Borrowers struggling under the stress of federal student loans have a new option to slash their repayments significantly, eventually in half.
The Biden administration's new income-based repayment program, dubbed "SAVE," opened enrollment Tuesday, offering millions of borrowers a more affordable way to pay their monthly student loan bills, which willexpires again in octoberAfter a three-year break.
“Through the SAVE program, we are making a commitment to every student,” Education Secretary Miguel Cardona said at a news conference Monday afternoon. "Your payments will be affordable. You won't be buried under a mountain of interest or in debt for a lifetime."
Over the next few days, more than 30 million borrowers will be invited to join the scheme, which was first introduced in January, with monthly repayments based on income and family size.
Unlike the White House's previous plan to cancel up to $20,000 of federal debt, which was struck down by the Supreme Court in June, the payment option would become a permanent part of the student loan facility and be available to current and future borrowers. It also creates a new safety net that automatically places certain borrowers into the SAVE program after they default on payments.
Borrowers who want to apply for the SAVE, or Savings for a Valuable Education, program should act quickly: Your application could take about four weeks to be processed, according to a senior education ministry official. Officials added that if you sign up now, your paperwork will have enough time to be processed before your first payment is due.
Borrowers won't have access to all of the program's benefits until next summer because some features won't take effect immediately. Here's a brief overview of how the program works:
Who is entitled to the new repayment plan?
Those with federal undergraduate or graduate student loans. Borrowers with undergraduate debt can get lower repayments than borrowers with graduate degrees.
Who is excluded?
parents who borrowed moneyUse a Parent PLUS loan to pay for a child's education and they cannot enroll in a new plan.
Home borrowers often only get the most expensive loans if they can't make their loan repaymentsincome-driven repaymentA scheme called repayment by income requires borrowers to pay 20 percent of their discretionary income over 25 years; everything else is forgiven.
How does the new SAVE program work?
All income-based repayment plans generally work the same way. Payment amounts are based on your income and family size and are adjusted each year. After a certain number of years (usually 20) of monthly payments, any remaining balance is forgiven. (The remainder is taxed as income, althoughtemporary tax rules(Excludes the balance of the 2025 federal income tax credit.)
The SAVE program replaces the revised "Pay As You Earn" or "REPAYE" program and is more generous in several ways. First, it will reduce payments toUndergraduate LoansUp to 5% of discretionary income, down from 10% in REPAYE (15% in other plans).
Graduate debt is also eligible, but the borrower will pay 10% of discretionary income on this portion. If you have both undergraduate and graduate debt, your payments will be weighted accordingly.
The new rules also adjust the payment formula by protecting more income to meet basic needs, thereby reducing overall payments. The change would also make more low-income workers eligible for $0 payments.
What is discretionary income?
After paying for basic needs like food and rent, any residual income is considered discretionary;Income-driven repayment planBorrowers are required to pay a certain percentage of discretionary income.
The SAVE program adjusts the payment formula to provide more income security for these basic needs, resulting in less discretionary income and lower spending.
SAVE increases the amount of income protected from repayment to 225 percent of the federal poverty level, which equates to roughly $15 an hour for a single borrower. If your income falls below that figure, you won't need to make monthly payments.
In other words, single people making less than $32,805 a year pay $0 a month. The same goes for someone in a family of four earning less than $67,500. This will help an additional million low-income borrowers qualify for zero-dollar repayments, the Education Department said.
Under the old REPAYE program, lower incomes were protected at 150% of the federal poverty level.
Will the way interest is handled change?
That. This is one of the most attractive features of the new program. If a borrower's monthly repayments are insufficient to cover the interest owed, the Department of Education will cancel the portion not covered.
In other words, if a borrower owes $50 a month in interest but only pays $30 back, the remaining $20 disappears as soon as the repayment is made. Monthly interest payments will be eliminated for those whose incomes are too low for them to be obliged to pay.
This new rule will provide relief to those who made payments but had their balances increase because they did not pay enough interest.
Is the plan effective immediately?
three big onesComponents of the planAvailable now, including higher income protection through a repayment formula that will bring repayments down to zero for more borrowers. A new treatment of unpaid interest is also in effect. Finally, married borrowers who file separately will no longer need to include their spouse's income in their monthly payment calculations. (Also, their spouses would also be excluded from the family size.)
But other benefits -- including a reduction of 10 percent of discretionary income on student loans to 5 percent -- won't go into effect until July.
Once the program is in full swing next summer, many borrowers will see their monthly bills drop by 40% in dollar terms compared with the repayment plan. But wages for the lowest earners could drop by 83%, while those for the highest earners would see only a 5% drop.
Has anything changed for microloan borrowers?
Yes, but this feature will go into effect next summer.
People who apply for small loans (or those with an original balance of $12,000 or less) will make monthly payments for 10 years before canceling, rather than the more typical 20-year repayment period of other income-based repayment plans. For every $1,000 borrowed above $12,000, the monthly payment increases by one year before the balance is forgiven, up to a maximum of 20 or 25 years.
Is the new plan always the best option?
The SAVE program is expected to provide the lowest payouts for most borrowers and may be the best option for most borrowers. Loan Simulator Tool OpensStudent Aid NetworkCan help you analyze which repayment plan is best for your situation and goals.
When you sign up, it should automatically use your points in the calculation. (You can add other federal loans if any are missing.) You can also compare plans side by side—over time, what the monthly and total costs are, and whether any debt will be forgiven.
What about borrowers who defaulted before payments were suspended?
Borrowers who were in arrears before their payments were interrupted (this happens when you are at least 270 days late) have receivedNew beginningand deemed timely payment. This means they can enroll in SAVE or any other repayment plan.
but they shouldtake certain stepsDo this, and do so by September 2024, to prevent long-term defaults on the loan.
Here's how: Contact the Ministry of Educationdefault parsing group- from the sideTelephone,Online or by mail - and apply for a loan through the Fresh Start program. Default groups can also help you enroll in income-based repayment plans, including SAVE.
The group will transfer your loan to a legitimate loan servicer and remove the default information from your credit report.
“Then their new servicer will put them in the I.D.R. They qualify for the minimum monthly payment plan,” said a Department of Education spokesman. “For most borrowers, that’s a savings. "
Can overdue borrowers apply?
Borrowers who were behind on their monthly student loan bills before repayments were interrupted can also start over and will be allowed to participate in the SAVE program just like any other borrower.
Going forward, borrowers who miss a payment for 75 consecutive days will automatically be enrolled in the SAVE program—as long as they approve the disclosure of their federal tax information to the Department of Education. The policy will take effect in July next year.
How do I apply?
You can apply onlineStudentAid.gov/SAVE; Borrowers will be able to see their payment amount before applying. Administration officials said the process would take no more than 10 minutes. Once logged in, you can check your login status in your account dashboard.
In the coming months, lenders will also be able to help borrowers enter and "self-certify" their income through the servicer's website or by phone, CEO Scott Buchanan said, without the need to Provide tax documents.Student Loan Servicing Alliance, an industry trade group.
Those already registered with REPAYE do not need to do anything - they will be automatically transferred to SAVE and their payments will be adjusted. You can also switch to SAVE from other income-based repayment plans without rescheduling your repayments.
For more information on commencing repayments click hereour guide.
What happens if I try to enroll and my application isn't processed in time for my first payment?
You will be placed on hold, which means payment will not be due for the next billing cycle.
Is there anything I need to do to stay registered?
The amount of your payment is adjusted each year based on your income, and your income must be updated each year.
However, if you allow the Department of Education to access your income information through the IRS (which you can do now as part of the application process), you don't have to re-verify your income every year because it's done automatically.
Tara Siegel BernardCovers personal finances. Before joining The Times in 2008, she was deputy managing editor of personal finance website FiLife and editor of CNBC. She also worked for Dow Jones and is a regular contributor to The Wall Street Journal. More About Tara Siegel Bernard
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