The Biden administration has recently announced a new student loan repayment plan, called the Saving on a Valuable Education (SAVE) plan.
While this program may be beneficial for some borrowers, it is important to understand how it works before deciding if it’s right for you.
In this article, we’ll discuss the specifics of the SAVE program and determine who might benefit most from its use.
Check out the SAVE Student Loan Repayment Podcast Episode
What is SAVE
SAVE is a new income-driven repayment (IDR) plan for student loan borrowers that was recently announced by the federal government.
It is replacing the existing Revised Pay As You Earn (REPAYE) plan, and all borrowers currently enrolled in REPAYE will automatically be migrated to the SAVE plan.
Key Features Of SAVE Being Implemented Today
The regulations will go FULLY into effect on July 1, 2024. However, three features will be implemented before repayment starts in September 2023.
One item to note: These changes ONLY APPLY TO REPAYE! i.e. there are no changes to IBR or PAYE.
Federal Poverty Line Adjustment Under SAVE
As you know, payments on SAVE are based on a percentage of income.
However, there are adjustments to your income the government makes. The biggest is reducing your income by an “income protection level.”
SAVE has made a massive shift in this income protection level, increasing it from 150% to 225%.
The Federal poverty guidelines (FPL) are used as the basis to adjust income. For a single borrower, the poverty line is $14,580 which is multiplied by 1.5 to get $21,870.
If someone earns $75,000 a year, this number would be subtracted from their gross earnings resulting in an adjusted income of $53,130.
From there, 10% of the total will be taken as a monthly student loan payment, which amounts to $442.75.
With the new regulation, the amount of income protected (in this example, $21,870) increases by 2.5 to $32,805 resulting in a lower monthly payment of $351.53.
SAVE Interest Subsidy
Currently, if your monthly payment doesn’t cover the interest on your loan each month, the difference is added to your loan balance.
For example, if your monthly payments are $300 and you are charged $500 in interest, then your loan balance will grow by $200 a month.
Currently, the only exception to this is REPAYE and the REPAYE interest subsidy. That subsidy forgives 50% of the deferred amount each month. Therefore, in my above example, your loan balance would grow by $100 a month not $200.
The new SAVE plan will feature a 100% subsidy. Going back to my example, I would pay $300 per month and my loan balance would not increase each month!
This subsidy IS NOT TAXED. As of now, the only tax you owe is when the loan is forgiven.
Currently, if you use REPAYE and you are married, no matter how you file your taxes, your monthly payments are based on combined incomes and combined Federal student loan balances.
This is changing under the SAVE plan.
If you file your taxes separately, then your payment will only be based on your income and your Federal student loan debt.
Currently, there is a massive married filing separately loophole for those on PAYE and IBR. This change now makes this loophole available for those on REPAYE.
Key Features Of SAVE Being Implemented July 1, 2024
These features will take effect on July 1, 2024
Percentage Of Income
Currently, the monthly payment is 10% of your discretionary income. This will drop to 5% for undergrad loans and will remain at 10% for graduate loans. If you have both, then you will pay a weighted average based on the original balances of your loans.
Currently, the term of these plans is 25 years. However, that is going to change based on how much you owe.
Borrowers whose original principal balances were $12,000 or less will receive forgiveness after 120 payments (the equivalent of 10 years in repayment), with an additional 12 payments added for each additional $1,000 borrowed above that level, up to a maximum of 20 for undergraduates or 25 years for graduates.
Payments Prior To Consolidation
In the past, borrowers that were on old income-based repayment plans had to consolidate their student loans in order to qualify for the newer plans.
Whenever you consolidate it’s considered a new loan.
Therefore, all the payments borrowers made prior to consolidation wouldn’t count toward forgiveness. I.e. they would restart the 20 or 25-year clock all over again.
Under SAVE, this is no longer the case. You can consolidate and still get credit for past payments.
What Feature Of SAVE Are The Same As Other Plans?
The primary feature that is staying the same is the tax bomb.
On income-driven repayment plans, your loans are forgiven after a certain time period.
However, you have to claim the amount forgiven as income in that tax year and pay income taxes on it.
When Will SAVE Be Available?
You can sign up for it today. However, instead of seeing the name SAVE as a repayment option, you may still see it called REPAYE. They will be using the terms REPAYE and SAVE interchangeably for now.
Will SAVE be replacing PAYE?
When SAVE was initially announced, the Biden Administration said it would be replacing all other income-driven repayment plans and they would no longer be an option.
For example, you’d no longer be able to PAYE unless you were already in repayment.
That language is not in the official release. Therefore, we are assuming as of now, PAYE and IBR will still be an option which is a good thing for many people.
Is SAVE Right For You?
The features of SAVE sound fastening. However, it’s not for everyone.
For example, about 50% of FitBUX members will still benefit from PAYE or IBR.
The reason is that REPAYE is 25 years long for graduate students. That is five years longer than PAYE.
Therefore, you are making an extra 60 payments presumably at a much higher income than you currently make.
Thus, you have to evaluate if it is beneficial to make an extra 60 payments or get out of debt 5 years earlier.
This calculation is different for everyone. However, I’ve listed a few situations where we see the new SAVE plan make sense.
- Undergrads: SAVE is 20 years for undergrads vs 25 years for graduate students. Therefore, they don’t have to make the extra 60 payments.
- PSLF: Those that are pursuing PSLF will have their loans forgiven in 10 years. Therefore, they don’t have to worry about the extra 60 payments.
SAVE vs Other Income-Driven Plans
IBR and PAYE will still be 10% of income for graduate loans and have interest deferral.
However, for graduate students, they are only 20 years vs 25 years.
These are the only major differences going forward.
How To Apply For SAVE
You must enroll in Revised Pay As You Earn. You can do this by taking the following actions.
- Visit studentaid.gov. Log in with your Federal Student Aid ID, or create an FSA ID if you don’t have one.
- Select income-driven repayment plan request. Preview the form so you know what documents to have ready, like your tax return.
- Choose your plan.
- Complete the application. Enter the required details about your income and family. Remember to include your spouse’s information, if applicable, as it will affect your payments under REPAYE.
You Can Temporarily Self-Report Income
Through December 30, 2023, borrowers can self-report their income when applying for or recertifying an income driven-repayment plan, according to the Education Department. That means you don’t have to submit tax documentation when you report your income.
This can be completed online when you submit the IDR application, as normal; in Step 2 of the application, select “I’ll report my own income information.”
The SAVE plan has the goal of reducing student loan payments in the near term.
It will feature a 100% subsidy for student loan repayment and reduce the monthly payment from 10% to 5% of discretionary income for undergraduate loans.
In addition, married borrowers filing their taxes separately will only be responsible for their own income and Federal student loan debt.
Although it may not be the best option for everyone, if you are an undergraduate student or pursuing PSLF, SAVE should be seriously considered.
If you need help deciding which repayment plan is best for you, consider getting help from a FitBUX Student Loan Planner who can look at your individual situation and recommend the most suitable option.
With their expertise, you’ll increase your chances of success in achieving financial freedom.