The Latest Student Loan Income-Based Repayment Program Provides A Myriad Of Benefits For Borrowers But Its Future Is Uncertain
The new program is available only for federal student loans. Private loans do not qualify,
After the Supreme Court struck down President Biden’s wholesale student loan forgiveness plan, the president presented his contingency plan known as Saving on a Valuable Education or “SAVE.”
SAVE is an income-based student loan repayment plan similar to prior plans like Income Contingent Repayment plan, Income Based Repayment, Pay As You Earn, or the Revised Pay As You Earn plans. But the monthly payment amount under SAVE is likely to be lower than the other plans because the income exemption has been increased to 225% of the federal poverty line as opposed to 150% on the other plans.
This means that if a borrower’s household income is under 225% of the federal poverty line, he or she will not have to make any monthly payments. Any income above the 225% will be considered discretionary income and between 5% to 10% of that amount (divided by 12 months) will be the monthly amount due.
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SAVE is available only for federal student loans. Private loans do not qualify.
A new feature of SAVE is the cap on interest accrual. If the monthly payment described above (if any) is not enough to cover the month’s accrued interest, then the remaining accrued interest will be forgiven. This will ensure that borrowers will not see their balance increase substantially so long as they make the requisite loan payments.
SAVE also excludes spousal income from the borrower’s loan payment calculation so long as they file separately. Those who already filed joint tax returns cannot amend them so that each spouse can file separately. In a previous column, I wrote about whether it is worth it to file returns separately for student loan payment purposes.
Next month, additional benefits will be available to borrowers. Borrowers holding only undergraduate loans will pay only 5% of their discretionary income toward their loans. Borrowers who have undergraduate and graduate loans will pay a weighted average of between 5% and 10% of their income based on the original principal balances of their loans taken to attend school.
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Also, borrowers who have paid for many years will be eligible for loan forgiveness even if they were in a standard repayment plan in the past. For those with only undergraduate loans, the repayment term cap is 20 years or 240 monthly payments. For those with a mixture of graduate and undergraduate loans (or only graduate loans), the repayment term cap is 25 years (300 monthly payments). This means that, depending on which of the two types of loans you have, the repayment term won’t increase beyond that 20- or 25-year cap, no matter how much money is borrowed.
Those holding commercially held Federal Family Education Loans (FFEL) are also eligible for the SAVE program although they must first convert their loans to federal direct loans. They must consolidate their loans before July 1, 2024, in order to have their past payments apply retroactively to determine whether they qualify for early loan forgiveness.
Lastly, those who are enrolled in the SAVE program will not have to make their monthly payment in July while the Department of Education finalizes how to calculate the repayment program.
So is it worth it to participate in the SAVE program? It is for most people already in an income-based repayment program. However, people with graduate loans enrolled in the Pay As You Earn program who are close to finishing the 20-year repayment period should not enroll in the SAVE program because it will add another five years of payments.
Also, people with high incomes and low balances should not enroll in SAVE as well because they may pay a higher monthly payment compared to a standard repayment plan. But it may be possible to stay in a standard repayment plan and then convert to SAVE a few months before the requisite 20- to 25-year repayment term has been reached.
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Also, court challenges and the upcoming election may threaten the viability of the SAVE program. Lawsuits have been filed by Republican-led states challenging the program. A week ago, a federal judge ruled that three states — Alaska, South Carolina, and Texas — have standing to challenge the SAVE program because these states would be harmed due to the SAVE program. Specifically, because these states would lose revenue if borrowers in their state converted their FFEL loans to direct loans.
A second lawsuit was filed in Missouri by Republican-led states requesting a preliminary injunction blocking implementation of the SAVE program. If they succeed, the SAVE program will be closed to new applications although it is believed that those who are in the SAVE program can stay in the program.
Lastly, the result of the presidential election will influence the future of SAVE. As of the date of publication, Donald Trump seems to have a slight lead in national polls and in the battleground states. The winner will serve his second and final term in office.
If Trump wins, the chances of student loan forgiveness are slim and he will likely close the SAVE program soon after he takes office. Furthermore, the Department of Education led by the Trump’s appointed Secretary will likely issue rules and regulations that will make it more difficult to obtain student loan forgiveness.
If Biden wins, he is likely to continue the SAVE program. But given his history of ignoring student loan issues until it is politically expedient, he is likely to either put things on hold until at least the midterm elections, or compromise with Republicans to pass a higher education reform bill and end the lawsuits challenging the SAVE program.
The SAVE program is the most generous income-based repayment program to date as it will forgive some interest accrual and provide lower monthly payments compared to its predecessors. Those who will benefit should apply as soon as possible because it may not be available in the future.
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at stevenchungatl@gmail.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.
