Your monthly student-loan bill could get a lot lower with new SAVE payment plan

Hours after the Supreme Court published its decision, Biden told borrowers that his administration had finalized the Saving on a Valuable Education, or SAVE, plan, touting it as “the most generous repayment program ever.” The new plan is the latest version of income-driven repayment, a suite of plans that allow federal student-loan borrowers to repay their debt as a percentage of their income and have the balance forgiven after 20 or 25 years of payments. Those plans are an alternative for borrowers who may struggle to afford mortgage-style payments that pay off their debt over 10 years. 

The final version of the SAVE plan, which the Biden administration released in the wake of the court’s decision, comes after more than a year and a half of proposals and discussions among stakeholders about changes to income-driven repayment. Parts of the plan will be available to borrowers when payments, interest and collections on student loans resume this fall after a pause of more than three years.  

The plan “is a big deal for both current borrowers and for all the future borrowers who are out there,” Bharat Ramamurti, the deputy director of the National Economic Council, told reporters. It’s “not a substitute for debt relief, but it is a huge benefit for borrowers.” 

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The plan also has opponents, with some Republican lawmakers criticizing it as “fiscally irresponsible” and even “blatantly illegal” and some opponents hinting at legal challenges. But in May, an attorney at a conservative think tank said in a webinar that fighting the payment-plan changes could be “an uphill battle” and would not be “as strong of a case as the case against mass student-debt cancellation.” 

Ramamurti told reporters last month that given the clarity in the statute, he’d be surprised if the administration was sued over the program. 

SAVE plan is the latest version of repayment help that’s been available for decades

Decades ago, Congress authorized the Department of Education to offer federal student-loan borrowers the ability to repay their debt as a percentage of their income. These plans were initially designed as a safety net for borrowers during periods of economic hardship. But over time, as college costs and student debt have ramped up but wage growth has stayed relatively stagnant, more borrowers have turned to these plans as a long-term payment strategy. Roughly 47% of the dollars in student-loan repayment was being paid back through one of these plans in 2022, according to a report from the Government Accountability Office. 

During the Obama administration, officials expanded access to these plans and made their terms more generous. Still, borrowers and advocates complained that they didn’t provide enough relief. For some borrowers, even an income-based payment was unaffordable, and for others, their monthly payments were so low that they didn’t cover the interest on their debt and so their balance continued to tick up. 

Balances won’t grow — even if the monthly payment is too low to cover the interest

The SAVE plan aims to tackle some of these concerns. For one, starting this fall when student-loan payments resume, borrowers who use the plan won’t see their balances grow, even if their payment isn’t enough to cover the interest. That gets at one of the biggest complaints Betsy Mayotte, the president of the Institute for Student Loan Advisors, hears from borrowers about income-driven repayment plans. 

“They make a payment every single month and they just watch their balance go up,” Mayotte said. “Despite the fact that they know that after 20 or 25 years on the plan that whole amount will be forgiven, it’s still pretty depressing and demoralizing to make a payment towards the debt every month only to see it go up.” With the new plan, “that’s not going to happen,” she said.

In addition, starting when student-loan payments resume, borrowers using the plan will see at least slightly lower monthly payments than what they were billed on other income-driven repayment plans. That’s because under the SAVE plan, more income is protected before payments kick in. 

A borrower’s monthly payment will be based on any income above 225% of the poverty line for their family size. In previous income-driven repayment plans, that threshold was 150% of the poverty line. 

And next summer, some borrowers could see their monthly payment amounts go down even more significantly. Starting in July 2024, borrowers with only undergraduate loans will only be required to put 5% of their income toward their debt, down from 10%. Borrowers with undergraduate and graduate loans will pay a share of their income between 5% and 10% that’s based on a weighted average of their loans. 

In addition, borrowers whose original loan principal was less than $12,000 will have their debt canceled after 10 years of payments. 

Not a silver bullet

Winston Berkman-Breen, legal director at the Student Borrower Protection Center, an advocacy group, said all of the various aspects of the plan will lower payments for borrowers, “and it’s really important to acknowledge that.” 

Still, he said, it’s not “a silver bullet to a fundamentally broken system.”  

That’s because the SAVE plan doesn’t include everyone, he said. Borrowers with Parent PLUS loans, which are the loans the government provides to parents to pay for their children’s education, aren’t eligible. In addition, borrowers with student loans from graduate school don’t have access to the full benefits of the plan. 

And even for those who are eligible, the plan doesn’t address the systemic issues plaguing the student-loan system, advocates say. For borrowers to access the plan and stay on it until they’re eligible for loan forgiveness, they have to hear about the program, apply for it and trust their student-loan servicer to follow through.  

That hasn’t worked out well in the past. A 2021 report from the National Consumer Law Center and the Student Borrower Protection Center found that more than 2 million borrowers had been repaying their student loans for more than 20 years. If those borrowers had been on functioning income-driven repayment plans, many likely would have been eligible to have their loans canceled. However, just 32 borrowers had had their loans canceled under income-driven repayment at that time.

Advocates and borrowers have complained for years that servicers weren’t providing borrowers with enough or the right information to ensure they had access to income-driven repayment plans and that they stayed on the plans through to forgiveness. The Department of Education is taking steps to fix errors created by servicers’ challenges in keeping track of borrowers’ progress toward cancellation on such plans. 

Advocates want bolder action

Still, where five or 10 years ago, advocates, policy wonks and borrowers may have been more bullish on the potential of a revamped income-driven repayment plan to help borrowers, “the public and advocacy groups have moved far beyond just fixing [income-driven repayment],” said Natalia Abrams, the president of the Student Debt Crisis Center. 

Now they’re advocating for bolder steps like debt cancellation. The Biden administration has acknowledged that the new SAVE plan isn’t a substitute for mass debt relief and plans to take another stab at mass student-loan forgiveness. Fundamentally, advocates who want to see broader solutions to the student-debt crisis as well as critics who worry about the cost to the government say the SAVE plan continues the march down the old path of relying on loans to pay for college. 

“This is leaning into the debt-financing framework that we currently use,” Berkman-Breen said.

Jason Delisle, a nonresident fellow at the Urban Institute, said the new plan could make taking on loans more attractive for some borrowers, particularly those pursuing low-cost degrees at places like community colleges, because they’d pay so little over time and have the balance forgiven sooner than under previous plans. 

“Taking a loan is not a slam dunk in that it’s just going to become a grant,” said Delisle, who has questioned the design of the income-driven plan and expressed concern about its possible unintended consequences. “This new plan will move it a lot closer to that.” 

He also worries that because borrowers with the lowest incomes will get some of the biggest benefits from the plan, it could subsidize schools where students earn degrees in low-paying areas of study. The Biden administration is in the process of creating a rule that would crack down on career-preparation programs that don’t lead to jobs that pay enough for borrowers to service their debt. 

Marshall Steinbaum’s research on borrowers between the ages of 18 and 34 who had a positive student-loan balance in 2009 indicates that a large share of millennial borrowers don’t repay their student debt in 10 years. Steinbaum, a senior fellow in higher-education finance at the Jain Family Institute, found that by 2019, almost half of these borrowers owed more than they did in 2009, and a quarter owed at least twice as much. 

The interest benefit provided by SAVE will mean that going forward, borrowers in a similar position won’t see their balance go up in the same way. Still, Steinbaum said he expects the new plan will continue along the trajectory of many borrowers not repaying their debt. 

“We have a student-debt crisis that no one, at least to my understanding, has a good idea of how to solve at the root of it,” he said. “Everything else that we’re talking about dealing with the back end of repayment or nonrepayment is kind of downstream of the policy failure.”  

In the more immediate future, some advocates are concerned about borrowers’ ability to access the benefits of the plan as payments resume this fall. An unprecedented 28 million borrowers will be entering repayment at the same time. Meanwhile, the Office of Federal Student Aid, which oversees the loan program, is coping with a budget crunch after Congress didn’t fully grant its request for funding. One of the consequences: The agency is paying servicers less, and they’ve slashed their customer-service hours.

“There’s going to be many borrowers who can benefit from these programs, and in the best of times it would be a huge outreach and education effort to just make sure folks can actually benefit,” said Cody Hounanian, the executive director of the Student Debt Crisis Center. “It’s not an ideal situation to introduce a new plan.” 

How to enroll in the SAVE plan

Borrowers who do think they’ll benefit from SAVE can take steps now to ensure they have access to the plan once payments resume, Mayotte said. If they’re already enrolled in REPAYE, a different income-driven repayment plan, they’ll automatically receive the benefits of SAVE once the plan becomes available.

Borrowers who aren’t in REPAYE but want to use SAVE can apply for REPAYE now on the Department of Education’s website. Still, borrowers may need to wait a few weeks before they can get a sense of what their monthly and overall loan payments through SAVE will be, because student-loan calculators largely haven’t been updated yet to include its benefits. 

“There is still a lot of confusion out there, and people are anxious to be able to find out right now what their payment is going to be,” Mayotte said. “People should just sit tight for a minute.”