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  • Writer's pictureNathan Zarcaro

[2023] Saving on a Valuable Education (SAVE): Differences to Other Income Driven Plans


For a couple years now, I've been writing about income driven repayment on the blog. Historically, there have been four different programs for borrowers to consider, including:



That is, until now.


Here is your 2023 guide to the new Saving on a Valuable Education (SAVE) plan, the newest income driven repayment plan.



What is income driven repayment?


Income driven repayment (IDR) is a special program designed by the United States Department of Education to help qualifying federal student loan borrowers adjust their monthly payments based on their household income and size.


The program calculates your discretionary income as compared to 150% of the poverty line, again for your location and household size. You'll then pay 10-20% of your monthly discretionary income, depending on the specific IDR plan you're on.


Like I mentioned, the IDR program has been made up of four different plans for the last eight years:


  1. Income Based Repayment

  2. Income Contingent Repayment

  3. Pay as You Earn

  4. Revised Pay as You Earn


But in 2023, as part of his sweeping reforms to the student loan system, President Joe Biden's administration announced a new IDR plan - the SAVE plan.



What is the SAVE student loan plan?


SAVE is the newest of the federal government's student loan assistance strategies. It will become fully effective come July 1, 2024, but in the meantime, certain aspects of the program will be available to borrowers.


Originally proposed back in 2021, the program will be a successor to the REPAYE plan. SAVE is also intended to, at some point, become the choice for IDR plans, as the others will be gradually phased out.


The plan promises to cut borrowers' payments, subsidize interest payments, and provide another approach to student loan repayment.


Additionally, payments made under the SAVE plan will count as PSLF eligible payments in the same way that they do for all other income driven repayment plans.



Who is eligible for the SAVE plan?


The SAVE plan will be available to anyone with Federal Direct loans. Those with Federal Family Education Loans (FFEL) or Perkins Loans will be eligible for the SAVE plan but will need to consolidate via a Direct Consolidation loan first.


Private debt and PLUS loans made to parents do not qualify for the SAVE plan.


Starting this summer, those currently enrolled in the Revised Pay as You Earn plan will begin to be migrated over to SAVE. Other qualifying federal borrowers will also have the opportunity to join the plan before student loan payments officially resume this fall.


I'll talk more about the application process in a minute.



How is SAVE different than existing IDR plans?


SAVE is different from existing income driven repayment plans in three major ways:


  1. The way your discretionary income is calculated

  2. Lower required payments for borrowers

  3. Staggered terms of student loan repayment

  4. Subsidized interest

  5. Spousal income exclusion


Let's take these one at a time.



1. Discretionary income calculation


Perhaps the biggest difference between SAVE and existing IDR plans is the way in which your discretionary income will be calculated. Discretionary income for IDR has always been calculated as the difference between your income and 150% of the federal poverty level, for your household size and geographic location.


Now, the SAVE plan will adjust this threshold to 225% of the poverty line, a move that will reduce expected monthly payments for the vast majority of qualifying borrowers.


This adjustment means that single borrowers earning less than $32,800 per year will be able to make $0 qualifying monthly payments. ($67,500 for households with four people).



2. Lower required payments for borrowers


Borrowers that join the SAVE plan will find their required payments drop by up to half, or even more! Currently, the four IDR plans carry the following required monthly payment percentages (as a percentage of your monthly discretionary income):


  • IBR: 10/15%, depending on the disbursement date of your loans

  • ICR: 20%

  • PAYE: 10%

  • REPAYE: 10%


Compare this to SAVE, which will require payments of just 5%. To qualify for the 5%, all of your loans would need to have been used for undergraduate education. Those that also have graduate debt will have their payment percentage decided by a weighted average between 5% and 10%.


For instance, a borrower with $10,000 of undergraduate debt and $30,000 of graduate debt will pay 8.75%.



Example of SAVE savings


The benefit is just what it sounds like. I'll run through an example, though.


Imagine a current borrower on the REPAYE program. For our analysis, imagine this borrower:


  • Lives in the contiguous United States

  • Has a spouse and two children (household size of 4)

  • Has a household taxable income of $80,000


Currently, this borrower's REPAYE payment would be $292 per month for 20 years (ignoring the annual income recertification).


Under the new SAVE plan, this borrower's monthly payments would be just about $52. Of course, in this instance, the borrower's payments dropped by more than half. This is because, rather than using 150% of the poverty line, the SAVE plan compares your income to 225% of the poverty line.



How payments are calculated


You're probably wondering how I came up with this amount. Luckily, the calculation is easy.


To calculate your projected payment under SAVE:


  1. Take your taxable income and subtract 225% of the poverty line given your household's information (data here). This calculates your discretionary income.

  2. Take 5% of this discretionary income amount.

  3. Divide by 12 (months). This will be your expected monthly payment.



3. Staggered terms of student loan repayment


With the exception of the REPAYE program, the existing income-driven repayment plans have set static repayment terms. For example, those on income-based repayment will make 20 years of payments (if their loan was disbursed after 7/1/2014).


Even REPAYE, which had terms of either 20 or 25 years, based this on whether you had just undergraduate debt or graduate loans as well.


But now, there are differing terms based on your outstanding balance at the time that you enroll in the SAVE plan. For example, those that have less than $12,000 remaining on their loans will default to a 10-year term, while those that owe more will rely on the more typical 20–25-year term.


Those that owe more than $12,000 will make an additional year of payments per $1,000 owed. Ultimately, those that owe more than $20,000 to $25,000 will find themselves with the typical 20-to-25-year repayment term.



4. Subsidized interest


The SAVE plan also will subsidize interest for borrowers that make timely monthly payments.


This is huge news and a provision that doesn't get anywhere near the attention it deserves. One the biggest gripes about the existing IDR plans is the interest that continues to accrue. Previously, those on IDR plans could actually see their outstanding balances increase every month - even after making their full payments.


This was problematic mentally, but also in principle. If a borrower continued on with their IDR plan until they earned forgiveness, it was not as big a deal, though the forgiven balance may be treated as taxable income.


The bigger problem was for those who left IDR plans or didn't make their payments. They would end up actually owing this new balance, which could be up to $100,000 or more than the amount a borrower had even taken in loans.


SAVE addresses this by subsidizing interest. According to the studentaid.gov website, "the plan eliminates 100% of remaining interest for both subsidized and unsubsidized loans after a scheduled payment is made under the SAVE plan." This means that loan balances will no longer grow due to unpaid interest so long as borrowers continue to make their payments in good standing.



5. Spousal income exclusion


You will now be able to get onto an income driven repayment plan without having to report your spouse's income. If you make far less than your spouse, and even if you don't, not needing to include his/her income when you certify your income will lead to lower monthly payments.


The potential downside to this is that you will not be able to include your spouse in your household size when considering the poverty line data, so you'll want to run your projected payments both ways and pick whichever is more financially advantageous for you.



How to apply for SAVE


Like I mentioned, those enrolled in the REPAYE plan will automatically be transitioned to the SAVE plan.


Applying for the SAVE program will be easy to do, and there are currently two different ways to enroll if you're not currently on REPAYE:


  • You can enroll in REPAYE now: Enrolling in this IDR plan now will lead to you automatically being transitioned over to the SAVE plan once available.


  • You can wait for the application to become available: A brand new SAVE application will go live in the next couple of months.


Regardless of which method you choose, the Department of Education has already released guidance that borrowers will have the opportunity to join the plan before restarting payments in October.


Some aspects of the plan will not be fully in effect until July 2024, however. These provisions include:


  1. Reducing payments: from 10% to 5% of discretionary income

  2. Make-up provision: a make-up provision for those that allows borrowers to get credit for periods they were in deferment or forbearance

  3. Consolidation changes: Borrowers who consolidate will no longer lose progress towards their forgiveness

  4. Help for those with default risk: Those more than 75 days delinquent on their payments will be automatically enrolled in IDR if they allow the Education Department to securely access their tax returns


A full list of other changes can be found here.



Conclusion


While the SAVE plan is not a perfect student loan solution for all borrowers, it does offer the potential for meaningful student loan reform in ways that existing income driven repayment plans do not.


Put your questions in the comments down below!



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About Nathan Zarcaro

Nathan Zarcaro is the founder of The Student Debt Destroyer and is passionate about personal finance related causes.  A 2018 graduate of Providence College's Liberal Arts Honors Program, Nathan studied Finance, and has worked for industry leaders in both finance and healthcare.  In his free time, Nathan enjoys playing golf and traveling with his wife Brigid.

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