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The Biden administration has introduced a new initiative to address student loan debt after the Supreme Court blocked a plan to eliminate $10,000 to $20,000 in debt for borrowers. The Department of Education will implement a revised income-driven repayment (IDR) plan called “Saving on A Valuable Education” (SAVE), which aims to reduce payments for borrowers and provide a transition period to help them resume repayment successfully.
“Earlier today, the Department of Education finalized our new income-driven repayment plan, Saving on A Valuable Education (SAVE), which will be the most affordable repayment plan in history,” Secretary of Education Miguel Cardona said in a statement. “It will cut monthly payments to zero dollars for millions of low-income borrowers, save all other borrowers at least $1,000 per year, and stop runaway interest that leaves borrowers owing more than their initial loan.”
“Finally, the Department is providing a 12-month on-ramp transition period that will help ensure borrowers smoothly and successfully return to repayment without falling into delinquency or default. Borrowers who can make payments should do so as payments will resume and interest will accrue, but the on-ramp to repayment will help borrowers avoid the harshest consequences of missed, partial, or late payments like negative credit reports and having loans referred to collection agencies,” Cardona added.
The SAVE plan will replace the current Revised Pay-As-You-Earn (REPAYE) plan. Borrowers enrolled in REPAYE will be automatically transitioned to SAVE without needing to take any action. Several changes to the IDR plan will take effect this year, with full implementation planned for July 1, 2024.
Among the changes before repayment resumes, the threshold for protected income will increase from 150% to 225% of the federal poverty guidelines. This means that a single borrower earning less than $32,805 annually (or $67,500 for a family of four) will not have to make payments. The increase in the protected income threshold will make around 1 million additional borrowers eligible for a $0 payment. Other borrowers will save at least $1,000 per year compared to the current REPAYE plan.
The SAVE plan will also stop charging monthly interest that isn’t covered by the borrower’s payment, preventing loan balances from growing due to unpaid interest. Additionally, married borrowers who file separate tax returns will no longer need to include their spouse’s income or family size in their payment calculation.
Once fully implemented in July 2024, the SAVE plan will introduce further changes. Undergraduate loan payments will decrease from 10% to 5% of incomes above 225% of the federal poverty line. Borrowers with both undergraduate and graduate loans will pay a weighted balance between 5% and 10% of their income based on the original loan balances.
Borrowers with smaller balances (defined as $12,000 or less) will be eligible for forgiveness of their remaining balances after 120 payments or 10 years of repayment. An additional 12 payments will be added for each additional $1,000 borrowed above that level, up to a maximum of 20 years for undergraduate loans and 25 years for graduate loans. Currently, IDR plans require a minimum of 20 to 25 years of repayment before forgiveness.
The Department of Education has announced a virtual public hearing on July 18th to discuss these changes and is welcoming written comments from stakeholders.
It is important to note that student loans were mostly nationalized in 2010 through legislation related to the Affordable Care Act (Obamacare). Studies have shown that college tuition costs have risen over 30% between 2010 and 2020, exceeding inflation rates during the same period.
