When Joe Biden campaigned for president in 2020, he promised to forgive $10,000 in student debt for all borrowers and reduce monthly payments. After moving into the White House, he attempted to accomplish both goals.
Biden's initial student loan forgiveness plan was rejected by the U.S. Supreme Court. But borrowers should absolutely not ignore his new SAVE Plan alternative.
Image source: Getty Images.
What is the SAVE Plan?
The Biden-Harris administration officially launched the Saving on a Valuable Education (SAVE) Plan on Tuesday. The SAVE Plan is a new income-driven repayment (IDR) plan for student loans. It determines payments based on income and family size, rather than loan balances.
The SAVE Plan replaced a previous IDR plan called the Revised Pay As You Earn (REPAYE) Plan. Like the REPAYE Plan, the president's new plan allows for the forgiveness of remaining student loan balances after a specified period.
Direct Subsidized Loans and Direct Unsubsidized Loans are eligible for the new SAVE Plan. So are Direct PLUS Loans for graduate or professional students. Direct Consolidations Loans are also eligible, as long as they didn't repay any PLUS loans made to parents. No loans made to parents are eligible for the SAVE Plan.
Some loans must first be consolidated into a Direct Consolidation Loan to become eligible under the SAVE Plan. These include subsidized and unsubsidized Federal Stafford Loans, FTEL Plus Loans for graduate or professional students, FTEL Consolidation Loans that didn't repay any PLUS loans made to parents, and Federal Perkins Loans.
How much can borrowers save?
President Biden said in a video announcing the plan, "It's the most affordable student loan plan ever." That wasn't an exaggeration.
Currently, payments on undergraduate loans are usually 10% of discretionary income. Under the SAVE Plan, those payments will be cut in half. The monthly payment for borrowers with both undergraduate and graduate loans will be a weighted average between 5% and 10% of their income, based on their original principal balances of the loans.
Discretionary income is defined under the SAVE Plan as the difference between adjusted gross income and 225% of the poverty level as established by the U.S. Department of Health and Human Services. This means that anyone who makes below 225% of the poverty level (including any single borrowers who make less than $15 per hour), will have a monthly payment of $0. The U.S. Department of Education estimates that more than 1 million borrowers will fall into this group.
Any borrowers with original principal balances of $12,000 or less will receive forgiveness after making 120 payments. For loans higher than that threshold, an additional 12 payments will be added for every additional $1,000 borrowed to qualify for student debt forgiveness.
Overall, the Biden-Harris administration estimates that total student loan payments per dollar borrowed will be reduced by around 40% with the SAVE Plan, compared to the REPAYE Plan. A typical borrower who graduates from a four-year public university will pay nearly $2,000 less per year. Borrowers earning above 225% of the poverty level will save an average of around $1,000 per year.
How can you sign up?
If you're already enrolled in the REPAYE Plan, you'll automatically be moved over to the SAVE Plan. If not, you can sign up for the SAVE Plan by going to the StudentAid.gov/SAVE website. It should only take around 10 minutes to complete the online application.
When you apply for the SAVE Plan online, you'll see your new student loan payment amount before the final submission of your application. The new monthly payment amount will go into effect in October for most borrowers who apply soon.
