Will the New "SAVE Plan" Save You Money on Student Loans?
- Author: Miguel Waters
- Posted: 2024-11-03
After the U.S. Supreme Court struck down President Biden's student loan cancellation plan last month, millions of Americans were left looking for a different way to save money on their student loan payments. Following a long pause on student loan payments, they are scheduled to resume on Oct. 1, 2023. Interest will begin accruing again on Sept. 1, 2023.
This means it's time for people to start gearing up to resume repayment of their student loans. If you're considering switching to an income-contingent repayment plan, there's a new plan you should know about. Called the SAVE Plan, it could potentially save you money on your payments and your total loan balance. Here's what to know.
What Is the SAVE Plan?
The SAVE Plan is the newest income-contingent repayment plan recently announced by the Biden administration. Under this plan, borrowers who earn up to 225% of the federal poverty limit will have their required monthly payments reduced to $0. This is up from the current threshold of 150% of the federal poverty limit.
As long as borrowers make regular payments, interest won't accrue. This means that people's student loan balances shouldn't rapidly increase because of compounding interest. After a borrower makes regular payments under the SAVE plan, their remaining balances will be canceled.
The length of time required will depend on the borrower's student loan balance. Anyone who has $10,000 or less in student loans will have any remaining amounts canceled after 10 years of payments. One year will be added for each additional $1,000 owed.
Payments on undergraduate student loans will be capped at no more than 5% of the borrower's discretionary income. Currently, payments are capped at 10% for undergraduate loans. Borrowers with student loans for graduate or professional school will have their payments capped at 5% to 10%, depending on the original balance of their student loans.
What Is an Income-Contingent Repayment Plan?
There are several repayment plans offered by the U.S. Department of Education. Borrowers who choose the standard repayment plan make regular monthly payments for 10 years that pay off their entire student loan balance. People who can't afford the monthly payments under the standard repayment plan can choose an income-based or income-contingent repayment plan. There are currently four plans available based on the borrower's income and family size. Payments are capped at 10% of the borrower's discretionary income, and any remaining balance is canceled after 20 to 25 years of repayment.
How the SAVE Plan Could Save You Money
The SAVE Plan might save you money in the following ways:
- Waiver of interest as long as you make your regular payments, even if your payments are reduced to $0
- Capped payments at 5% of your discretionary income if you make more than 225% of the federal poverty limit
- Cancelation of your remaining student loan balance after making payments for at least 10 year
Having lower student loan payments could also free up money you can use for other things, including saving for a home or car or starting a family.
How to Sign Up for the SAVE Plan
The Department of Education says it will notify borrowers when they can sign up for the SAVE Plan later in July. If you are currently signed up for the REPAYE plan, you will automatically be rolled into the new SAVE Plan. You can also contact your loan servicer for information on applying.
You must be in good standing with your Direct Loans to enroll in the SAVE plan. Direct Loan borrowers are eligible to sign up for the SAVE plan. If you have other student loans, you can consolidate them into a direct loan to take advantage of the new plan.
The SAVE plan is meant to provide relief to millions of student loan borrowers who struggle to afford their payments. As student loan payments are set to resume within the next few months, it's important for you to prepare now so that you can afford to make them. Changing your current repayment plan to the SAVE plan might be one way to reduce your payments when they begin and save money so you can spend it on other needs.
