions of borrowers will see at least three additional years of payments added to the timeline when the review is complete.
5. Recertification can now be automatic
This is a major change from how income-driven repayment worked in the past. Previously, you had to recertify your enrollment every year, manually updating your family size and uploading your latest tax returns.
Starting in 2024, automatic recertification will be available if you agree to securely share your tax information with the Department of Education. This eliminates one of the biggest pain points of IDR and can ensure your enrollment in the SAVE Plan will be continuous.
6. You may need to apply
If you're already enrolled in the REPAYE Plan, which is the most popular of the current income-driven repayment plans, you don't have to do anything. The SAVE Plan is replacing the REPAYE Plan, so you'll be enrolled automatically.
On the other hand, if you're enrolled in any other repayment plan, or your loans are just in the standard repayment plan by default, you can apply for the SAVE Plan at StudentAid.gov. The application should take 10 minutes or less for most borrowers, and the benefits could be well worth the effort.
