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Borrowers succumbing to the pressure of federal student loans have a new option to significantly reduce their payments, eventually as much as half.
The Biden administration's new income-driven repayment plan, known as SAVE, opened for enrollment Tuesday, giving millions of borrowers a more affordable way to pay their monthly student loan bills, which willwins again in Octoberafter a three-year break.
"With the SAVA plan, we are making a promise to all students," Education Minister Miguel Cardona said during a teleconference with reporters Monday afternoon. “Your payments will be affordable. You won't be buried under a mountain of interest and burdened with a lifetime of debt.”
In the coming days, more than 30 million borrowers will be invited to join the plan, which was first proposed in January and bases monthly repayments on income and family size.
Unlike the White House's previous plan to write off up to $20,000 of federal debt — which was struck down by the Supreme Court in June — this payment option will become a permanent part of student loan options and will be available to current and future borrowers. It also creates a new safety net by automatically enrolling certain borrowers in the SAVE plan after they fall behind on payments.
Borrowers looking to enroll in a SAVE plan — or save for a valuable education — should act fast: You can wait about four weeks for your application to be processed, senior Education Department officials said. If you apply now, your paperwork will be processed in plenty of time before your first payment is due, officials added.
Borrowers won't get all of the plan's benefits until next summer because some features won't take effect right away. Here's a summary of how the plan will work:
Who is entitled to a new repayment plan?
Those with federal undergraduate or graduate loans. Borrowers with undergraduate debt qualify for lower payments than borrowers with graduate degrees.
Who is excluded?
Parents who borrowedwho pay for their children's education using Parent PLUS loans cannot join the new plan.
If home borrowers cannot afford their payments, they will usually only have access to the most expensive ones.income-based compensationa plan – known as income-contingent repayment – that requires borrowers to pay 20% of their discretionary income over 25 years; all that remains is forgiven.
How does the new SAVE plan work?
All earnings-based repayment plans generally work the same way. Payments are based on your income and family size and reset each year. After monthly payments are made for a certain number of years, usually 20, any remaining balance is forgiven. (The remainder is taxable as income, although atemporary tax ruleexempts forgiven amounts until 2025 from federal income tax.)
The SAVE plan — which replaced the revised Pay As You Earn, or REPAYE, program — is more generous in several ways. For starters, it would reduce payments tocredits for graduationto 5 percent of discretionary income, down from 10 percent on REPAYE (and 15 percent on other plans).
Graduate student debt is also eligible, but borrowers would pay 10% of discretionary income on that portion. If you have undergraduate and graduate debt, your payment will be weighted accordingly.
The new rules also adjust the payment formula, protecting more income for basic needs, which in turn reduces overall payments. This change will also allow more low-income workers to qualify for $0 payments.
What is discretionary income?
After paying for basic necessities such as food and rent, any remaining income is considered discretionary;income-based repayment plansrequire borrowers to pay a percentage of that discretionary income.
The SAVE plan adjusts the payment formula so that more income is protected for these basic needs, generating less discretionary income and a lower payout.
SAVE increases the amount of income protected from reimbursement to 225% of the federal poverty guidelines, which is roughly equivalent to $15 per hour for a single borrower. If you earn less than that, you don't have to pay any monthly payments.
In other words, a single person earning less than $32,805 per year would pay $0 per month. The same goes for someone in a family of four with an income of less than $67,500. That should help an additional million low-income borrowers qualify for a $0 down payment, the Department of Education said.
Under the old REPAYE program, lower income was protected, or up to 150 percent of the federal poverty guidelines.
Will the method of interest processing change?
Yes, this is one of the most attractive features of the new plan. If the borrower's monthly installment does not cover the interest due, the Ministry of Education will cancel the uncovered part.
In other words, if a borrower owes $50 in interest each month, but the payment only covers $30, the remaining $20 will be gone by the time the payment is made. And the monthly interest will be waived for those who are not liable to pay because their incomes are very low.
This new rule will provide relief to those who made payments but saw their balances skyrocket because they didn't pay enough to cover the interest owed.
Does the plan go into effect immediately?
the big threecomponents of the planare available now, including securing a higher income than repayment formula, which will reduce borrowers' payments to zero. A new treatment of unpaid interest is also in effect. Finally, married borrowers filing separately will no longer have to include their spouse's income when calculating their monthly payment. (Their spouse will also be excluded from the family size.)
But other benefits — including a reduction in payments from 10% to 5% of discretionary income on undergraduate student loans — won't take effect until July.
When the plan is in full swing next summer, many borrowers' monthly bills per dollar will be 40% lower compared to the REPAYE plan. But those with the lowest incomes could see their incomes drop by 83 percent, while those with the highest incomes would see a reduction of only 5 percent.
Are there any changes for small loan borrowers?
Yes, but this feature will go into effect next summer.
People taking out smaller loans — or those with an original balance of $12,000 or less — would make monthly payments for 10 years before canceling, instead of the more common 20-year repayment period in other income-based repayment plans. Every $1,000 borrowed above $12,000 would add a year of monthly payments before the balance is forgiven, up to a maximum of 20 or 25 years.
Will the new plan always be the best option?
The SAVE plan is expected to provide the lowest payout for most borrowers and is likely to be the best option for most. Loan simulator tool inStudentAid.govcan help you analyze which repayment plan makes the most sense for your circumstances and goals.
After signing up, it should automatically use your credits in its calculations. (You can add other federal loans if any are missing.) You can also compare plans side-by-side—how much they'll cost over time, monthly and total, and whether any debts will be forgiven.
What about borrowers who were in default before the payment break?
Borrowers who defaulted before the payment break — which happens when you're at least 270 days late — gotNew beginningand are considered to be current with their payments. This means they can apply for SAVE or any other repayment plan.
But they shouldtake certain measuresdo so – and complete them before September 2024 to prevent your loans from defaulting in the long run.
Here's how: Contact the Department of Educationdefault resolution group- from sidephone,online or by mail - and request the withdrawal of your bad debt loans through the "New Start" program. Standard Group can also help you enroll in an income-driven repayment plan, including SAVE.
The group will transfer your loans to a regular loan officer and remove the bad debt record from your credit report.
“Your new provider will then put them in the I.D.R. plan with the lowest monthly payment they are eligible for,” said a Department of Education spokesperson. "For most borrowers, this is a SAVINGS."
Can delinquent borrowers apply?
Borrowers who fell behind on their monthly student loan bills before the payment break also got a fresh start and will be able to apply for the SAVE program like any other borrower.
Starting now, borrowers who go 75 days without a payment will automatically be enrolled in the SAVE plan – provided they have approved the release of their federal tax information to the Department of Education. This policy will take effect next July.
How to register?
You can apply online atStudentAid.gov/SAVE; borrowers will be able to see the payment amount before applying. Government officials said the process should not take more than 10 minutes. Once signed in, you can check your login status by visiting your account dashboard.
And over the next few months, loan officers will also be able to help borrowers apply and "self-certify" their income without tax documentation, either through the servicer's website or over the phone, said Scott Buchanan, CEOStudent Loan Servicing Alliance, an industrial trade group.
Those who were already registered with REPAYE do not need to do anything — they will automatically be transferred to SAVE and their payment amounts will be adjusted. It is also possible to switch from another income-based repayment plan to SAVE without resetting the payment hour.
For more information on initiating a refund, here.our guide.
What happens if I try to apply but my application cannot be processed in time for my first payment?
You will be put on hold, meaning payments will not be due, for the next billing cycle.
Is there anything I need to do to stay subscribed?
The size of your salary is adjusted each year based on your earnings, and your income must be updated each year.
But if you give the Department of Education permission to access your income information through the IRS (something you can do now during the application process), you won't have to re-verify your income every year because it will be done automatically.
Tara Siegel Bernardcovers personal finances. Before joining The Times in 2008, she was deputy managing editor of FiLife, a personal finance website, and a contributing editor at CNBC. She also worked at Dow Jones and was a regular contributor to The Wall Street Journal. Learn more about Tara Siegel Bernard
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