The Biden administration’s new student loan repayment plan, known as the SAVE Plan, is set to become the next battleground in the legal fight over student loan relief.
The plan has mostly been overshadowed by President Biden’s now-failed proposal for mass student loan cancellation. But following the Supreme Court’s recent decision, the Biden administration has shifted focus to the SAVE Plan, arguing it’s “the most affordable repayment plan ever.”
The SAVE Plan is an income-driven repayment plan that would offer lenient repayment terms, including no interest accumulation if borrowers make regular payments, reduced monthly payments — some even as low as $0 — and debt cancellation within as little as 10 years.
There’s still a lot for the Biden administration to figure out, but for now, here’s what you need to know about the SAVE Plan:
What is an income-driven repayment plan?
The U.S. Education Department offers various plans for repaying federal student loans. One option is the standard plan, which requires borrowers to pay a fixed monthly amount to repay their debt within 10 years. However, if borrowers have difficulty meeting this amount, they can enroll in income-driven repayment plans that offer lower monthly payments based on income and family size. If a borrower’s earnings are low enough, their payment can be reduced to $0, and any remaining debt can be erased after 20 or 25 years.
How is Biden’s plan different?
As part of his debt relief plan, President Biden announced the creation of a new income-driven repayment plan, the SAVE Plan, which aims to lower payments even further. The plan is intended to replace existing income-driven plans.
Under the SAVE Plan, more people will be eligible for $0 payments. Borrowers will not have to make payments if they earn less than 225 percent of the federal poverty line, compared to the current cutoff of 150 percent of the poverty line. Another change prevents interest from accruing as long as borrowers make their monthly payments. Once borrowers cover their adjusted monthly payment, any remaining interest will be waived.
Starting July 2024, more changes will take effect, such as capping payments on undergraduate loans at five percent of discretionary income, down from the current 10 percent. For borrowers with graduate and undergraduate loans, payments will range from five percent to 10 percent, depending on the original loan balance. These changes could reduce monthly payments in half for millions of Americans.
Additionally, from July 2024, borrowers with initial balances of $12,000 or less will have their loans canceled after 10 years of payments. Each additional $1,000 borrowed beyond that will require an extra year of payments before cancellation.
How can you apply?
The Education Department will notify borrowers when the new application process launches later this summer. Borrowers currently enrolled in an existing plan known as REPAYE will be automatically moved into the SAVE Plan. Borrowers can also sign up by contacting their loan servicers directly.
Is this even legal?
The legality of the SAVE Plan remains uncertain, as it has not been taken up by a federal court. Rather than creating a new payment plan from scratch, the Biden administration proposed changes to an existing plan and solidified them through a negotiated rule-making process, allowing the Education Department to develop federal regulations without congressional approval. While this process is commonly used by administrations of both political parties, critics question whether the new plan exceeds the scope of the law.
