Introducing the SAVE Plan: A New Path to Student Loan Forgiveness

Gradual Loan Relief with Small Payments and Reduced Interest

In an effort to address the mounting burden of student loan debt, a new plan called SAVE (Saving on a Valuable Education) is poised to bring relief to millions of borrowers. While President Biden’s sweeping student loan forgiveness plan was struck down by the Supreme Court, the SAVE plan offers an alternative path towards similar outcomes. Graduates can anticipate benefiting from this plan as early as this fall when their monthly loan payments resume after a three-year pause.

Unlike traditional loan forgiveness, the SAVE plan will unfold gradually rather than in one lump sum. Through this complex repayment plan, borrowers will experience substantial savings by keeping their monthly payments small or even at $0, while simultaneously preventing interest from inflating their debt.

“This plan has the potential to revolutionize student loan repayment in our country,” says Dominique Baker, an associate professor of education policy at Southern Methodist University. The Department of Education has designed SAVE as a new form of income-driven repayment plan, gradually phasing out the current Revised Pay As You Earn plan (REPAYE).

What sets the SAVE plan apart is its generosity. Under the old plan, borrowers repaid $10,956 for every $10,000 borrowed. With SAVE, this amount is reduced to just $6,121—an impressive loan forgiveness policy, particularly for undergraduate students, according to Jason Delisle, an expert on higher education at the Urban Institute.

A review conducted by Delisle and his colleagues found that under SAVE, the percentage of bachelor’s degree recipients fully paying off their loans would decrease from 59% to 22% under the current income-driven repayment system.

While the exact cost of SAVE is uncertain, estimates range from $138 billion to $361 billion over the next decade, depending on the analysis. In contrast, the previously proposed forgiveness program was projected to cost around $400 billion. Despite the cost, SAVE is a permanent program, offering benefits to future borrowers as well.

Now, let’s delve into the specifics of the SAVE plan and how it works. Like existing income-driven plans, SAVE determines monthly payments based on borrowers’ income and family size. However, SAVE introduces several enhancements to make the terms more favorable.

Firstly, an additional one million borrowers will now qualify for $0 monthly payments. The income “floor” determines the amount below which borrowers are exempt from making payments for essentials like food and transportation. The SAVE plan raises this floor to 225% of the federal poverty guideline, meaning that a single borrower earning less than $32,805 annually (or $67,500 for a family of four) will be exempt from payments.

Secondly, as long as borrowers make their monthly payments, the SAVE plan prevents interest from accruing. This is a significant improvement compared to previous plans where borrowers with low or $0 payments witnessed their debt growing due to accumulating interest.

Thirdly, undergraduate borrowers will experience a 50% reduction in their monthly payments due to a change in the assessment rate. The Education Department will base payments on 5% of borrowers’ remaining income, rather than the current 10%.

Lastly, SAVE offers a more generous forgiveness mechanism. Undergrad borrowers who borrow $12,000 or less can have their debts wiped away after just 10 years of payments. Borrowers with larger undergraduate debts will still qualify for forgiveness after 20 years, while those with graduate school debts will have to wait 25 years.

The first two provisions of SAVE—$0 payments and interest prevention—will take effect soon. The latter two changes will be implemented from July 2024 onward.

SAVE is exclusively available to borrowers with federally held loans, including direct subsidized, unsubsidized, and consolidated loans, as well as PLUS graduate loans. Borrowers with Federal Family Education Loans (FFEL) or Perkins Loans held by commercial lenders must consolidate into a federal direct loan to be eligible. Parents with Parent PLUS loans are not eligible for SAVE.

To apply for SAVE, borrowers must first ensure they are on the current REPAYE plan. The Department of Education will notify borrowers of the application process later this summer. However, borrowers can apply for REPAYE now, which will automatically transition them to SAVE once it takes effect.

With student loan payments set to resume in October, it is essential to act promptly. The Department of Education recommends checking your repayment plan status on StudentAid.gov under the “My Aid” link in the “My Info” sidebar. Since processing requests may take a few weeks due to income and family size verification, it’s crucial to take this step before payments resume.

The department is also working on streamlining the application process for all income-driven repayment plans, aiming to reduce completion time to 10 minutes or less. As part of this effort, borrowers will have the option to integrate their IRS tax returns, enabling automatic recertification of enrollment each year, eliminating the need for repeated applications and updates.

While the SAVE plan may face legal challenges, experts believe it has a stronger legal foundation compared to the recently struck-down forgiveness plan. SAVE relies on the Higher Education Act, which grants the Department of Education the authority to design income-driven repayment plans, making it more resilient to legal scrutiny.

The SAVE plan represents a significant step towards addressing the student loan crisis, offering borrowers a path to reduced monthly payments, interest prevention, and eventual loan forgiveness. As borrowers prepare to resume payments, applying for SAVE will be a crucial decision that can alleviate their financial burdens and shape their futures.

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