After being on hiatus throughout the pandemic, federal student loan repayments will begin again in October. While loan forgiveness on a broad scale doesn’t look like it will be happening, a new plan, called the Saving on a Valuable Education Plan (SAVE), will replace the Revised Pay As You Earn Plan (REPAYE). The SAVE plan has some key provisions that can lower monthly payments and also provide a path to some loan forgiveness.
What Is the SAVE Plan?
The SAVE plan is a federal Income-Driven Repayment (IDR) Plan. These plans set the amount of the monthly payment by taking into consideration your income and your family size. You have to recertify your income every year, and there is some paperwork involved, but it can be a way to keep moving towards paying off your loan while keeping monthly payments as low as possible.
The Department of Education has announced that the SAVE plan will replace the REPAYE plan and will offer the lowest monthly repayment of any IDR plan offered. The plan is being rolled out in two phases. The first changes take place this summer, and the rest next year.
What Are the Changes?
A key feature of the IDR plans is that there is a cap on monthly payments that is a percentage of your discretionary income. Under the SAVE plan, both the cap and the definition of discretionary income have been revised to be more favorable to borrowers.
Starting this summer, discretionary income is being redefined. It is currently the difference between your adjusted gross income and 150% of the poverty level. Under the new plan, the calculation calls for 225% of the poverty level. For individuals, that equates to approximately $32,800. So if you make $80,000 per year in adjusted gross income, your discretionary income would be $47,200.
The monthly payment cap for 2023 is currently 10%. In 2024, this is being lowered for undergraduate loans to 5% of discretionary income over 225% of the poverty line. For graduate loans, this is moving to a weighted average between 5% and 10%.
There’s also a cap on the interest portion of the repayment. Any amount of interest that exceeds the amount of the monthly payment will not be charged under the SAVE plan. This means you pay off loans quicker, as your money goes to pay down the principal of the loan.
If you’re married, under the SAVE plan you no longer have to report your spouse’s income if you file your taxes separately.
There Are More Benefits Coming in 2024
The SAVE plan offers a much faster track to loan forgiveness. Borrowers with $12,000 or less in federal loans will have balances forgiven after ten years of making loan payments. Each additional $1,000 above $12,000 adds another year onto the loan forgiveness timeline. This is a huge change from the current forgiveness timeline of 20 years.
What’s the Application Process?
If you’re already enrolled in the REPAYE plan, you’ll be automatically transferred to the SAVE Plan. If you aren’t enrolled, you can enroll now and be automatically transferred, or you can wait until the SAVE application becomes available later this summer.
Are There Other Ways to Manage Student Loans?
Yes! Public Service Loan Forgiveness is an excellent way to get out from under student loans, especially when you have a very large balance. This plan is available to federal, state, local, and Tribal government and qualifying nonprofit employees with federal student loans.
The government will forgive the remaining loan balances for eligible borrowers who complete 120 qualifying loan payments, i.e., ten years of work before being eligible for loan forgiveness.
There are a lot of options for qualifying employers, but you must work full-time:
- Government organizations on any level (including tribal)
- 501(c)(3) nonprofits
- AmeriCorps or the Peace Corps
- Nonprofit organizations without 501(c)(3) status but provide a qualifying public service as their primary mission.
- Religious organizations
The Bottom Line
The SAVE plan will make it easier to make progress on repaying student loans while also moving forward with the financial and lifestyle goals you’ve set for yourself. Availing yourself of an income-driven repayment plan and combining that with Public Service Loan Forgiveness can get you there much faster.
If you’d like an objective second opinion about your finances, please contact Michael Shea, a CERTIFIED FINANCIAL PLANNER™ and owner of True Equity Wealth Management LLC. Email him at [email protected] or fill out a contact form.
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