By Shelbe Klebs and Brian Denten with The Pew Charitable Trusts’ Student Loan Initiative
Reading time: Five minutes
Introduction by Catherine Brown, Senior Director of Policy and Advocacy at NCAN
A great deal has been written about the Supreme Court’s decision to block the Biden Administration from widespread student
debt cancellation. Comparatively less has been said about the Biden Administration’s new (and vastly more generous than the current program) income-driven repayment (IDR) option, which was finalized in June. In short, this plan will provide significant
relief to borrowers who can’t afford their monthly payments, allowing borrowers to contribute as little as $0 and no more than 5% of their discretionary income towards paying down their student loans.
We know that you and the students you serve may have questions about this program as you consider who should enroll. That is why we invited the experts at The Pew Charitable Trust’s non-partisan, independent Student Loan Initiative to explain the details of the plan. If you still have questions after
reading, please don’t hesitate to reach out to Catherine Brown at brownc@ncan.org.
In June 2023, the Biden administration announced the final regulations for a new IDR plan, known as Saving on a Valuable Education (SAVE). This new plan rebrands the existing Revised Pay As You Earn (REPAYE) plan to make payments more affordable for borrowers from low-income backgrounds and constrain the discouraging effects of balance growth. Borrowers currently enrolled in REPAYE will automatically transition into the SAVE plan as portions
of it are implemented ahead of the resumption of repayment this October. Although the full plan won’t be available until summer 2024, Pew research suggests that the components coming online this fall will help borrowers better afford payments and stay engaged in the repayment system by substantially changing how payments are calculated and interest accrues. However,
these changes and how they are rolling out may not be easily understood by borrowers, so here’s what you should know about the new IDR plan.
Components of SAVE available in summer 2023:
Definition of discretionary income: The SAVE plan will carve out a larger portion of borrowers’ incomes for the calculation used to determine their
monthly payment. In REPAYE, borrowers’ discretionary income is calculated as the difference between their annual income and 150% of the poverty guideline ($21,870 for a single borrower), depending on family size and state. This amount will increase
to 225% ($32,800 for a single borrower) this summer as the SAVE plan comes online. Borrowers making less than the 225% threshold for their income and family size will be eligible for a $0 payment.
Although this provision will affect
all borrowers, it will most acutely affect those with the lowest incomes who will be eligible for $0 payments. The ability to make $0 payments as repayment resumes will be especially important because rates of economic insecurity among student
loan borrowers have increased over time, according to Pew survey data.
Lowering monthly payments could also help borrowers avoid the negative consequences associated
with delinquency and default, including impacts on credit scores and the garnishment of borrowers’ wage and tax returns.
Treatment of interest: The SAVE plan will pay for all unpaid interest that remains each month on loans after borrowers make their payment, meaning
borrowers’ balances will not increase if they make their on-time payment, including for borrowers on $0 payments. This is a significant expansion of previous IDR plans’ interest subsidies, which did not cover all unpaid interest for the full repayment
term.
This provision may help borrowers stay engaged with repayment, as Pew research has found that the effects of balance growth can discourage borrowers from continuing repayment because attempting to reach full payoff may feel futile. Freezing borrowers’ balances after they make their on-time payment will prevent the balances
from ballooning over time during periods of low or $0 payments.
Components of SAVE available in summer 2024:
Percentage of discretionary income: In addition to changing the discretionary income parameters, the SAVE plan will also use a smaller percentage
to calculate borrowers’ monthly payments on undergraduate loans than current IDR plans. SAVE will require borrowers to repay 5% of their discretionary income, versus 10% in current IDR plans. Borrowers with both undergraduate and graduate loans
will repay a percentage based on a weighted average determined by their share of undergraduate versus graduate loans. Borrowers with only graduate loans will repay at 10% of their discretionary income. This change will address borrowers’ capacity
to afford their monthly payment with the goal of lower delinquency rates.
Forgiveness timeline: SAVE will significantly shorten the timeline to forgiveness for borrowers with lower balances. Borrowers enrolled in SAVE who
originally borrowed $12,000 or less will receive forgiveness after making the equivalent of 10 years of loan payments, with the forgiveness timeline increasing by one year for every additional $1,000 borrowed. Outside of this provision, forgiveness
timelines will remain the same as they are in REPAYE: 20 years for undergraduate loans and 25 years for graduate loans.
Past research has found that low-balance borrowers struggle with their student loan payments more often than their peers with higher balances, potentially because of not completing their degree or attending a poor-quality program.
Shortening forgiveness timelines will help these borrowers directly and prevent them from being required to make low or $0 payments for 20 years.
The Department of Education also announced that the long-planned implementation of data sharing between the department and the Internal Revenue Service will be available
before repayment restarts. For borrowers who opt in, this data sharing will allow for the automatic calculation of their income-driven payment when they enroll and annually, instead of being required to proceed through a yearly manual recertification
process that can be slow and prone to error. This improved coordination will simplify IDR plan enrollment and help borrowers stay in plans long term.
The resumption of repayment this fall will be an unprecedented moment for borrowers, the department, and its servicing partners. Clear and agile communication will be crucial as borrowers begin making payments for the first time in three years, or potentially
ever. Although the automatic transitioning of REPAYE borrowers into SAVE will ensure that a significant number of borrowers receive its benefits, additional communication should target borrowers enrolled in other repayment plans, as well as those
making payments for the first time, to guarantee that they are aware of SAVE’s availability and benefits. Pew will continue to monitor the restart of the repayment system and SAVE’s full rollout over the next year.
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