If you were one of the millions of Americans hoping that as much as $20,000 of your federal student loan debt would soon be forgiven, then I have bad news. On June 30th, 2023, the U.S. Supreme Court officially struck down President Biden’s student loan forgiveness program in a 6-3 decision ruling.
Why? They stated that Biden had overstepped his executive authority. The basis of the President’s landmark promise to cancel student loan debt came from the HEROES Act – a law that said during times of emergency (such as the COVID pandemic), the president can grant relief to the American people without a vote from Congress.
While that initiative may now be dead, the good news is that the White House was quick to unveil its backup plan. In parallel with student loan forgiveness, the Department of Education has been hinting about reform to one of their income-driven repayment (IDR) plans called REPAYE. On the same day as the release of the Supreme Court’s decision, Biden announced that REPAYE will transform into a new IDR plan called SAVE. Here’s what you’ll need to know.
What is the SAVE Plan?
SAVE stands for “Saving on a Valuable Education”. According to the Department of Education, it will be the most generous IDR plan they’ve ever created.
For anyone who’s not familiar with IDR plans, they take a traditional ten-year federal student loan term and stretch it out to 20 or 25 years (depending on which one you choose). Next, based on your income, payments are recalculated to an amount that’s much more affordable. Generally, any balance that’s left over by the end of the 20 or 25-year term is forgiven.
While this sounds good in theory, the current IDR plans have been the subject of criticism over the years. Many borrowers complained that they were too complicated or difficult to qualify for. Hence, the Department of Education sought to overhaul the system by creating SAVE and intends on making it the primary IDR option going forward.
Here’s what the SAVE plan would offer.
Discretionary Income Percentage Cut in Half
With the current IDR plans, your student loan payment is based on 10 percent of your discretionary income. Discretionary income can be thought of as the money you have left over after paying for your basic living needs like food, shelter, energy, etc.
Under SAVE, this figure would automatically be cut from 10 to 5 percent. That means that all things being equal, anyone who qualifies for this new IDR plan would see their student loan payment amount divided in half.
One caveat is that this change only applies to undergraduate loans. Borrowers who took out money for graduate school would still have their payments calculated using the 10 percent rate.
Higher Non-Discretionary Income Definition
So how does the federal government decide how much of your income is discretionary vs non-discretionary? Truthfully, this number would be different for every household in America. However, to keep things even, the government uses a figure that’s based on the FPL or “federal poverty level” guidelines.
Currently, the Department of Education defines non-discretionary income as 150 percent of FPL. However, SAVE would raise this limit to 225% of FPL.
This is an important change. If you have a family of four, then your 2023 FPL would be $30,000. Therefore, if you earn $75,000, then:
- Under the current rules, 150 percent or $45,000 would be considered non-discretionary. Your student loan payment would then be based on the remaining $30,000.
- Per the new SAVE plan, 225 percent or $67,500 would be considered non-discretionary. Your student loan payment would then be based on the remaining $7,500.
As you can see, with less of your income being considered discretionary, this would drastically reduce your federal loan payments. In fact, millions of Americans would now qualify for a $0 per month payment because their entire income would be considered non-discretionary.
No More Negative Amortization
Anyone who’s ever racked up credit card debt will be familiar with the concept of negative amortization. This is when more interest gets added to your balance than your monthly payment covers and keeps building upon itself. Even though you’re trying to pay down your debt, you never make any progress because it’s growing worse over time.
One of the criticisms of the current student loan IDR plans is that the same thing can happen. Borrowers may be paying $100 per month but simultaneously being charged $150 in interest. Hence, they never feel like they’re actually becoming debt free.
The new SAVE plan would eliminate this by providing that loans cannot grow due to unpaid interest. In other words, your balance would grow more slowly since there wouldn’t be any interest growing on top of previously accumulated interest.
Faster Loan Forgiveness
Earlier we mentioned that the current IDR plans allow for the cancelation of any remaining debt after 20 or 25 years (depending on the type of plan you have). This is of course assuming you’ve been making regular payments.
Under the SAVE plan, this timeline would now be accelerated to as soon as 10 years for borrowers with an original balance was $12,000 or less. For every $1,000 above this limit, another year of payments will be added up to a maximum term of 20 or 25 years.
This shift in the loan forgiveness timeline under the SAVE plan could make a significant difference for many borrowers, especially those looking for more manageable ways to quickly clear their student debt. For anyone considering this plan, it’s a good idea to look into the best personal loan reviews to understand how different options complement these new terms. Reviews can provide crucial insights into various lenders’ flexibility, rates, and customer satisfaction, helping you make a well-informed decision that aligns with your financial strategy and goals. Understanding all your options can empower you to effectively manage your student loans and potentially free up resources for other financial needs sooner.
Not Considering Spouse’s Income
With the current IDR plans, borrowers who file their taxes as “married filing separately” still have to take their spouse’s income into consideration when calculating payment amounts. However, SAVE will allow these borrowers to exclude this income which will help yield a smaller payment.
When Will SAVE Be Available?
Officially the SAVE plan will not be available until July 1, 2024. However, the White House has said that it plans to begin integrating some of these changes such as the 225 percent of FPL and eliminating negative amortization as early as this summer.
In the meantime, borrowers are encouraged to apply for the current REPAYE IDR plan on the government’s official website. Once REPAYE transitions into SAVE, anyone who’s already enrolled will be moved over automatically.
Until then, borrowers should plan on resuming their federal payments starting September 1st. That means working them into your budget by using an app like Buxfer to see what you’re currently spending your money on and if any changes are necessary.
While this date won’t be extended again (as it was eight times previously), it’s worth noting that the White House also announced a new 12-month ramp-up period for resuming federal payments. This means that if you forget to pay or can only make a partial payment, they will not report it to the major credit bureaus or collections. The intention is to help ensure that the most financially vulnerable borrowers have some lead way for getting back on track without getting into default.
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