Interest on federal student loans will start accruing again in a few days, with payments set to restart in October. Borrowers face a choice between standard repayment plans that offer a fixed timeline for full balance repayment, forbearance, or an income driven repayment (IDR) plan where monthly payments are determined based on income. These include four types of IDR plans: Income Contingent Repayment (ICR), Income Based Repayment (IBR), Pay As You Earn (PAYE) plan, and Revised Pay As You Earn (REPAYE). A detailed comparison of these and other repayment plans can be found here.
A few months ago, the Department of Education and the White House unveiled the Saving on a Valuable Education (SAVE) plan. This will replace the current REPAYE plan and is deemed as the most generous IDR plan so far. It increases the income exemption for loan payments from 150% to 225% of the poverty line. Meaning, for instance, single borrowers earning $32,800 or less or a family of four earning $67,500 or less will not owe loan payments. Additionally, interest-racking would be limited under the SAVE plan as long as the monthly payments, which could include the principal and accrued interest, are met.
Take note, however, that spousal income is excluded for borrowers filing tax returns separately. Nonetheless, separate filing could potentially result in higher tax bills. More insights on the pros and cons of separate filing can be read on this previous column.
According to guidance, starting July 2024, borrowers with original principal balances of $12,000 or less will be granted forgiveness of any remaining balance. This is done after making ten years’ worth of payments, with the maximum repayment period before forgiveness rising by one year for every additional $1,000 borrowed, up to 20 or 25 years according to a White House statement.
Bear in mind, however, that the following individuals may benefit most from applying for the SAVE program:
- Those already in REPAYE since they are automatically enrolled in the SAVE program. Married couples, especially, should consider filing their tax returns separately.
- Anyone whose forthcoming monthly payments will not cover the accrued interest, possibly resulting in a bigger balance over time.
On the contrary, those with low balances and high income may end up with higher monthly payments under the SAVE program than under a standard repayment plan, which would cover the interest accrual and render the SAVE plan’s interest cap unbeneficial.
Choosing the right repayment plan highly depends on your current and projected financial situation as well as long-term goals. Overall, the SAVE program can aid borrowers in transitioning back into repayment after two years of forbearance, potentially paving the way for future loan forgiveness opportunities.