Biden's New SAVE Plan: Lower Student Loan Payments with Forgiveness
With student loan payments set to restart in October 2023, the Biden Administration recently announced a new student loan income-based repayment plan called the SAVE Plan. Not only is the SAVE plan going to significantly lower the required monthly payment for both undergraduate and graduate student loans for many borrowers, but there is also a 10-year to 25-year forgiveness period built into the new program. While the new SAVE program is superior in many ways to the current student loan repayment options, it will not be the right fit for everyone. In this article, we will cover:
How does the new SAVE Plan work?
How does the SAVE program compare to other student loan repayment options?
How are the monthly payments calculated under the SAVE program?
What type of loans qualify for the SAVE plan?
How do you apply for the new SAVE plan?
How does loan forgiveness work under the SAVE plan?
Who should avoid enrolling in the SAVE plan?
The new Fresh Start Plan to wipe away defaults and delinquent payments in the past
The SAVE Student Loan Repayment Plan
The SAVE plan is a new Income-Driven Repayment Plan (IDR) for student loans that also contains a loan forgiveness feature. The monthly payments under this program are based on a borrower’s annual income and household size. Once a borrower is enrolled in the SAVE program, any balance remaining on the loan is forgiven after a specified number of years.
Replacing The REPAYE Plan
The SAVE Plan will be replacing the current REPAYE plan, but the terms associated with the SAVE plan are enhanced. Any borrowers previously enrolled in the REPAYE plan will automatically be transitioned to the SAVE plan.
What Types of Loans Are Eligible?
Only federal student loans are eligible for the SAVE plan. Private student loans and Parent PLUS loans are not eligible for this repayment option. Both federal undergraduate and graduate student loans are eligible for the SAVE plan, but the monthly payment calculation and forgiveness terms differ depending on whether the borrower has undergraduate loans, graduate loans, or both.
SAVE Plan Monthly Payment Calculation
There are several income-driven repayment plans currently available to borrowers, but those plans typically require the borrower to commit 10% to 20% of their discretionary income toward their student loan payments each year. The new SAVE plan will only require individuals with undergraduate loans to commit 5% of their discretionary income toward their student loan payments each year. As mentioned above, individuals currently enrolled in the REPAYE plan, which requires a 10% of income payment, will automatically be transitioned to the SAVE plan, which could lower their monthly payment amount.
Definition of Income
The SAVE program limits the borrower to only having to pay 5% of their household discretionary income toward their undergraduate loan balance each year. While that seems pretty straightforward, there are a few terms that we need to define here. First, it’s 5% of household income, meaning if you are married and file a joint tax return, you must use your combined income when applying for the SAVE plan. If there are two incomes, that could naturally raise the amount you pay each month toward your student loans.
However, if a borrower is married but chooses to file their tax return, married filing separately instead of married filing jointly, then only the spouse applying for the SAVE plan has to report their income. While at first this might seem like a no-brainer, I would urge extreme caution before electing to file your tax return married filing separately. While this tactic could lower the required monthly payments for your student loan and potentially increase the forgiveness amount at the end, electing to file as married filing separately could dramatically increase your overall tax liability depending on the income level between the two spouses. It creates a situation where you could win on the student loan side but lose on the tax side. For this reason, I strongly encourage married couples to consult with their tax advisor before completing the SAVE plan application.
If you are a single filer, there is nothing to worry about; it’s just your income.
We also have to define the term discretionary income. Discretionary income usually means your total income minus all your living expenses like rent, groceries, utilities, etc. But that is not how it’s defined for purposes of the SAVE plan, which makes sense because everyone has different living expenses. For purposes of the 5% SAVE plan calculation, your discretionary income is the difference between your adjusted gross income (AGI) and 225% of the U.S. Department of Health and Human Services Poverty Guideline based on your family size.
For 2023, here are the Federal Poverty Levels based on family size:
Individuals: $14,580
Family of 2: $19,720
Family of 3: $24,860
Family of 4: $30,000
The list continues as the size of the family increases, and these amounts change each year. Let’s look at an easy example:
Sarah is a single tax filer
She has $80,000 in undergraduate federal student loans
Her adjusted gross income (AGI) is $40,000
Here is how her student loan payment would be calculated under the SAVE Plan.
Adjusted Gross Income: $40,000
Minus 225% of Individual Household Poverty Rate: $32,805 ($14,580 x 225%)
Equals: $7,195
Multiply by 5%: $359.75
So Sarah would only have to pay $359.75 for the YEAR (about $30 per month) toward her student loan under the new SAVE plan.
Some Borrowers Will Pay $0
No payments will be required under the SAVE plan for borrowers with an adjusted gross income below 225% of the Federal Poverty Level. In the example above, if Sarah’s AGI was only $30,000, since her $30,000 in income is below 225% of the Federal Poverty threshold of $32,805, she would not be required to make any monthly student loan payment under the SAVE plan until her income rises above the 225% threshold.
Size of the Household
As you can see above, it’s not just the annual income amount that determines how much a borrower will pay under the SAVE plan but also how many individuals there are within that person's household. More specifically, they ask for individuals who qualify as your “dependents.” If Sarah is a single filer with 2 roommates, she cannot claim those roommates as household members for the SAVE repayment plan. The SAVE application specifically asks for the following:
How many children, including unborn children, are in your family and receive more than half of their support from you?
How many other people, excluding your spouse and children, live with you and receive more than half of their support for you?
Studentaid.gov has the following illustration posted on their website to give borrowers a rough estimate of what the monthly payment student loan payment will be based on varying levels of income and family size:
The 5% Payment Will Take Effect July 2024
You will notice something odd in the illustration above. When I presented the example with Sarah, her AGI was $40,000 for a household of 1, which resulted in an estimated monthly payment of $30 but the chart above says $60 per month. Why? Under the current REPAYE plan which the SAVE plan is replacing, the payment amount is 10% of discretionary income. The lower 5% of discretionary income amount associated with the new SAVE plan is not expected to be phased in until July 2024. This means that borrowers who enroll in the SAVE plan now, while their payment may still be lower than that standard 10-year repayment plan, they will have to pay 10% of their discretionary income toward their student loans until they reach July 2024 when the new 5% rule becomes effective.
Going Into Effect in 2023
There are three components of the SAVE Plan that are going into effect in 2023, some of which we have yet to address in this article.
The larger income shield. Most of the current income-based student loan repayment plans only shield the borrower’s AGI up to 100% to 150% of the Federal Poverty Level compared to the new SAVE plan’s 225%. Under the SAVE plan, the 225% shield is in effect for 2023 reducing the amount of the borrower’s AGI subject to the current 10% repayment allowance. Also, more borrowers will be completely relieved of making payments when they restart in October because the income protection threshold is higher under the SAVE Plan.
The treatment of unpaid interest: We have not covered this yet but we will later on, the treatment of unpaid interest and the compounding of the interest for loans covered by the SAVE plan will be much more favorable for borrowers. This feature goes into effect in 2023.
Married Filing Separately: Married couples who choose to file their tax return married filing separately will no longer be required to include their spouse’s income in their monthly payment calculation under the SAVE plan.
Graduate Loans
The more favorable 5% income repayment amount that takes effect in July 2024 is only available for undergraduate loans under the SAVE plan. Individuals with graduate loans are eligible to enroll in the SAVE program but the minimum payment amount is based on 10% of discretionary income instead of 5%.
For borrowers that have both undergraduate and graduate student loans, they will take a weighted average between their undergraduate loans at 5% and graduate loans at 10% to reach the percent of discretionary income that will be required under the SAVE payment plan. Example: If you have $20,000 in undergraduate loans and $60,000 in graduate loans, you have $80,000 in student loans in total: 25% are undergraduate and 75% are graduate.
5% x 25% = 1.25%
10% x 75% = 7.50%
Average Weighted: 8.75%
This borrower would have to commit 8.75% of their discretionary income toward their SAVE student loan repayment plan.
SAVE Plan Loan Forgiveness
There is also a loan forgiveness component associated with the new SAVE Plan. Once you have made payments on your student loan for a specified number of years, any remaining balance is forgiven. The timeline to forgiveness under the SAVE plan can range from 10 years to 25 years. The original principal balance of your student loan or loans is what determines your forgiveness timeline.
Beginning in July 2024, borrowers who had original student loan balances of $12,000 or less, may be required to make monthly payments in accordance with the income-based payment plan, but after 10 years, any remaining loan balance is completely forgiven.
For each $1,000 in original student loan debt over the $12,000 threshold, they add one year to the borrower's forgiveness timeline up to the maximum of 20 years for undergraduate debt and 25 years for graduate debt. For example, Sue has a student loan with a current balance of $ 8,000 but the original principal balance of the loan was $14,000. Since Sue is $2,000 over the $12,000 threshold, her forgiveness timeline will be 12 years. If Sue continues to make income-based payments under the SAVE plan, any remaining balance after year 12 is completely forgiven.
Payments Made In The Past Count Toward Forgiveness
A big question for borrowers, for years that you had already made student loan payments, do those years count toward your SAVE plan forgiveness timeline? Good news, the answer is “Yes” and it gets better. You also receive credit for the specific periods of deferment and forbearance which will count toward the forgiveness timeline.
For example, Jeff graduated from college in 2017, he has an original loan balance of $20,000 and made payments on his student loans in 2017, 2018, 2019, and then did not make any student loan payments 2020 – 2023 due to the COVID relief. Jeff enrolls in the SAVE repayment plan. Since his original loan balance was $8,000 over the $12,000 10-year threshold, his timeline to forgiveness is 18 years. However, because Jeff started making student loan payments in 2017 and he also receives credit for the years of deferred payments under the COVID relief, he is credited with 7 years toward his 18-year forgiveness timeline. After Jeff has made another 11 years' worth of income-based student loan payments under the SAVE program, any remaining loan balance will be forgiven.
Forgiveness May Trigger A Taxable Event
If you are forgiven all or a portion of your student loan balance, you may have to pay taxes on the amount of the loan forgiveness. It states right on the SAVE plan application that “forgiveness may be taxable”. As of 2023, forgiven loan balances are a tax-free event but that rule sunsets in 2025. With the SAVE plans having a 10-year to 25-year forgiveness period, who knows what the tax rules will be when those remaining loan balances become eligible for forgiveness.
Borrowers Who Consolidate Multiple Loans
It’s not uncommon for college graduates to have 3 or more federal student loans outstanding at the same time because they will typically take multiple student loans over their college tenure and then at some point consolidate all of their loans together. When borrowers consolidate all of their loans into one under the SAVE plan, they receive a credit for a weighted average of payments that count toward forgiveness based upon the principal balance of loans being consolidated.
That’s the technical way of saying if you consolidate two of your student loans into one and the first loan that you consolidated began repayment 9 years ago and had a $1,000 original balance but then you consolidated it with a second loan with an original balance of $8,000 that you just started making payments on last year, if you qualify for 10-year forgiveness under the SAVE plan, the full loan balance will not be forgiven next year which would be the 10th year since you started making payments on the $1,000 loan. They are going to weigh the balance of each loan and how long you have been making payments on each loan to determine how much credit you receive toward your forgiveness timeline once enrolled in the SAVE plan.
Does Interest Accumulate In The SAVE Plan?
A concern will often arise with these income-based repayment plans that if your income is low enough and it does not require you to make a payment or if the payment is very small, does the interest on the student loan continue to accumulate which in turn continues to increase the amount that you own on your student loan?
Under the new SAVE plan, the answer is “No”. The SAVE plan cancels unpaid interest. For example, if under the SAVE plan your monthly payment is $150 but the monthly interest on your loan is $225, instead of the $75 being added to your loan balance, the $75 in unpaid interest is canceled by the Education Department. This new feature associated with the SAVE plan will prevent outstanding loan balances from ballooning due to unpaid compounding interest.
Loan Defaults and Delinquent Borrowers (Fresh Start Program)
The Department of Education is giving all student loan borrowers a fresh start under what is specifically called the Fresh Start Program. For all borrowers that either fell into default prior to the COVID payment pause or have delinquent student loan payments on their credit history, all student loan borrowers are allowed to enroll in the new Fresh Start program which brings everyone current regardless of what their student loan payment history was prior to the COVID payment pause.
But action needs to be taken prior to September 2024 to qualify for this Fresh Start. This does not happen automatically. I have been told that you will need to contact either the Education Department’s Default Resolution Group or your student loan service provider and ask to be enrolled in the Fresh Start Program. Once in the Fresh Start Program, the loan default and/or late payments are also permanently removed from your credit report.
How Do You Enroll In The SAVE Plan?
To enroll in the SAVE plan, you can visit the StudentAid.gov website. You will be able to apply for the SAVE program, get an estimate of what your monthly payment amount will be, and ask any questions that you have about the SAVE program. You can also call 1-800-433-3243. There is also a printable PDF of the SAVE application that you can download from the website.
SAVE is one of many “Income-Driven Repayment” (IDR) plans that are available to borrowers. Fortunately, on the first page of the SAVE application, you can check a box that says, “I want the income-driven repayment plan with the lowest monthly payment.” For many borrowers, this will be the new SAVE plan, but if one of the other IDR programs like IBR, PAYE, or ICR offers a lower monthly payment, you will be enrolled in that Income-Driven Repayment Plan.
The SAVE Plan Is Not For Everyone
While there are no income limitations that restrict borrowers from enrolling in the SAVE Plan, this plan will not be the right fit for everyone. It will take careful consideration on the part of each borrower to determine if they should enroll in the SAVE plan, continue with the standard 10-year repayment plan, or select a different Income-Driven Repayment option. Right on the SAVE application, it states that there is no cap on that amount of the monthly payment and “your payments may exceed what you would have paid under the 10-year standard repayment plan”.
Everyone’s situation will be different depending on your annual income amount, the size of your outstanding loan balance, the type of loans that you have, the size of your household, tax filing status, how long you have already been paying on your loans, and what you can afford to pay each month toward your student loans.
In general, for higher-income earners with small to medium-sized loan balances, the SAVE program may not make sense because the payments under the SAVE program are based solely on your income and household size rather than your loan balance.
The Monthly Payment Amounts Change Each Year
Since the SAVE Plan is an income-driven repayment plan, your required monthly payment amount can vary each year as your income level and household size change. If you were making $30,000 as a single filer in 2024, you might not be required to make any payments, but if you change jobs and begin earning $80,000 per year, your payments could increase dramatically under these Income-Driven Repayment plans.
In the past, these income-driven repayment plans have been a headache to maintain because you had to go through the manual process of recertifying your income each year, but there is good news on this front. The SAVE plan will give borrowers the option to give the Department of Education access to the IRS database to pull their income from their tax return automatically each year to avoid the manual process of recertifying their income each year. Section 5A of the SAVE application is titled “Authorization to Retrieve Federal Tax Information From the IRS”, so you can elect this when you enroll in the SAVE plan.
You Are Not Locked Into The SAVE Plan
Once you are enrolled in the SAVE plan, you are not locked into it. At any time, you may change to any other student loan repayment plan for which you are eligible, so if your circumstances change in the future, you could enroll in a different repayment option that better meets your financial situation.
Student Loan Repayment Strategy
As borrowers, it's very tempting to quickly select the student loan repayment program that offers the lowest monthly payment amount, but that may not be the best long-term financial solution. As I mentioned before, the standard repayment schedule for student loans is fixed payments over 10 years. With the SAFE plan potentially lowering the monthly payment amounts and stretching the loan out over a longer duration, borrowers could end up paying more over the life of that loan. In addition, for borrowers aiming for forgiveness, it isn’t easy to know what your income may be 5+ years from now.
While interest does not compound in the SAVE program, if your payments are only being applied toward the interest portion of your loans, the principal amount of the loan is not decreasing, which could cause you to pay more over that 20 to 25-year period than you would have just keeping the standard payment schedule a paying off your loan in 10 years. While forgiveness may be waiting for you after 20 years, it could trigger a taxable event, making the forgiveness target even less attractive.
The SAVE program is positive because it may give some borrowers much-needed relief as student loan payments restart and for borrowers just graduating from college. However, for borrowers who enroll in the SAVE program, it may make financial sense to ignore the forgiveness aspect of the program and pay more than just the minimum monthly payment to pay off the loans faster. Debt-free living is a wonderful thing.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
