The Saving on a Valuable Education, or SAVE plan, officially launched recently. This income-driven repayment (IDR) option for federal student loan borrowers is designed to be the most generous repayment plan to date, and an estimated 20 million student loan borrowers could benefit from it.
Here's a rundown of the four main goals of the plan, and what you might need to do to make sure you can take advantage of it.
Goal 1: Reduce student loan payments
This is the most important takeaway for most federal student loan borrowers. The SAVE plan is designed to reduce the monthly payments that borrowers are required to make on their student loans, and it does this in two main ways:
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- First, the percentage of discretionary income borrowers are required to pay toward undergraduate loans is being cut in half, to 5% versus 10% for existing income-driven plans.
- Second, the definition of discretionary income is rising from 150% to 225% of the federal poverty level, effectively excluding more income from consideration.
As a result of the second change, over 1 million borrowers will see their required loan payments drop to $0. The effect of the combination of the two changes is that most borrowers will save $1,000 per year or more on their student loan payments. As one example, a single borrower who earns $38,000 per year and has $25,000 in outstanding undergraduate loans would see their required monthly payment fall from $134 to just $43 under the new plan.
Goal 2: Prevent unpaid interest from accumulating
One of my good friends from college has quite a student loan horror story. He borrowed about $45,000 to get his undergraduate degree and another $35,000 to get a master's degree in education to fulfill his goal of becoming a high school science teacher. He has been making the monthly payments on his $80,000 worth of student loans, as required by his income-driven repayment plan, for about 15 years. And now he owes more than $95,000.
The reason is that his monthly payments haven't been enough to cover the interest that accumulates on his loans. Under other IDR plans, any unpaid interest is added to the principal.
The SAVE plan fixes this. No borrower enrolled in the plan who makes their required monthly payments (even if they are $0) will see their balance go up over time.
Goal 3: Make forgiveness easier for many borrowers
Like other IDR plans, the SAVE plan forgives any remaining balance after 20 years of repayment for undergraduate borrowers, or 25 years of repayment for anyone with graduate loans.
In addition to this, the SAVE plan also forgives any remaining balance after just 10 years for borrowers whose initial principal was $12,000 or less. One additional year is added for every $1,000 above this amount. For example, someone who originally borrowed $16,000 would be eligible for forgiveness after 14 years in repayment.
Goal 4: Make it easier to keep your payments low
In the past, borrowers had to recertify for their income-driven repayment plans once per year to provide their latest income data so their payments could be adjusted. And it wasn't uncommon for borrowers to forget to do this. In full disclosure, I forgot to recertify during a particularly busy year, and my student loan automatically switched to the standard 10-year repayment plan, which roughly doubled my monthly payments until I could re-enroll.
The SAVE plan is going to offer the option to automatically recertify every year. You'll have to agree to securely share your tax information from the IRS every year, but you won't have to worry about completing a manual recertification process every year.
How to enroll in the SAVE plan
First, it's important to mention that millions of student loan borrowers will be automatically enrolled in the SAVE plan. Specifically, if you were previously enrolled in the REPAYE plan (the most popular of the existing income-driven repayment plans), you will be transitioned to the SAVE plan automatically, as the SAVE plan is going to officially replace REPAYE.
