Student loan borrowers who are fearful that they won’t be able to afford to restart their payments in October can take a look at a new affordable option right now called SAVE or the Saving on a Valuable Education Plan.
SAVE won’t bail out everyone’s budget. But it could work well for millions of borrowers who might be buried in other debt, like high cost credit cards, or find themselves wondering how to pay the rent.
One of the best features: The interest on those federal student loans won’t build up and trap you if you consistently make the required payments under the SAVE plan. About 70% of borrowers on income-driven repayment plans before the pandemic-related pause are expected to benefit from this change alone, according to the U.S. Department of Education.
If your required monthly payment doesn’t cover the interest, the department will stop charging any of the monthly interest not covered by that monthly payment on the SAVE plan.
“Notably, the SAVE plan eliminates all remaining interest on subsidized and unsubsidized loans after a payment is made,” said Bruce McClary, senior vice president of media relations and membership for the National Foundation for Credit Counseling.
The change addresses a problem involving negative amortization.
Total student loan balances grew significantly over the years for many borrowers in plans that didn’t cover all the interest owed each month. You run into a situation where negative amortization takes place when your loan payment amount is less than the new interest that accrues each month.
When interest is added to the balance, it drives up the total balance over time — and triggers a great deal of stress for many borrowers who feel they’re never going to get ahead.
If the borrower qualifies for loan forgiveness down the line, it can work out fine. But that’s not always the case. The SAVE plan offers a fix to that potential problem.
Another key point: More borrowers will be able to get their federal student loan payments down to $0 a month under the SAVE plan, if their income is low enough. If you’re worried about October, study your options now and move quickly.
In a nutshell: The SAVE plan is designed to help borrowers reduce their monthly payments, limit how much interest can add up over time and ultimately reduce the amount that would be paid back over one’s lifetime.
What is SAVE?
It’s dubbed as the “most affordable repayment plan yet.”
The new SAVE plan replaces the old Revised Pay As You Earn or the REPAYE Plan, an income-driven repayment plan. Borrowers on the REPAYE Plan automatically will be put on the SAVE Plan; they won’t need to sign up.
But — here’s a key point — other borrowers who are enrolled in different income-driven repayment plans who wish to apply for SAVE will need to apply using the online portal at StudentAid.gov. “This won’t be done automatically,” said McClary, of the National Foundation for Credit Counseling.
To prepare for student loan repayment, update your contact information with your loan servicer and on StudentAid.gov to make certain that you’ll get your bill and know when to make your payments.
It’s crucial for borrowers to verify their income-driven status by visiting studentaid.gov and reviewing the My Aid page, McClary said.
“If there are any lingering questions, it’s recommended that you get in touch with your servicer,” McClary said. “It’s important not to make assumptions about your repayment plan.”
The SAVE plan fully goes into effect on July 1, 2024, but borrowers can still get some key benefits now before the payment pause ends in October.
Borrowers have to pay just 5% of their discretionary income toward student loans, rather than 10%, starting July 1, 2024.
Under SAVE, your discretionary income is defined as the difference between your adjusted gross income and 225% of the U.S. Department of Health and Human Services Poverty Guideline amount for your family size. The old threshold was 150%.
How do you sign up for SAVE?
A beta version for SAVE is now available at StudentAid.gov, the website for the U.S. Department of Education. But it’s not exactly a round-the-clock application process just yet as of early August.
“The application may be available on and off during this beta testing period,” the Education Department states online.
If the application is offline when you try, you’d need to try later. You’d receive a confirmation email after your application has been received. You wouldn’t need to resubmit an application later on when the process is fully launched.
Borrowers received emails from the Department of Education in late July and those emails include links to information about SAVE. See StudentAid.gov/idr for how to sign up for an income-driven repayment plan.
Why can SAVE help your budget?
“The monthly payment will be lower with SAVE than with other income-driven repayment plans,” said Mark Kantrowitz, a student loan expert who is the author of “How to Appeal for More College Financial Aid.”
About one-third of borrowers currently are in some type of federal income-driven repayment plan, Kantrowitz said, such as Income Contingent Repayment or ICR, the Income-Based Repayment Plan or IBR, the Pay As You Earn plan or PAYE, and the Pay As You Earn Repayment plan or REPAYE. And the percentage, he said, is likely to go up somewhat as the new SAVE plan comes into play.
Low-income borrowers will see the biggest benefits from SAVE. No specific income limit exists to determine if you’d qualify for SAVE. But benefits will be based on income and household size.
“Generally, borrowers whose total debt exceeds their annual income will benefit from the income-driven repayment plans,” Kantrowitz said.
When it comes to SAVE specifically, he said, borrowers with undergraduate debt may benefit if their total debt exceeds about half their annual income.
How can you pay $0 a month under SAVE?
More than 1 million additional low-income borrowers will qualify for a $0 monthly payment under the SAVE plan, including 400,000 already enrolled on the REPAYE plan, according to the Education Department. The idea for lower-income households is to free up cash for food, rent and other basics for daily life.
“This is a game changer for those who qualify for $0 monthly payments. Once they sign up for their $0 monthly payments, interest will not continue to accrue,” said Tayri Martinez-Orza, a quality assurance specialist at GreenPath Financial Wellness, a nationwide nonprofit financial counseling and education service based in Farmington Hills
Someone could be looking at a $0 monthly payment on federal student loans if they’re signed up to be part of this plan and are a single borrower earning $32,800 or less, which is roughly $15 an hour for someone working full-time.
More:Don’t ignore student loan payments resuming in October: SAVE plan, other tips to consider
The monthly payment would be $0 for a family of four earning $67,500 or less (threshold amounts are higher in Alaska and Hawaii). “Borrowers earning more than these amounts will save at least $1,000 per year, compared to the current income-driven repayment plans,” according to the U.S. Department of Education.
Who can qualify for a $34 a month payment?
Others can qualify for relatively small monthly payments if they’re making more money. But the payments get bigger for those who have relatively high incomes but no dependents.
If you have a family of three and make $60,000 a year, for example, your estimated payment is $34 a month under the SAVE plan.
Or that payment could climb to $227 a month for someone with no dependents making $60,000 a year.
Another example: An estimated monthly payment could be $143 a month for someone without children who is making $50,000 a year. But the payment drops to $0 for a family of three with $50,000 in annual income.
Someone who has no dependents and makes $38,000 a year would face a monthly payment under the SAVE plan of $43 a month. Under the old REPAYE plan, the monthly payment would have been $134 so the savings ends up being $91 a month in this example.
A key twist: Married borrowers who file their taxes separately will no longer be required to include their spouse’s income in their payment calculation for SAVE, according to the Education Department.
McClary said the SAVE plan has several enhancements over existing income-driven repayment plans, including the fact that the qualification process has become simpler with the exclusion of spousal income from the calculation.
These borrowers will also have their spouse excluded from their family size when calculating IDR payments.
Why October is a key month
Many student loan borrowers need to plan to resume making monthly payments on their debt in October after a three-year-plus hiatus — and that would have been true even if the U.S. Supreme Court had not ruled against the Biden administration’s wide sweeping effort to forgive more than $400 billion in student loans.
As part of negotiations in Congress in May to raise the nation’s debt ceiling, a deal was struck on ending the payment pause that began in March 2020 as part of economic-relief efforts during the pandemic. Dealing with the country’s debt was essential to prevent the United States from defaulting on its debt for the first time ever — and avoid triggering a recession.
Why SAVE can help in the long run, too
Some debt forgiveness can take place under SAVE.
If you make your monthly payment on the SAVE plan, the Education Department notes, your loan balance won’t keep growing due to unpaid interest. After making at least 10 years of payments, some borrowers could see their remaining debt canceled down the line.
“Borrowers with original principal balances of $12,000 or less will receive forgiveness of any remaining balance after making 10 years of payments,” according to the Department of Education.
Another key point: The maximum repayment period before forgiveness rises by one year for every additional $1,000 borrowed. You could see loan forgiveness in 12 years, for example, if your original principal balance was $14,000.
“For those utilizing the SAVE program, loan balances can be forgiven after 10 years of payments instead of 20 years” under other plans, said Martinez-Orza, of GreenPath Financial Wellness.
She noted that the new Department of Education SAVE program makes income-driven repayment plans even better. GreenPath is encouraging its callers to see whether they’re eligible for the SAVE plan.
Is SAVE your best option?
Your best bet continues to be to study the federal income-driven repayment plans available, including SAVE. A “Loan Simulator” at the Education Department site can help you select the right income-driven repayment plan.
If you’re not making much money, an income-driven repayment plan can adjust your monthly payment to reflect your income and family size. Apply with the Education Department soon if you’d like a lower monthly payment before your first bill hits.
What kind of paperwork do you need?
When you apply, Kantrowitz said, you should allow the Education Department to automatically access your latest federal income tax return. Then, you wouldn’t need to manually provide any income or family size information for your initial application or recertification.
If you agree to the disclosure, the Department of Education and your loan servicer will automatically recertify your enrollment in the income-driven repayment plan and adjust your monthly payment amount once a year. You’d be notified when your payment changes. And you’d always be able to manually recertify your plan.
The redesigned application reportedly would enable you to sign up for an income-driven repayment plan in “10 minutes or less, save your progress, and track your application via your StudentAid.gov account,” according to the Education Department.
Contact personal finance columnist Susan Tompor: firstname.lastname@example.org. Follow her on Twitter @tompor.