After a pause due to the pandemic, federal student loan repayments will resume in October. However, there's good news for borrowers with the introduction of the Saving on a Valuable Education Plan (SAVE). This plan replaces the Revised Pay As You Earn Plan (REPAYE) and offers provisions such as lower monthly payments making student loan repayment more manageable and a path to loan forgiveness.
Introducing the SAVE Plan
The SAVE Plan is a federal Income-Driven Repayment (IDR) Plan that calculates your monthly payment based on your income and family size. Its goal is to keep moving you towards paying off your loan while keeping your monthly payments as low as possible. The Department of Education has announced that the SAVE Plan will replace the REPAYE plan and offer the lowest monthly repayment of any IDR plan available.
What Are the Changes?
A key feature of the IDR plans is that there is a cap on monthly payments that is a percentage of your discretionary income. Under the SAVE plan, both the cap and the definition of discretionary income have been revised to be more favorable to borrowers.
Starting this summer, discretionary income is being redefined. It is currently the difference between your adjusted gross income and 150% of the poverty level. Under the new plan, the calculation calls for 225% of the poverty level. For individuals, that equates to approximately $32,800. So if you make $80,000 per year in adjusted gross income, your discretionary income would be $47,200.
The monthly payment cap for 2023 is currently 10%. In 2024, this is being lowered for undergraduate loans to 5% of discretionary income over 225% of the poverty line. For graduate loans, this is moving to a weighted average between 5% and 10%.
There’s also a cap on the interest portion of the repayment. Any amount of interest that exceeds the amount of the monthly payment will not be charged under the SAVE plan. This means you pay off loans quicker, as your money goes to pay down the principal of the loan.
If you’re married, under the SAVE plan you no longer have to report your spouse’s income if you file your taxes separately.
There Are More Benefits Coming in 2024
The SAVE plan offers a much faster track to loan forgiveness. Borrowers with $12,000 or less in federal loans will have balances forgiven after ten years of making loan payments. Each additional $1,000 above $12,000 adds another year onto the loan forgiveness timeline. This is a huge change from the current forgiveness timeline of 20 years.
What’s the Application Process?
If you’re already enrolled in the REPAYE plan, you’ll be automatically transferred to the SAVE Plan. If you aren’t enrolled, you can enroll now and be automatically transferred, or you can wait until the SAVE application becomes available later this summer.
Are There Other Ways to Manage Student Loans?
Yes! Public Service Loan Forgiveness is an excellent way to get out from under student loans, especially when you have a very large balance. This plan is available to federal, state, local, and Tribal government and qualifying nonprofit employees with federal student loans.
The government will forgive the remaining loan balances for eligible borrowers who complete 120 qualifying loan payments, i.e., ten years of work before being eligible for loan forgiveness.
There are a lot of options for qualifying employers, but you must work full-time:
Government organizations on any level (including tribal)
AmeriCorps or the Peace Corps
Nonprofit organizations without 501(c)(3) status but provide a qualifying public service as their primary mission.
Why Pre-Retirees Should Take Advantage
Pre-retirees can benefit from the SAVE plan in multiple ways. By participating in income-driven repayment plans, they can reduce their monthly loan payments and allocate more funds towards retirement savings. This can provide greater financial security and freedom in their golden years. The loan forgiveness provisions offered by the SAVE plan present an opportunity to potentially eliminate student loans before retirement, easing the financial burden.
Additionally, if you're a pre-retiree and still have loans for your children's education, the SAVE Plan can provide relief. With lower monthly payments, you can allocate more funds towards your retirement savings or other financial goals. Review your repayment options, consider consulting with a financial advisor, and create a plan that balances your loan payments with your retirement plans.
What You Can Do Now
It's crucial for borrowers to take proactive steps to ensure a smooth transition and make the most of available opportunities. First, verify your student loan servicer and update your contact information. Log into your Federal Student Aid account at StudentAid.gov to confirm your current federal student loan servicer. Transitions to new loan servicers can be disruptive, leading to confusion and missed payments.
Next, evaluate your repayment options, particularly income-driven repayment (IDR) plans. The Education Department is implementing the IDR Account Adjustment, which could bring borrowers closer to loan forgiveness. Even if you haven't been in an IDR plan previously, you may still benefit from the new provisions of the SAVE plan. Apply for IDR plans and request a recalculation if your income has reduced.
Lastly, explore Public Service Loan Forgiveness. This program offers loan forgiveness to eligible borrowers who complete 120 qualifying loan payments while working full-time for qualifying employers, such as government organizations, 501(c)(3) nonprofits, and more. If you're eligible, PSLF can provide significant relief from student loan debt.
By taking action now, you can ease the transition and make meaningful progress towards your financial goals.
The Bottom Line: Easing the Path to Financial Freedom
The SAVE plan is your ticket to making real headway in paying off your student loans while still reaching your financial and lifestyle goals. By taking advantage of an income-driven repayment plan and potentially qualifying for Public Service Loan Forgiveness, you can fast-track your path to financial freedom. With the SAVE plan, you'll have the tools to get rid of your debt and focus on the future you want.
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
This content not reviewed by FINRA