The Saving on a Valuable Education (SAVE) Plan is the latest iteration of income-driven repayment (IDR) plans aimed at providing relief to student loan borrowers by making their monthly payments more affordable. The SAVE Plan, rolled out by the U.S. Department of Education, calculates your monthly payment based on your income and family size, just like other IDR plans. However, what makes the SAVE Plan stand out are its unique benefits that promise to lower payments for many borrowers and curb the growth of loan balances due to accrued interest.
This new repayment option replaced the Revised Pay As You Earn (REPAYE) Plan, and borrowers who were previously on the REPAYE Plan automatically receive the benefits of the SAVE Plan without needing to take any additional steps. The SAVE Plan is particularly timely as it arrives at a period when many borrowers are preparing to resume student loan payments following the end of a multi-year payment pause.
In this article, we’ll explore the details of the SAVE Plan, its advantages, potential drawbacks, and how it compares to other IDR plans.
Key Takeaways
- The SAVE Plan is an income-driven repayment plan that offers the most affordable payments for the majority of student loan borrowers compared to previous plans.
- Student loan forgiveness eliminates part or all of a borrower’s federal student loan debt after a period of time, depending on the plan or program.
- Only federal Direct Loans are eligible for forgiveness under IDR plans, meaning private student loans are not covered.
- Borrowers working in public service can qualify for loan forgiveness after making 120 qualifying payments.
- Some borrowers may have their loans discharged due to circumstances beyond their control, such as permanent disability or school closure.
- Borrowers who believe they were defrauded by their educational institutions may apply for loan discharge under the Borrower Defense to Repayment program.
What is the SAVE Plan?
For many student loan borrowers, repaying their student loans has been a daunting financial burden. The Department of Education has introduced a variety of income-driven repayment plans over the years to alleviate this strain, but these plans have not always been straightforward or effective for all borrowers.
The SAVE Plan, introduced in 2023, is the Department of Education’s latest effort to make student loan repayment easier and fairer. It is designed to reduce the financial burden on borrowers by offering the lowest monthly payments of any existing IDR plan. Additionally, it tackles some of the persistent issues borrowers have faced under older IDR plans, such as growing loan balances due to accumulating interest that exceeds their monthly payments.
The SAVE Plan comes at a time when millions of Americans are set to resume payments on their student loans after a long hiatus caused by the COVID-19 pandemic. For many, this plan could be the answer to managing their student loan debt more effectively while still meeting other financial goals.
Key Features of the SAVE Plan
1. More Affordable Payments
The SAVE Plan aims to offer the most affordable payments compared to any previous IDR plan. The plan calculates your monthly payment based on your discretionary income, but it significantly raises the threshold for what qualifies as discretionary income. In effect, this means more of your income is shielded from the calculation, resulting in lower monthly payments.
For instance, borrowers earning less than 225% of the federal poverty level will not be required to make any payments under the SAVE Plan. This threshold translates to about $15 per hour for a single borrower. Other borrowers, while still required to make payments, are likely to see a significant reduction in their monthly payment amounts compared to previous plans.
2. Future Payment Reductions
One of the most anticipated features of the SAVE Plan is the planned payment reductions set to take effect in July 2024. At that time, monthly payments for undergraduate loans will be cut in half. This means that borrowers could see their payments reduced even further than they are today, making the SAVE Plan an even more attractive option for many people struggling to keep up with their student loans.
3. Interest Waiver on Unpaid Interest
One of the biggest frustrations with income-driven repayment plans has been the way that unpaid interest can accumulate, causing loan balances to balloon even for borrowers who are making their payments on time. The SAVE Plan addresses this issue by eliminating any unpaid interest that is not covered by the borrower’s monthly payment.
For example, if your loan accrues $100 in interest each month, but your monthly payment under the SAVE Plan is only $75, the remaining $25 in interest will be waived. This means that your loan balance will not increase as long as you are making your required monthly payments.
This feature offers borrowers peace of mind, knowing that their debt won’t grow larger even as they continue to pay.
4. Forgiveness After 10-20 Years
Like other IDR plans, the SAVE Plan offers loan forgiveness after a set number of years of making qualifying payments. For undergraduate loans, forgiveness is granted after 20 years, while graduate loan borrowers must make payments for 25 years before being eligible for forgiveness.
This long-term forgiveness is especially beneficial for borrowers who may never be able to pay off their loans in full due to low incomes or other financial obligations. After the 20- or 25-year repayment period, any remaining balance on the loan will be forgiven, though it’s important to note that forgiven amounts may be considered taxable income by the IRS.
5. Borrower Eligibility and Auto-Enrollment
Borrowers who were already enrolled in the REPAYE Plan were automatically transferred to the SAVE Plan, meaning no additional action is needed on their part to start receiving the new plan’s benefits. Additionally, those who are new to IDR plans can easily sign up for the SAVE Plan through the Department of Education’s Federal Student Aid website.
6. Married Borrowers Benefit
Under the SAVE Plan, married borrowers who file their taxes separately will no longer have their spouse’s income considered when calculating their discretionary income. This is a significant improvement for those in dual-income households where one spouse earns significantly more than the other, as it will allow lower-earning spouses to qualify for reduced payments.
Pros and Cons of the SAVE Plan
Pros
- Lower Monthly Payments
The SAVE Plan offers the most affordable payments of any IDR plan, making it a lifeline for borrowers who struggle with high monthly payments. - Prevents Loan Balance Growth
By waiving unpaid interest, the SAVE Plan ensures that borrowers won’t see their loan balance grow, even if their payments don’t cover all the accrued interest each month. - Forgiveness After 20-25 Years
Borrowers who make consistent payments will have the remaining balance on their loans forgiven after 20 years (for undergraduate loans) or 25 years (for graduate loans), offering a long-term solution to student loan debt. - No Interest Accumulation
Borrowers won’t face ballooning loan balances due to unpaid interest, as the SAVE Plan wipes out any interest not covered by monthly payments. - Improved Terms for Married Borrowers
Married borrowers who file taxes separately won’t have to factor in their spouse’s income when determining their payments, making it easier for lower-earning partners to qualify for reduced payments.
Cons
- Long Repayment Term
While the SAVE Plan offers forgiveness after 20-25 years, it still requires borrowers to make payments for decades, which can feel overwhelming for some. - Tax Implications
Any balance forgiven under the SAVE Plan may be considered taxable income by the IRS, potentially resulting in a large tax bill in the year the debt is forgiven. - Limited to Federal Loans
As with other IDR plans, the SAVE Plan only applies to federal student loans. Private student loans are not eligible, meaning borrowers with private loans will need to explore other repayment options. - May Not Be Ideal for High Earners
Borrowers with higher incomes may not see as much benefit from the SAVE Plan, as their monthly payments will be higher compared to those with lower incomes.
Comparison: SAVE Plan vs. Other IDR Plans
There are currently several IDR plans available, including Pay As You Earn (PAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR). While all of these plans base payments on income, the SAVE Plan stands out due to its lower payment amounts and protections against interest accumulation.
For most borrowers, the SAVE Plan will be the most cost-effective option, offering the lowest payments and the most favorable terms. However, borrowers who are close to forgiveness under one of the existing plans may want to carefully consider whether switching to the SAVE Plan is the best choice.
How to Apply for the SAVE Plan
If you’re already enrolled in the REPAYE Plan, you don’t need to do anything to receive the benefits of the SAVE Plan — the transition is automatic. However, if you’re not currently enrolled in an IDR plan, you can apply for the SAVE Plan by visiting the Federal Student Aid website and filling out the necessary forms.
Conclusion: A Promising Path Forward
The SAVE Plan represents a major step forward in addressing the long-standing issues with student loan repayment. By offering more affordable payments, eliminating unpaid interest, and providing long-term forgiveness, the SAVE Plan gives borrowers a more manageable path to becoming debt-free.
That said, it’s essential for borrowers to carefully consider their individual financial circumstances before enrolling in the SAVE Plan. While it offers significant benefits, it’s not without its downsides, such as the potential for a large tax bill upon loan forgiveness and the long repayment term.
Ultimately, the SAVE Plan is a positive development for millions of Americans struggling with student loan debt. It provides an opportunity to reduce the financial strain of loan payments while maintaining the possibility of loan forgiveness down the road. For borrowers feeling overwhelmed by their student loans, the SAVE Plan could offer the