Understanding the SAVE Plan: A Comprehensive Guide for Student Loan Borrowers

Student loan debt continues to be a significant financial burden for many Americans, second only to mortgages. As of June 2023, outstanding student loan balances totaled $1.39 trillion, according to Experian data. To alleviate this burden, the Department of Education has introduced the Saving on a Valuable Education (SAVE) plan, which replaces the REPAYE plan. This new income-driven repayment plan aims to offer more affordable options for student loan borrowers.

In this blog, we will explore how the SAVE plan works, who qualifies, how to sign up, and whether it might be the right choice for you. Additionally, we will compare it with other income-driven repayment plans to help you make an informed decision.

How Does the SAVE Plan Work?

The SAVE plan is designed to make student loan repayment more manageable by addressing various aspects such as income thresholds, interest accrual, and forgiveness timelines. Some features of the plan are already in effect, while others will be implemented in July 2024. Here’s a detailed look at how the SAVE plan impacts student loan debt repayment:

1. Reduced Monthly Payments

Under the SAVE plan, monthly payments are calculated as a percentage of discretionary income, which is defined as the difference between household income and 225% of the U.S. poverty guideline for your household size. For undergraduate loans, the payment is reduced from 10% to 5% of discretionary income. Graduate students will continue to pay 10%, but those with both undergraduate and graduate loans will pay a weighted average between 5% and 10%. According to the Biden administration, these changes can save borrowers upwards of $1,000 annually compared to other income-driven repayment plans.

2. Higher Income Limits for $0 Payments

The SAVE plan increases the income level that qualifies for $0 monthly payments, making an additional 1 million low-income borrowers eligible. For instance, a single borrower earning around $15 per hour or $32,800 per year, or a family of four earning $67,500 or less, will not have to make any payments.

3. Shorter Loan Forgiveness Timeline

One of the most attractive features of the SAVE plan is the shorter timeline for loan forgiveness. Borrowers with original principal loan balances of $12,000 or less can receive forgiveness after 120 payments (10 years). Each additional $1,000 in loan balance adds 12 more payments. For example, a borrower with a $16,000 loan can earn forgiveness in 14 years.

4. Less Interest Accrual

With the SAVE plan, borrowers’ loan balances will no longer increase due to unpaid interest if they make their minimum payment and the interest amount exceeds the payment. For example, if a borrower’s monthly payment is $90 and their loan accrues $150 in interest each month, the remaining $60 will not be charged as long as the $90 payment is made.

5. Easier Access for Borrowers

The SAVE plan simplifies the enrollment and recertification process. Borrowers can grant the Department of Education access to their tax returns, eliminating the need to manually provide this information. Additionally, borrowers can choose to automatically reenroll in the program each year. If you are married and file taxes separately, your spouse’s income will not be considered, and you do not need them to cosign the application.

Who Qualifies for the SAVE Plan?

Any former undergraduate or graduate student with eligible federal student loans can enroll in the SAVE plan. However, loans in default and federal loans for parents, such as direct PLUS loans, do not qualify. Certain loans, like FFEL and Perkins loans, must be consolidated into a direct consolidation loan before they can qualify for SAVE. Payment amounts are based on the borrower’s loan amount, income, and family size, so each borrower’s payment can differ.

How to Sign Up for the SAVE Plan

If you are already enrolled in the REPAYE plan, you will automatically be switched to the SAVE plan. For new applicants, follow these steps:

• Gather necessary information: FSA ID, telephone number, permanent address, financial information, and email address.
• Complete the income-driven repayment plan application on StudentAid.gov. This application covers all income-driven repayment plans, including SAVE.
• Request the lowest monthly payment, which is usually the SAVE plan.

If you are currently on a different income-driven repayment plan, you can log in to your StudentAid account and request to switch to the SAVE plan. Use the Loan Simulator to calculate different payment options based on your circumstances if you are unsure which plan is best for you.

Is the SAVE Plan Right for Me?

Choosing the right repayment plan is crucial for managing your budget and financial goals. The SAVE plan offers several benefits, but it may not be suitable for everyone. Consider the following scenarios:

When the SAVE Plan Might Be Right for You

• Your loan balance is less than $20,000: You can receive loan forgiveness faster than with any other income-driven repayment plan.
• You want the lowest monthly payment: The SAVE plan is ideal for borrowers who need lower payments to manage their budget or have significant upcoming expenses.
• You are a low- to medium-income earner: The payment amount varies based on income and family size, benefiting those with lower earnings the most.

When the SAVE Plan Might Not Be Right for You

• You have private student loans: Private loans are not eligible for the SAVE plan or any other federal income-driven repayment plan.
• You want to pay off debt quickly: The SAVE plan prioritizes smaller payments over a longer period, which may not align with your goal of rapid debt repayment.
• You are a high-income earner: Higher earners may not benefit as much from the SAVE plan since they are less likely to need assistance meeting their loan obligations.

Other Income-Driven Repayment Plans

In addition to the SAVE plan, there are three other income-driven repayment plans available:

Income-Based Repayment (IBR)

To qualify for IBR, your payment must be lower than what you would pay under a standard 10-year repayment plan. Loans taken out before July 1, 2014, cap payments at 10% of discretionary income with forgiveness after 20 years. Loans taken out after that date require payments of 15% of discretionary income with forgiveness after 25 years.

Income-Contingent Repayment (ICR)

Under ICR, you pay the lesser of 20% of your discretionary income or the amount you would pay on a fixed 12-year repayment plan, adjusted for income. Repayment lasts 25 years. This is the only income-driven repayment plan available for parents with direct parent PLUS loans, but these loans must first be consolidated into a direct consolidation loan.

Pay As You Earn (PAYE)

While the SAVE plan continues to roll out, the PAYE plan will wind down, and borrowers can no longer apply after July 1, 2024. Like SAVE, PAYE bases payments on income and family size, but eligibility requirements differ.

The Bottom Line

The SAVE plan offers lower monthly payments, shorter forgiveness timelines, and higher income thresholds, making it a beneficial option for many borrowers. However, it may not be suitable for everyone, especially high earners or those looking to pay off their debt quickly.

If you have federal student loans and are looking for a more manageable repayment plan, the SAVE plan could be a great fit. For any mortgage service needs, O1ne Mortgage is here to help. Call us at 213-732-3074 to speak with one of our expert loan salespersons today!