Student Loan Switch Up
On Thursday August 28th, the Supreme Court denied a request to temporarily reinstate the Saving on a Valuable Education (SAVE) student loan income-driven repayment (IDR) plan. What does this mean for the eight million people (or one in five federal student loan borrowers) currently enrolled?
Background
The SAVE plan was implemented in August of 2023, replacing the Revised Pay as you Earn (REPAYE) IDR plan. Previously under REPAYE, a borrower’s monthly payment was based off their discretionary income, or the difference between their adjusted gross income (AGI) and 150% of the U.S. Department of Health and Human Services Poverty Guideline for their household. In the shift to the SAVE plan the threshold for discretionary income was set at 225% of the poverty guideline, meaning that monthly payments would be calculated on a smaller discretionary income balance. Of the eight million borrowers, 4.6 million qualified for $0 monthly payments.
Other features that the SAVE plan offered:
- Borrowers with undergraduate loans had their payments halved. Calculations in previous IDR plans had payments based off 10% of discretionary income. Under the SAVE plan, undergraduate loan payments were based off 5% of a household discretionary income. This in conjunction with the increased percentage related to the poverty guideline meant a larger decrease in the monthly amount owed.
- Required years of payments to qualify for forgiveness was reduced from 20 or 25, to only 10 years for borrowers with principal balances of $12,000 or less.
- Unpaid interest would not accrue as long as borrowers kept up with their monthly payments. Under other IDR plans the government covered half of the interest accrued each month, with the remainder going unpaid and added to the overall balance. Under the SAVE plan, the government would cover all of the remaining unpaid interest after a borrower’s regular monthly payment.
What Changed?
In June, two federal judges temporarily blocked the SAVE plan after lawsuits were filed concerning how the overall plan was initially approved. One week later, one of the temporary blocks was lifted allowing continued payments, but ultimately on July 18th the 8th Circuit Court of Appeals entirely blocked the SAVE plan until a final determination was made. With The Supreme Court denying a temporary reinstatement of the plan, the future of SAVE is still up for debate.
The Department of Education has placed all eight million borrowers currently enrolled in the SAVE plan into an indefinite administrative forbearance. This means that upcoming payments won’t be due until a determination has been made in court rulings, or until otherwise noted by the Department of Education. While on this forbearance, interest will not accrue. However, this time of paused payments will not be counted towards the months needed for loan forgiveness under IDR plans or Public Student Loan Forgiveness (PSLF).
What does this mean for your household?
What options do borrowers currently on the SAVE plan have?
- Do Nothing - Payments and interest are paused and a person can take the money that was going towards student loans and incorporate it into their regular spending money.
- Keep Paying – Even though a person wouldn’t be required to keep making payments, they could choose to continue to do so to pay down the overall balance. These payments would not go towards their loan forgiveness qualifications. However, if a borrower was pursuing Public Student Loan Forgiveness (PSLF) and had been employed with qualifying organizations for 120 months, they do have “month buy back” options available. Learn more about qualifications here.
- Switch to a Different Plan – Borrowers on the SAVE plan could apply for other available loan repayment plans if they thought it better matched their circumstances or general repayment strategy.
- Pay Down other Debts – While payments are paused, this may be the time to get caught up on other debts. For example, this could mean paying down credit card balances to improve revolving debt (which makes up the second largest portion of a credit score). Or making sure you aren’t falling behind with missed payments (the largest factor of your credit score) of other debt since those late payment remarks can stay on your credit report for up to seven years from the original date of delinquency.
- Save Up – This may be the opportunity to build up an emergency fund. Or to save money for upcoming holiday spending so that when the time comes, they won’t need to rely on borrowing more.
The office of Federal Student Aid (FSA) will be providing updates at https://studentaid.gov/saveaction on rulings that impact borrowers related to the SAVE plan.
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