SAVE Plan Forgiveness and Repayment: The Most Affordable Student Loan Plan - How it Works

You have probably already heard that the Biden-Harris Administration automatically discharged $1.2 billion of student loans for approximately 153,000 eligible borrowers under the shortened time to execute SAVE Plan forgiveness this February.

This is after accelerating the forgiveness component of the Saving on a Valuable Education (SAVE) Plan, six months earlier than expected to offer relief ASAP.

But forgiveness isn’t the only advantage, an additional 4.3 million borrowers have a $0 monthly payment thanks to the program. U.S. Secretary of Education, Miguel Cardona echoed President Biden’s support of this program:

“We are once again sending a clear message to borrowers with low balances: if you’ve been paying for a decade, you’ve done your part, and you deserve relief. Under President Biden’s leadership, our Administration has now approved loan forgiveness for nearly 3.9 million borrowers, and our historic fight to cancel student debt isn’t over yet.”

So, how can you get on this train? And more importantly, do you even want to? Read on to find out.

President Biden has announced a new student loan repayment plan in July of 2023 called the “Saving on a Valuable Education (SAVE) Plan”. This plan, which Biden called the most affordable repayment plan ever, does three things:

• Makes monthly payments cheaper than ever before for millions of Americans.

• Speeds up loan forgiveness to ten years for some borrowers.

• Stops unpaid interest from making your loan bigger.

In other words, your loan stays the same size if your monthly payment doesn’t cover all the interest. This key feature of the SAVE Plan is already helping millions of borrowers. It has cut their monthly payments by up to half and forgiven their debt after ten years. However, it could also extend your repayment timeline, so it’s important to consider all the angles.

This article will examine what the SAVE Plan involves, how it might affect borrowers, any issues that may arise, and what might happen.

Key Points of the SAVE Plan

Here are some important parts of the SAVE Plan:

• Loan Forgiveness after 10 years if you borrowed $12,000 or less: Borrowers must be enrolled in the SAVE Plan, having made at least 10 years of payments. Borrowers can receive forgiveness after an extra year of payments for every $1,000 borrowed above $12,000. All borrowers under the SAVE plan receive forgiveness after 20 or 25 years, depending on whether they have taken out loans for graduate school.

• Automatic Discharge: Any borrower eligible for forgiveness under the SAVE Plan will have their loans automatically discharged without action from their side. The U.S. Department of Education will regularly identify and discharge these loans.

• Automatic Credit Towards Forgiveness: Borrowers will automatically receive credit towards forgiveness for specific periods of deferment and forbearance. Additionally, they can make “catch-up” payments to earn credit for all other periods of deferment or forbearance.

• Works with PSLF and No More Recertification: Payments made under the SAVE Plan count towards the Public Service Loan Forgiveness program. Plus, the plan makes it easier by getting rid of yearly recertification.

• Support for Low-Income and Married Borrowers: Low-income borrowers may not need to make any monthly payments. Married borrowers who file taxes separately can leave out their spouse’s income when working out their payments.

• Help for All Borrowers: Almost all borrowers with Direct Loans in good standing qualify, including those with Subsidized, Unsubsidized, PLUS, and Consolidation Loans.

• Lower Monthly Payments and Faster Forgiveness: This plan cuts monthly payments for most federal student loan borrowers. It also forgives loans a decade faster than other income-driven repayment plans.

Despite possible legal challenges, the SAVE Plan aims to give relief to student loan borrowers by reducing payments and speeding up loan forgiveness.

The SAVE plan will cut payments on undergraduate loans in half compared to other IDR plans, ensure that borrowers never see their balance grow as long as they keep up with their required payments, and protect more of a borrower’s income for basic needs.

Here are some ways the SAVE Plan helps borrowers:

• Smaller Payments and No Growing Interest: The SAVE plan protects more of your income from student loans. This results in smaller payments for undergraduate loans compared to other IDR plans. As long as you make your required payments, your loan balance won’t grow, and unpaid interest won’t pile up.

• No Payments for Lower Incomes: If you’re a single borrower making $32,800 or less, or part of a family of four making $67,500 or less, you won’t need to make any payments under SAVE.

• More of Your Income is Protected: Under the SAVE Plan, your discretionary income is the difference between your adjusted gross income and 225% of the poverty line. This means more of your paycheck is safe from student loan servicers.

Related: When Do I Need to Recertify Student Loans?

The Saving on a Valuable Education plan offers some great terms for loan forgiveness. These depend on the original principal balance of your loans. Here’s how it works:

• Loans of $12,000 or Less: If your original loan balance was $12,000 or less, you can look forward to having the remaining balance of your loan forgiven after you’ve made payments for 10 years.

• Loans Over $12,000: If your original loan balance was more than $12,000, you’ll have an extra year added to your repayment period for every additional $1,000 you borrowed. But there’s a limit on this – the maximum repayment period is 20 years for undergraduate loans and 25 years for graduate loans before any remaining balance is forgiven.

If you consolidate your loans, you’ll get partial credit for any payments you’ve made towards forgiveness.

SAVE Plan Monthly Payment Formula

The formula for the SAVE plan’s monthly payment calculation can be written as follows:

Monthly Payment = ((AGI – (PL x 2.25)) x 0.05) / 12

In this equation:

• “AGI” refers to the Adjusted Gross Income of the borrower. For married couples both holding federal student loans and opting for the SAVE plan, the AGI would be their combined annual income.

• “PL” signifies the Federal Poverty Level corresponding to the borrower’s family size.

For instance, let’s consider a single individual with no children living in one of the 48 contiguous states, where the Federal Poverty Level for a family of one is $14,580. If this person has an AGI of $50,000, their monthly payment would be calculated as follows:

Monthly Payment = (($50,000 – ($14,580 x 2.25)) x 0.05) / 12 = $112.41

Hence, under the SAVE plan, a single person with an AGI of $50,000 can expect an approximate monthly payment of $112.41.

Now, let’s consider a married couple without children, living in the same region, both with federal student loans, and opting for the SAVE plan. The Federal Poverty Level for a family of two in this region is $19,610. Suppose each partner has an AGI of $50,000, making their combined AGI $100,000. Their monthly payment under the SAVE plan is computed as follows:

Monthly Payment = (($100,000 – ($19,610 x 2.25)) x 0.05) / 12 = $283.95

So, a married couple with a combined AGI of $100,000 can anticipate a monthly payment of around $283.95 under the SAVE plan.

These formulas provide a general idea of the expected monthly payments under the new SAVE plan. Remember, the actual payment may vary depending on several factors. For the most accurate calculations, consult a financial advisor or utilize a reliable student loan repayment calculator.

SAVE Plan Monthly Payment Example

Using a step-by-step example, let’s break down how the payment calculation under the SAVE Plan works.

Suppose you’re single, earn an annual income of $50,000, and only have undergraduate loans. In this scenario, a single person’s current federal poverty guideline is $14,580.

Here are the steps to calculate your monthly federal student loan payment:

1. Determine 225% of the Federal Poverty Guideline: Multiply $14,580 by 225%, giving you $32,805.

2. Calculate Your Discretionary Income: Subtract the value obtained above from your income: $50,000 – $32,805 = $17,195.

3. Yearly Payment Under SAVE Plan: Apply 5% to your discretionary income to determine the annual payment: 5% * $17,195 = $859.75.

4. Monthly Federal Student Loan Payment: Divide the yearly payment by 12 to get your monthly payment: $859.75 / 12 = $71.64.

Your monthly payment under the SAVE Plan would be $71.64 in this situation.

When You Have Both Undergraduate and Graduate Loans

The payment calculation becomes a tad complex if you possess both undergraduate and graduate loans. It requires a weighted average of 5% and 10% of your income, determined by the original principal balances of your loans.

Here are the steps to calculate your monthly federal student loan payment:

1. Proportion of Loans: Establish the ratio of undergraduate to graduate loans in relation to your total loan amount.

2. Weighted Percentage: Multiply the proportion of undergraduate loans by 5% and the proportion of graduate loans by 10%.

3. Determine Weighted Average: Add the resulting figures to get the weighted average percentage.

4. Yearly Payment: Apply this weighted average percentage to your discretionary income to compute the yearly payment.

5. Monthly Payment: Lastly, divide the yearly payment by 12 to obtain your monthly payment.

An FYI for Married Borrowers

The SAVE Plan introduces significant adjustments for married borrowers:

• If you file taxes separately, your spouse’s income won’t be considered when calculating your payments. This could result in lower monthly payments.

• Know that filing taxes separately might increase your annual tax bill.

Reconsidering Married Filing Separately vs. Jointly

Many couples previously preferred to file their taxes separately to keep their spouse’s income out of loan payment calculations. With the SAVE Plan’s introduction, it’s wise to reassess this strategy. You should consider the potential loan payments against the tax implications of each filing method.

What’s New for Those Filing Separately?

The new SAVE Plan rules introduce some key changes:

• Borrowers who file separately can exclude their spouse’s income when calculating monthly loan payments.

• Despite filing separately often resulting in higher overall taxes, the potential savings on loan payments might make it worthwhile.

Whether you should switch to the SAVE plan depends on your situation. This includes things like whether your loans are for undergraduate or graduate studies, how much you owe, and how much you make.

Let’s look at some good and bad points to help you decide whether the SAVE plan is right for you.

Good Points

• Lower Monthly Payments: The SAVE plan cuts payments for borrowers with undergraduate loans.

• No More Yearly Recertification: With the SAVE plan, the U.S. Department of Education will use your latest tax return. This means you won’t need to recertify each year.

Bad Points

The SAVE Plan’s only drawback: A longer r­­epayment time.

With the SAVE plan, the repayment period can be longer than other existing plans, such as the Pay As You Earn plan, which provides loan forgiveness after 20 years of qualifying payments.

Although the plan offers lower monthly payments, these smaller payments might not be worth it for some borrowers if it extends their repayment period. For instance, some might prefer to pay off their student loan debt five years sooner under the PAYE plan, even if the monthly payments are a bit higher.

The SAVE plan might be the better choice if you only have undergraduate loans because of its lower monthly payments. But if you have graduate loans, other things matter, and PAYE might be a better fit.

Not sure what’s right for you? Schedule a meeting with us, and we’ll create the best repayment strategy tailored to your unique situation.

Choosing the right payment plan can be tricky with so many choices. Here’s a quick comparison of the SAVE plan and other income-driven repayment (IDR) plans:

• SAVE Plan: This is the new option. It cuts monthly payments for borrowers with undergraduate loans to 5% of discretionary income. That’s a big drop from 10% under most other IDR plans. The SAVE plan will replace the Revised Pay As You Earn plan.

• REPAYE: This plan gives an interest subsidy and takes 20 years for undergraduate loans to qualify for debt forgiveness. For graduate school loans, it takes 25 years.

• PAYE: This plan caps student loan payments at 10% of discretionary income, with student loan forgiveness granted after 20 years of payments. In many cases, it costs less in the end compared to the SAVE plan.

• IBR: This plan caps payments at 10% of discretionary income for loans borrowed on or after July 1, 2014, and at 15% for loans borrowed before that date.

• ICR: The income-contingent repayment plan calculates payments as the smaller amount between 20% of discretionary income or what you would pay on a repayment plan with a fixed payment over 12 years.

You can use the Loan Simulator on the Federal Student Aid website, StudentAid.gov, to compare your payments under the different repayment plans.

Related: PAYE vs REPAYE

The SAVE Plan and Public Service Loan Forgiveness

Are you considering combining the SAVE Plan’s benefits with the Public Service Loan Forgiveness (PSLF)? If so, here’s some great news:

• Payments made under the SAVE Plan qualify for PSLF.

• This combination offers a promising route towards potential loan forgiveness.

The SAVE Plan offers many benefits for eligible borrowers, including lower monthly payments, an interest cap, and simplified recertification.

Related: What is a Qualifying Payment for PSLF?

The SAVE Plan can benefit many people with federal loans. Here are some important points about who can apply:

• It’s open to those with a federal Direct Loan in good standing. That includes Direct Subsidized, Direct Unsubsidized, Direct PLUS for graduate or professional students, and Direct Consolidation Loans.

• The SAVE Plan does not have strict income limits. Payments depend on the borrower’s discretionary income — the amount of your adjusted gross income over 225% of the poverty level.

• If you earn a lower income, you may have smaller or even no monthly payments.

But there is one exception: Parents who used Parent PLUS loans to help their children with school costs cannot join this new plan. They can only sign up for the government’s income-contingent plan, where they pay 20% of their extra income for 25 years before the remaining balance is forgiven.

A possible workaround for these parents is the double consolidation loophole, but it will close in 2025.

Confirming Your Eligibility

If you believe you meet these criteria, you’re encouraged to sign up for SAVE at StudentAid.gov/save. The benefits under the SAVE Plan apply automatically to eligible participants, and no further action is needed from the borrower’s end. The U.S. Department of Education will be responsible for identifying eligible loans and discharging them regularly.

How to Sign Up for the SAVE Plan

Here are the steps for how to sign up for the SAVE Plan:

Visit the official website

StudentAid.gov/save. Locate and click on the ‘Apply’ or ‘Enroll’ button.

Gather Your Information

Provide all necessary personal and financial information. The exact information required may vary, but generally, you will likely need the following:

• Personal identification: including your legal name, date of birth, Social Security Number, and contact information.

• Education details: such as your school name, graduation year, and degree program.

• Loan information: like your federal student loan details including the type of loan, amount borrowed, and current balance.

• Financial information: including your current income details, tax returns or other forms of income verification.

• Employment information: This includes your current and previous employment history, particularly if you’re applying for Public Service Loan Forgiveness (PSLF), which requires proof of employment in a qualifying public service job.

• Additional Information: In addition to the information listed above, you may also need to create a Federal Student Aid (FSA) ID if you do not have one already. This ID serves as your legal signature and should not be shared with anyone.

These are general guidelines and the specifics may vary slightly based on your circumstances. Always refer to the application instructions or a financial advisor for the most accurate information.

Note: If you are already enrolled in a federal student loan repayment program, you may need to change your program to participate in the SAVE plan. Consider consulting with a financial advisor or the student loan servicer to understand the implications and process of switching plans.

The SAVE plan introduces another approach to automatic sign-up and brings several important changes to the IDR plan process starting next year, making it more efficient and borrower-friendly.

• Automatic Transition from REPAYE to SAVE: If you’re enrolled in the REPAYE plan, you’ll be automatically transitioned to the SAVE plan once it becomes available. This is part of the overall strategy to phase out the REPAYE plan.

• Automatic IDR Enrollment for Late Payments: The SAVE plan brings a new system for handling late payments. If you’re 75 days behind on payments and have consented to share your income information with the Department of Education, you’ll be automatically enrolled in an IDR plan. This proactive measure helps prevent loan defaults and ensures manageable monthly payments. This feature will become operational with the full implementation of the SAVE plan.

On top of these changes, the Education Department plans to roll out several key improvements this summer:

• IRS System Integration: By allowing the Education Department to access your tax and family size information, you’ll no longer need to manually provide this data on your IDR application, making the process faster and more efficient.

• Automated IDR Recertification: If you agree to let the IRS share your tax information, you’ll no longer have to manually recertify your income and family size yearly. You’ll be notified of your new payment amount if your information changes.

• No Interest Capitalization After Leaving IDR: If you decide to leave any IDR plan (except the IBR Plan), any unpaid interest will no longer be added to your principal. This change helps to limit the growth of your student loan debt. Learn more: Student Loan Interest Capitalization

• Redesigned IDR Application: The Education Department aims to simplify the IDR application process, reducing the completion time to under 10 minutes.

These changes to automatic sign-up and the upcoming enhancements will make the overall IDR process more seamless and borrower-friendly.

The Biden administration estimates that its new income-driven repayment plan, the SAVE Plan, will cost $156 billion over the next decade.

The White House calculated this figure assuming that the Supreme Court’s decision would allow student debt cancellation.

While this estimate is higher than the administration’s first analysis, it’s still notably lower than many outside analyses.

For instance, the Congressional Budget Office’s projection is much higher at $276 billion over 10 years. Another economic projection pegs the cost even higher at $475 billion over the next decade.

While promising widespread support and relief, the new student loan repayment plan is likely to encounter legal objections. Key points in this legal landscape include:

1. The Authority Question: Some critics question President Biden’s authority to enact the SAVE plan. They argue that it effectively converts the student loan system into a loan forgiveness scheme, something they believe Congress would never have approved.

2. Courtroom Battles: “Does the SAVE plan indeed transform the student loan system into a structure that Congress would never have endorsed?” will likely form the heart of legal disputes against the plan.

3. Legal Precedent: The certainty of legal disputes does not equate to an assured downfall of the SAVE plan. According to many experts, the SAVE plan isn’t as legally precarious as the recently rejected debt forgiveness plan.

4. HEROES Act vs. Higher Education Act: The Supreme Court’s decision on the debt forgiveness plan pivoted on the interpretation of the HEROES Act, which allows the Secretary of Education to “alleviate the hardship” of federal student loan debt during a national crisis. In contrast, the SAVE plan relies on the Higher Education Act.This law has facilitated creating and modifying income-driven repayment plans for years without legal interference.

5. Congressional Authority: Congress gave the Secretary of Education authority to design income-driven repayment plans. So it’s in law rather than being implemented by executive order as was Biden’s student loan forgiveness plan.

Despite these considerations, the future responses from the courts to potential challenges against the SAVE plan remain to be seen, given the continually evolving legal landscape.

President Joe Biden, having campaigned on the promise of wide-ranging student debt relief, has faced roadblocks due to ongoing legal challenges. Despite these obstacles, his administration has continued introducing major changes in the federal student loan system. The most recent of these is the innovative SAVE Plan which has made big headlines in relieving student loan debt already.

This plan offers most borrowers the lowest monthly payments ever and ensures their loan balances stop increasing. It also reduces potential tax effects and speeds up income-based repayment loan forgiveness for those who have borrowed a small amount for undergraduate studies.

Are you feeling lost with all these changes? My team and I are here to help. Schedule a meeting with us, and we’ll create the best repayment strategy tailored to your unique