The Saving on a Valuable Education (SAVE) plan is an income-driven repayment plan for student loan borrowers. The plan sets monthly payments at 5% to 10% of discretionary income and allows for forgiveness of loan balances after 20 or 25 years. According to a new formula for calculating discretionary income, approximately one million low-income borrowers will qualify for a monthly payment of $0 for their student loans.
What is the Saving on a Valuable Education (SAVE) plan?
The Biden administration introduced the Saving on a Valuable Education (SAVE) plan in August 2023. The plan serves as a replacement for the Revised Pay As You Earn (REPAYE) plan. Borrowers on REPAYE are automatically enrolled in the SAVE plan without the need for any action, while borrowers enrolled in other repayment plans can switch through the Federal Student Aid website or by contacting their student loan servicer.
Like other income-driven plans, the SAVE plan calculates payments based on the borrower’s income and family size. This new plan features the lowest monthly payment requirement of any income-driven plan and is available to anyone with an active Direct Loan.
Features of the SAVE plan include:
- A reduction in monthly student loan payments. If you have undergraduate student loan debt, your monthly payment will be reduced from 10% of discretionary income to 5%. If you have graduate student loans, the average monthly payment will range between 5% and 10% of discretionary income.
- A new formula for discretionary income. This new formula is based on 225% of the federal poverty level (FPL), compared to 150% previously. This means that an individual borrower earning $32,800 or less annually (or $67,500 for a family of four) will have a monthly student loan payment of $0. The Biden administration estimates this applies to one million low-income borrowers.
- No accumulation of unpaid interest. If your student loan payment is insufficient to cover the monthly interest charges, unpaid interest will not be added to your student loan balance under the SAVE plan. This means that the loan amount will not increase due to compounded interest.
How does the SAVE plan work?
Since the SAVE plan is similar to other income-driven plans, you do not have to take many additional steps to enroll. Once enrolled, your payments can be cut in half (compared to other income-driven plans), and in some cases, you may not have to make any payments at all. While other income-driven plans require payments ranging from 10% to 20% of discretionary income, this is set at 5% for undergraduate loans in the SAVE plan. If you have graduate school loans, the monthly payment can be up to 10% of discretionary income or the weighted average of your student loan balances.
There is a grace period from October 1, 2023, to September 30, 2024, ensuring that borrowers who miss payments will not face any damage to their credit scores or loan standing. So you won’t have to worry about falling behind on your student loan debt during this time.
The White House estimates that the typical borrower at a four-year public university will save about $2,000 annually with the SAVE plan, and 85% of borrowers at community colleges are expected to be debt-free within 10 years.
SAVE
In comparison to REPAYE
Since the SAVE plan replaces the REPAYE plan, it’s important to consider the differences between the two plans and how each impacts student debt repayment:
| Differences between SAVE and REPAYE | SAVE | REPAYE |
|---|---|---|
| 5% to 10% of discretionary income goes to repayment; no payments required for individual borrowers earning $32,800 or less annually and for families of four earning $67,500 or less annually. | 10% of discretionary income goes to repayment. | |
| Repayment after 20 years for undergraduate loans, 25 years for graduate loans, and 10 years for borrowers with low balances (less than $12,000). | Repayment after 20 years for undergraduate loans and 25 years for graduate loans. | |
| Loan balance does not increase due to unpaid interest. | Unpaid interest is added (i.e., added to the original principal balance). | |
| Increased income exclusion from 150% to 225% of the federal poverty line. Borrowers may pay more through REPAYE compared to the standard repayment plan. | The spouse’s income is always included in payment calculations, regardless of whether the marriage is filed separately or jointly. |
Advantages and Disadvantages of the SAVE Plan
Advantages
- Payments can be as low as $0. While all income-driven repayment plans require a percentage of discretionary income to be paid, the SAVE plan allows you to earn more and pay less towards your loans. You can earn up to $32,800 (or up to $67,500 for a family of four) without paying anything towards your loans on the SAVE plan.
- No more compounding interest. As long as you make the required monthly payment, your balance will not increase due to unpaid interest. This will make repayment easier and faster.
- No need for spouse’s signature. The new plan lacks the spouse signature requirement to apply for income-driven repayment plans.
Disadvantages
- Not an immediate repayment plan for student loans. You still have to make payments on your loans, and this repayment option does not forgive your loans immediately as the original President Biden plan would have done.
- Fully implemented in 2024. While some borrowers may be automatically enrolled as REPAYE is phased out, some features may not be available until 2024. This includes the feature for borrowers who have been repaying for 10 years on a loan balance of less than $12,000. Payments made before 2024 qualify for the repayment grace period.
What is President Biden’s new immediate student loan repayment plan?
On June 30, 2023, the Supreme Court struck down President Biden’s plan for immediate student loan forgiveness of up to $20,000 per borrower. The White House responded by offering the SAVE plan. Although this plan is not the broad debt forgiveness many had hoped for, all borrowers currently in repayment are eligible for the SAVE plan.
Which student loans will be automatically forgiven?
The SAVE plan does not provide immediate student loan forgiveness, but it operates similarly to other income-driven plans. After a certain period, borrowers will have their student loan balances forgiven. For some people, this could be after 10 years or even 25 years, depending on their balance and the type of loans they are repaying.
Does paying off student loans early save money?
Paying off student loans early can save more money on total interest expenses in the long run. The earlier you pay off your student loans, the more money you can save.
Source: https://www.investopedia.com/saving-on-a-valuable-education-plan-7559022
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