Student loans: Biden debuts application for new affordable repayment plan

Ronda Lee

Ronda LeeTue, August 1, 2023, 1:51 PM EDT

Student loan borrowers can now apply for what the Biden administration called “the most affordable repayment plan in history.”

The Education Department this week released an updated beta version of its income-driven repayment plan application on the Federal Student Aid (FSA) websitethat allows borrowers to enroll in the Saving on a Valuable Education, or SAVE, plan.

The SAVE plan lowers monthly payments, provides faster forgiveness for some, and prevents balances from growing due to unpaid interest. It’s also one of the efforts the Biden administration is championing after the Supreme Court overturned loan forgiveness in June.

Here’s what to know.

Students take their seats for the diploma ceremony at the John F. Kennedy School of Government during the 361st Commencement Exercises at Harvard University in Cambridge, Massachusetts May 24, 2012.   REUTERS/Brian Snyder    (UNITED STATES - Tags: EDUCATION)
Students take their seats for the diploma ceremony at the John F. Kennedy School of Government during the 361st Commencement Exercises at Harvard University in Cambridge, Massachusetts May 24, 2012. (REUTERS/Brian Snyder)

What is SAVE?

SAVE is an income-driven repayment plan, which structures your monthly payment based on income and family size, with monthly payments as low as $0. Currently, there are four different IDR plans that offer loan forgiveness after 20 or 25 years of payments, depending on the plan.

SAVE replaces the Revised Pay As You Earn Repayment Plan (REPAYE) income-driven repayment plan and makes some key changes. They include:

  • The most borrowers must pay toward their undergraduate loans is 5% of their discretionary income, down from 10%.
  • No borrower making less than 225% of the federal poverty level will have to make a monthly payment.
  • Loan balances will be forgiven after 10 years of payments — instead of 20 years — if the original loan balance is $12,000 or less.
  • Borrowers won’t be charged with unpaid monthly interest, so balances won’t grow if they make their payments — even if the monthly payment is $0 because their income is low.

“Some aspects of SAVE will be implemented this summer, some not until July 1, 2024,” Mark Kantrowitz, author and student loan expert, told Yahoo Finance. “In particular, the cut in the percentage of discretionary income for undergraduate debt from 10% to 5% will not be implemented until July 2024.”

Who’s eligible for the SAVE plan?

Borrowers who are already enrolled in the REPAYE plan will automatically be enrolled in SAVE.

Borrowers who want to switch plans or enroll in SAVE need to log into their Federal Student Aid account, update their contact information, review their loan application, provide income, review current income-driven plan or switch to a new plan, and agree to the terms to submit the application.

The application process takes approximately 10 minutes to complete, according to the Education Department.

Borrowers in default need to get their loans in good standing to be eligible for an income-driven plan. Default borrowers can use the Fresh Start program to get in good standing and become eligible for an income-driven plan.

For those enrolled in the Public Service Loan Forgiveness program, your remaining balance will be forgiven in 10 years, regardless of which income-driven plan you’re enrolled in, including the SAVE plan.

What about interest accrual and capitalization?

Federal student loans accrue interest and many income-driven repayment plans have interest capitalization, where unpaid interest is added to the outstanding balance of the loan.

Interest will still accrue on all federal loans starting September, but interest capitalization has been eliminated for all income-driven repayment plans except income-based repayment (IBR) plans because of a statutory requirement, according to Kantrowitz.

Borrowers in IBR plans and those with commercially-held Federal Family Education Loans (FFEL) will still see interest capitalized if they switch to the SAVE plan.

Do I need to contact my loan service provider to sign up for SAVE?

Typically to switch IDR plans, you would need to go to your loan service provider to choose a plan. But that’s not the case for the SAVE plan, which all borrowers can apply for on the FSA website. That may help borrowers avoid confusion since 44% of them have a new loan servicer since the pandemic began and payments were put on pause. You can learn more about the change in loan service providers here.

SAVE and the one-time payment adjustment

Switching to SAVE won’t affect borrowers who will get a one-time adjustment to their payment history that gets them closer to forgiveness.

The one-time payment adjustment counts certain months that were previously ineligible toward student loan forgiveness under income-driven repayment plans.

The adjustment to student loan accounts would go toward helping borrowers get closer to forgiveness under income-driven repayment plans, which offer cancellation after 20 or 25 years, depending on the particular plan.

Borrowers who have been in repayment for 20 or 25 years and are eligible for forgiveness received notices last month that their remaining balances would be discharged in August.

All other borrowers will see the one-time payment adjustment applied to their accounts in 2024. You can learn more about the one-time payment adjustment here.

Ronda is a personal finance senior reporter for Yahoo Finance and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda.

About The Wall Street Analyzer 1501 Articles
The Wall Street Analyzer's staff of writers, analysts, publishers, producers, market researchers, and PR professionals aim to provide investors with the tools they need to make informed decisions on buying stock. Our staff is a mix of financial professionals and media savvy individuals whose experiences bring the best talent from both ends of the spectrum.