While the Supreme Court struck down President Joe Biden’s student loan forgiveness program in late June, a separate and significant change to the federal student loan system is moving ahead.
Eligible borrowers can now enroll in a new income-driven repayment plan that could lower their monthly bills and reduce the amount they pay back over the lifetime of their loans.
If borrowers apply this summer, the changes to their bills are expected take effect before payments resume in October after the yearslong pandemic pause ends. But the Biden administration is encouraging borrowers to apply as soon as possible to make sure the changes happen on time.
Once the plan, which Biden is calling SAVE (Saving on a Valuable Education), is fully phased in next year, some people will see their monthly bills cut in half and remaining debt canceled after making at least 10 years of payments.
Unlike Biden’s blocked one-time forgiveness program, the new repayment plan will provide benefits for both current and future borrowers who sign up for it.
But the benefits will come at a cost to the government. Estimates vary, depending on how many borrowers end up enrolling in the plan, ranging from $138 billion to $475 billion over 10 years. As a comparison, Biden’s student loan forgiveness program was expected to cost about $400 billion.
The SAVE repayment plan has gone through a formal rulemaking process at the Department of Education. The agency has previously created several other income-driven repayment plans in the same manner without facing a successful legal challenge.
Some parts of the SAVE plan will be implemented this summer and others will take effect in July 2024. Here’s what borrowers need to know.
How income-driven repayment plans work
Currently, there are several different kinds of income-driven repayment plans for borrowers with federal student loans. The new SAVE plan will essentially replace one of those, known as REPAYE (Revised Pay As You Earn), while the others are phased out for new borrowers.
Under these plans, payments are based on a borrower’s income and family size, regardless of how much outstanding student debt is owed.
There is also a forgiveness component. After making at least 10 years of payments, a borrower’s remaining balance is wiped away.
Who qualifies for SAVE
Borrowers must have federally held student loans to qualify for the SAVE repayment plan. These include Direct subsidized, unsubsidized and consolidated loans, as well as PLUS loans made to graduate students.
Parents who took out a federal PLUS loan to help their child pay for college are not eligible for the new repayment plan.
Borrowers with Federal Family Education Loans, known as FFEL, or Perkins Loans that are held by a commercial lender rather than the government will need to consolidate into a Direct loan in order to qualify.
Private student loans do not qualify for the new SAVE repayment plan or any other federal repayment plan.
How to apply
Borrowers can apply for the SAVE plan by submitting a recently updated application for income-driven repayment plans found here.
Borrowers can expect to receive an email confirmation after applying.
The application was officially launched on August 22 after an initial beta testing period. Applications that were submitted during the beta period will not need to be resubmitted.
People who are already enrolled in the REPAYE repayment plan will be automatically switched to the SAVE plan.