Millions of student loan borrowers are set to experience a reduction in their monthly payments. The adjustment will be implemented as the final elements of President Joe Biden’s new income-driven repayment plan go into effect.
Biden administration officials have been touting that new plan, called the Saving on a Valuable Education plan — or SAVE, for short — as the most affordable repayment option ever. At least 7.5 million borrowers have enrolled in SAVE in so far, according to the Education Department. And while most of these borrowers have already been able to get their payments reduced under SAVE compared to older IDR plans, many will see a further reduction this July.
Here’s what borrowers need to know.
Lower Payments And Student Loan Forgiveness Under SAVE Plan
The SAVE plan is like other IDR plans, like Income-Based Repayment and Pay As You Earn, in most ways. The plan uses a formula applied to a borrower’s income that exceeds an initial exempted amount based on their family size. Payments last for 12 month increments, after which that payment amount may increase or decrease depending on changes to the borrower’s income. Borrowers can be eligible for student loan forgiveness after a certain number of years in repayment — typically, 20 or 25 years (depending on whether they have graduate school debt), although the Biden administration just enacted “early” loan forgiveness in as little as 10 years for those who started off with relatively small balances.
But the details of SAVE make the plan more affordable than other IDR options in most cases. SAVE provides for a larger income exemption before the repayment formula kicks in, allowing millions to have lower student loan payments (and in some cases, no payments at all). When the repayment formula does kick in for income that exceeds the exemption, payments are currently based on 10% of the borrower’s discretionary income — similar to the PAYE plan, but more affordable than IBR.
More Affordable Student Loan Payment Formula Goes Into Effect This July
This summer, additional SAVE regulations are set to take effect, which may reduce borrowers’ student loan payments even further.
Starting on July 1, the SAVE repayment formula for borrowers with only undergraduate student loans will be based on only 5% of discretionary income, rather than 10%. Graduate school borrowers will stay at the 10% formula. For those who have a mix of undergraduate and graduate student loans, their payments will be somewhere between 5% and 10% of discretionary income, based on the weighted average of their graduate school and undergraduate school loans.
This would substantially reduce many borrowers’ monthly student loan payments under SAVE. An undergraduate borrower with a family size of 1 making around $70,000 per year currently would have a payment of around $310 per month under SAVE. But after the new repayment formula changes go into effect in July, their payment would drop to only $155 per month — a 50% reduction. A borrower making the same amount of income but with a 50-50 split of undergraduate and graduate school loans would see their payment go down to around $232 per month — a 25% reduction.
Student Loan Forgiveness And SAVE Plan Could Face New Legal Challenge
But before the new SAVE repayment formula goes into effect this summer, the Biden administration may be facing a new legal challenge.
The Attorney General for the state of Kansas announced plans to sue the Education Department over the new SAVE plan. An op-ed published in the Washington Free Beacon suggests that the thrust of the suit may focus on Biden’s early student loan forgiveness under SAVE, which allowed more than 150,000 borrowers to receive over a billion dollars in debt cancellation last month. It is unclear at this time whether the suit will also target the modified repayment formula that is set to be implemented this July, or other borrowers who are already enrolled in SAVE. The suit is expected to be filed later this month.
