In the constantly evolving world of student loans, it’s crucial to be aware of new repayment options and how they can impact your financial future. While President Biden’s broad student loan forgiveness plan was halted by the Supreme Court, a glimmer of hope has emerged in the form of the Saving on a Valuable Education (SAVE) program. The SAVE program promises to provide a new approach to income-driven repayment, potentially saving borrowers money. Let’s dive into the details of the SAVE program and understand its implications.
What is the SAVE Program?
Basics of the Program: The SAVE program is designed for federal student loan borrowers and calculates monthly payments based on one’s income and family size. As a general principle, borrowers with a lower income and larger family size will have a reduced payment, even potentially reaching a $0 monthly payment. However, this plan may not suit everyone, especially those with higher incomes and smaller families.
A significant change is that the SAVE program will be replacing the Revised Pay as You Earn (REPAYE) plan. However, the two shouldn’t be confused with the broad loan forgiveness program that was proposed and rejected.
How Much Would Payments Be?
Calculating Payments: The monthly payment is derived from your discretionary income. For the period from October 2023 to June 2024, payments are 10% of this discretionary income. However, by July 2024, borrowers with only undergraduate loans will see a 50% reduction in their payments, whereas those with graduate loans will continue with the 10% rate. Those with a combination of undergraduate and graduate loans will need to work with a blended rate.
Loan Forgiveness Through SAVE:
Opportunities for Forgiveness: Beginning July 2024, borrowers with an initial balance of $12,000 or less can expect loan forgiveness after a decade of qualifying payments. Those who borrowed more will have extended timelines, with a maximum of 20 years for undergraduate loans and 25 years for graduate loans. It’s important to note that payments made before enrolling in the SAVE program may count towards this forgiveness threshold.
SAVE vs. REPAYE: A Comparison
Key Differences:
- Discretionary Income: The REPAYE plan had a flat 10% of discretionary income for all borrowers. In contrast, the SAVE program offers a reduced 5% for undergraduate loans.
- Loan Forgiveness: The REPAYE required a minimum of 20 years for loan forgiveness, with 25 years for graduate loans. With SAVE, borrowers with smaller initial balances can aim for forgiveness after only 10 years.
- Interest Accumulation: Under SAVE, unpaid interest won’t be added to the loan balance.
- Income Considerations: The SAVE program doesn’t include a spouse’s income in the monthly payment calculations if taxes are filed separately.
Who Should Consider the SAVE Program?
Essentially, any student with federal loans can apply for the SAVE program. However, those who were already on the REPAYE plan will be automatically transitioned to SAVE.
Potential Drawbacks
While the SAVE plan presents several advantages, there are potential disadvantages to consider:
- Extended Repayment Time: SAVE may extend the repayment period up to 20-25 years.
- Stagnant Loan Balance: If your payments only cover the interest, the principal balance might not decrease.
- Tax Implications: Post-2025, forgiven loans could be taxable.
Making the Decision
Deciding whether the SAVE program is right for you will depend on your specific circumstances. Consider using a student loan calculator and consulting with a financial advisor to determine which plan offers the most advantages for your situation.
How to Get Started with SAVE
If you were a part of the REPAYE plan, rest easy; you’ll be automatically transitioned to SAVE. Otherwise, you’ll need to apply for enrollment in the SAVE program.
In conclusion, the SAVE program offers a new avenue for student loan borrowers to potentially reduce their monthly payments and aim for loan forgiveness. Like all financial decisions, it’s crucial to evaluate your individual circumstances, understand the program fully, and seek professional advice if needed. This might be the lifeline many borrowers have been waiting for.
About the SAVE repayment plan: https://www2.ed.gov/policy/highered/reg/hearulemaking/2021/idrfactsheetfinal.pdf
Save Plan info: https://studentaid.gov/idr/
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