New Student Loan Repayment Plan Could Save You Hundreds Each Month

You might be able to save a lot of money by enrolling in the government’s new student loan repayment plan.

By , Attorney

Legal Update: On June 30, 2023, the U.S. Supreme Court struck down President Biden's debt cancellation plan to provide $10,000 in federal student loan debt per borrower ($20,000 for those who went to college on Pell Grants). In response, President Biden created the Saving on a Valuable Education (SAVE) plan. This income-driven repayment plan lowers loan payments and the total amount you'll pay over time.

The SAVE plan determines borrowers' payments based on income and family size. Some monthly payments will be as low as $0. The income threshold to qualify for $0 payments was increased from 150% to 225% of federal poverty guidelines—an annual income of $32,805 for a single borrower or $67,500 for a family of four (2023 figures). In addition, your loan balance is canceled after ten years of payments, rather than 20 or 25 under other plans, if your original principal balance was $12,000 or less. For each additional $1,000 you borrowed above that amount, the plan adds 12 payments before forgiveness kicks in, up to a maximum of 20 or 25 years. So, if a borrower's original principal balance was $14,000, they'll get forgiveness after 12 years.

All student borrowers in repayment are eligible for the SAVE plan, and borrowers already in a Revised Pay as You Earn (REPAYE) plan will be automatically enrolled in SAVE. Go to the Education Department's website to learn more about the SAVE plan and register. The process will probably take around ten minutes, and many sections automatically populate with information the government already has on hand, such as from tax returns.

On August 24, 2022, the Biden Administration announced the cancellation of $10,000 in federal student loan debt ($20,000 if you went to college on Pell Grants) for those earning less than $125,000 per year. In addition, the government put student loan payments on pause until 2023.

While these government actions grabbed the headlines, a sleeper detail buried in President Biden's loan cancellation plan could put more money in your pocket. Assuming you still have a balance after the $10,000 or $20,000 cancellation, entering the government's new repayment plan could save you hundreds each month after your payments resume.

How the New Income-Driven Repayment Plan Works for Federal Student Loans

The Department of Education's new income-driven repayment plan caps monthly payments on undergraduate debt to 5% of your discretionary income. This limit is down from 10% or 15% under existing plans and will substantially reduce monthly payments for lower- and middle-income borrowers.

Payments for federal graduate loans will be capped at 10%. Borrowers with both undergraduate and graduate loans must pay a weighted average rate.

Under This Income-Driven Repayment Plan, You Can Keep More of Your Money

The plan also raises the amount of money considered non-discretionary income. "Non-discretionary" income isn't used in calculating how much you can afford to pay in monthly student loan payments.

For existing plans, the threshold that's shielded when calculating loan repayments is 150% of the federal poverty level, which is $20,385 for a single person in 2022. Under the new plan, the Department of Education is raising how much money borrowers can keep to 225% of the poverty level, or $30,577 (2022 figure) per year for a single person.

Also, the plan ensures any borrowers making about the equivalent of a $15 hourly minimum wage or less won't have to make payments.

Your Federal Student Loans Won't Accrue Interest

In addition, this new repayment plan covers any accrued unpaid interest. So, the amount you owe won't grow if you make a qualifying payment, which could be $0 for those with low income.

Under current plans, your payment might not cover the monthly interest on your loans. Then, the unpaid interest gets capitalized and added to the loan balance, making your debt larger.

Getting rid of accruing unpaid interest means that your balance won't increase as long you stay current with your monthly payments.

Loan Forgiveness After Ten Years for Balances of $12,000 or Less

Under this plan, the loan balance is forgiven after ten years of payments, instead of the usual 20 years, for borrowers with original loan balances of $12,000 or less.

When Will the Plan Be Available?

Before this repayment plan is available, a draft rule must be published in the Federal Register. Then, it's open for public comments for 30 days. So, exactly when the plan could become available is unclear. But it will most likely open by the summer of 2023.

To get updates about this new income-driven repayment plan and when it will start, sign up to receive emails on the Department of Education subscription page.

Effective date: August 24, 2022