The return to federal student loan repayment is officially here. And with monthly bills coming due for the first time in more than three years this October, millions of borrowers are scrambling to figure out how to afford their payments, which average nearly $400.
That’s where the Saving on a Valuable Education Plan — or SAVE for short — comes in. Unveiled by the Department of Education (ED) in Summer 2023, SAVE replaces the existing REPAYE plan and promises to be the most affordable repayment plan ever available to borrowers — a welcome change amid record-high financial stress.
So how exactly does SAVE work? Here’s what to know about the newest income-driven repayment (IDR) plan.
SAVE’s benefits are being implemented in two phases
ED is implementing SAVE in two phases, the first of which has already been completed, and the second of which will be completed next summer.
SAVE benefits that are already available include:
Increased federal poverty line deduction
IDR plans calculate a borrower’s monthly payments relative to their discretionary income, which is defined as the difference between the borrower’s adjusted gross income and a percentage of the federal poverty guideline. Whereas this percentage is 150% for other IDR plans, SAVE uses 225% of the federal poverty guideline in its calculation, thus resulting in a lower monthly payment.
100% interest subsidy
Because IDR plans calculate monthly payments relative to borrowers’ income, lower-income borrowers may see their required monthly payment drop as low as $0. However, if their monthly payment amount is so low that it doesn’t cover the loan’s interest, borrowers may see their loan balance grow over time.
While other IDR plans subsidize a portion of this interest accumulation, SAVE subsidizes all of the interest accrued while a borrower is enrolled in the plan. In other words, if a borrower’s required monthly payment is less than the amount of interest that accrues in a month, ED will cover the difference.
Spousal income exclusion
SAVE allows married borrowers who file their taxes separately to exclude their spouse’s income from their monthly payment calculation. This was not allowed under REPAYE, but is allowed under other IDR plans.
SAVE benefits that will be implemented in Summer 2024 include:
Lower monthly payments for undergraduate loans
Under other IDR plans, borrowers’ monthly payments are equal to 10 to 15 percent of their discretionary income. Once its second phase of features is implemented next summer, SAVE’s monthly payment calculation for undergraduate loans will drop to five percent of a borrower’s discretionary income. Monthly payments for graduate loans will be equal to 10 percent of a borrower’s discretionary income, and if a borrower has both undergraduate and graduate loans, their monthly payment amount will be a weighted average between five to 10 percent of their discretionary income, based on their original loan balance.
For many borrowers, this change will lead to dramatically lower monthly payments. For example, a single undergraduate loan borrower who earns an annual salary of $70,000 would see their required monthly payment amount drop by more than 60 percent:
- REPAYE: $401
- SAVE 2023: $310
- SAVE 2024: $155
Expedited forgiveness eligibility timeline
Other IDR plans forgive remaining debt after a borrower has made 20 to 25 years’ worth of payments. Under SAVE, the time it takes for borrowers to qualify for forgiveness is relative to the amount they originally borrowed.
For borrowers whose principal loan balance is $12,000 or less, remaining debt will be forgiven after 10 years of repayment. That time increases by one year of repayment for every additional $1,000 borrowed, up to 20 years (for borrowers with undergraduate loans only) or 25 years (for borrowers with graduate loans only, or a mix of graduate and undergraduate loans).
Most borrowers qualify for SAVE, but they still have to apply to get enrolled.
With the exception of Parent PLUS loans, all federally held, Direct loans are eligible for SAVE. Borrowers with commercially-held federal loans, such as FFEL or Perkins Loans, must consolidate into a federal direct consolidation loan in order to qualify for SAVE.
Even though most borrowers meet these eligibility requirements, they still must submit an application in order to enroll in SAVE. The only exception to this is borrowers who are enrolled in REPAYE; since SAVE is replacing REPAYE, borrowers enrolled in REPAYE will be automatically switched to SAVE before their loan servicer issues their next monthly bill.
Without help from the right stakeholders, SAVE’s impact can only go so far.
To be sure, SAVE has the makings of a promising solution to an urgent issue. But with millions of borrowers facing one of the biggest financial transitions of their lives, confusion and stress are running rampant — and will hamper SAVE’s impact, unless the right stakeholders step up to provide the clarity and guidance borrowers so desperately need.
Given the profound effect student debt has on workplace wellbeing — and in turn, on critical business objectives — employers are the ideal stakeholder to get involved. By offering benefits that equip their workforce with the solutions and strategies they need to tackle the return to repayment with confidence, employers stand to boost engagement and win employees’ loyalty for the long haul.
