What is the new income-driven student loan repayment plan? Here's how to tell if it's right for you

A new student loan repayment plan launched in August 2023 could provide relief to borrowers of federal student loans who will have to resume payments in the fall.

The Saving on a Valuable Education (SAVE) plan is a type of income-driven repayment (IDR) that could lower some borrowers’ student loan payments to $0, while others could see savings of more than $1,000 per year compared to other plans. With the average borrower set to owe more than $200 per month after payments resume (according to data from Experian), this new plan could help take some of the sting out of their loan debt.

Here’s how the SAVE plan works and how to tell if it's a good fit for you. 

The SAVE plan provides multiple benefits for borrowers, but here are three ways it currently stands out from other income-driven repayment plans: 

• It increases the amount of your income that's protected from payments. On an income-driven repayment plan, payment amounts are based on a percentage of your discretionary income (the difference between your adjusted gross income and a percent of the poverty guideline determined by the U.S. Department of Health and Human Services factoring in your state of residence and family size). The more discretionary income you have, the higher your payments. With the SAVE plan, your discretionary income is calculated using 225% of the federal poverty amount instead of the 150% used by most IDR plans. This means less income is considered discretionary, and thus lower payments.
• If you make a monthly payment, your loan won’t grow due to unpaid interest. The Biden Administration estimates that about 70% of borrowers who were on IDR plans before the pandemic could benefit from this. 
• Married couples who file separately won’t be required to include their spouse’s income in their payment calculation. Couples filing separately will also have their spouse excluded from their family size in the calculation, which will help lower monthly payments.

The SAVE plan still has benefits that aren't in effect yet. Some of them will start in July 2024 including:

• Payments will be cut in half for undergraduate-only borrowers. Payments on undergraduate loans will be reduced from 10% of income above 225% of the poverty line to 5% of income above that threshold, which should cut monthly payments in half. 
• Payments will be lowered for borrowers with both graduate and undergraduate loans. The administration states that those with both graduate and undergraduate loans will pay a weighted average between 5% and 10% of their income based on their original loan balances, which should bring down monthly payments for these borrowers.
• Borrowers with small balances could reach forgiveness faster than on other plans. Current IDR plans require 20 or 25 years of payments before forgiveness for all principal balances. With SAVE, borrowers who had original balances of $12,000 or less will receive forgiveness after 120 payments (the equivalent of 10 years' worth). The borrower will need to make an additional 12 payments for each $1,000 borrowed over $12,000, capping at 20 or 25 years of payments before forgiveness.

Additionally, starting in July 2024, borrowers who consolidate loans within the federal student loan system won’t lose progress toward forgiveness and will receive credit toward forgiveness for certain periods of deferment and forbearance. For other periods of deferment and forbearance, borrowers can make catch-up payments to get credit toward forgiveness. 

The SAVE plan is available to student borrowers with a federal direct student loan in good standing. And, it could be a useful tool in several scenarios. 

Here are a few signs that it might be the right move for you: 

• You’ll have trouble making your payments. As with all IDR plans, the SAVE plan will limit your payments to a percentage of your discretionary income. It could reduce the amount you owe, and the Biden administration estimates that borrowers will see their total payments per dollar borrowed drop by 40%. 
• You’re on another IDR plan. If you’re already on REPAYE, you’ll be automatically enrolled in the SAVE plan. The SAVE plan could lower your payment further — it's estimated that this plan will cut payments on undergraduate loans in half compared to other IDR plans. So, it could be worth switching. 
• You earn less than $15 an hour. Under this plan, a single borrower earning less than $15 won’t have to make any payments. 
• You have a small amount of student loans that you can’t afford. If you’re struggling with a small amount of student loan debt, this plan could help. Since it shortens the forgiveness period from more than 20 years to 10 years for those with original balances of $12,000 or less when compared to current plans, it could be a smart move for those in this situation. 

Federal student loan borrowers can sign up for the SAVE plan through StudentAid.gov/SAVE. The site recommends choosing the option for your loan servicer to choose the lowest monthly payment plan.

Since the SAVE plan replaces the Revised Pay As You Earn (REPAYE) plan, borrowers on that plan (or who have recently applied) are automatically signed up for the SAVE plan.

The SAVE Plan aims to cut payments for millions of borrowers by increasing the amount of income that’s protected from student loan repayment calculations, moving forgiveness closer for those with small student loan balances, and by next July, cutting the percentage of discretionary income used for student loan repayment calculations.

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