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Borrowers who succumb to the pressure of federal student loans have a new option to significantly reduce their payments, ultimately by as much as half.
The Biden administration's new revenue-based repayment plan, known as SAVE, opened Tuesday, providing millions of borrowers with a cheaper way to pay their monthly student loan bills.expires again in Octoberafter a three-year break.
"With the SAVE plan, we're making a promise to every student," Education Secretary Miguel Cardona said during a phone call with reporters on Monday afternoon. “Your payments will be affordable. You won't be buried under a mountain of interest and burdened with lifelong debts.
In the coming days, more than 30 million borrowers will be invited to sign up for the plan, which was originally proposed in January and is based on monthly installments based on income and family size.
Unlike the previous White House plan to forgive up to $20,000 in federal debt (overturned by the Supreme Court in June), this payment option will become a permanent cog in the student loan machine and will be available to existing borrowers and futures contracts. It also creates a new safety net by automatically enrolling certain borrowers into the SAVE plan after they fall behind on their payments.
Borrowers looking to enroll in the SAVE plan (or saving for quality education) should act quickly: It can take up to four weeks to process an application, senior Department of Education officials said. By registering now, you can get through the paperwork with plenty of time before your first payment is due, officials added.
Borrowers won't get the full benefits of the plan until next summer, as some features won't go into effect immediately. Here is a summary of how the plan works:
Who can use the new payment plan?
Individuals with federal loans for undergraduate or graduate studies. Borrowers with undergraduate debt qualify for lower payments than graduate borrowers.
Who is excluded?
Parents who borrowedpay for their children's education through Parent PLUS loans, they cannot join the new plan.
If parent borrowers cannot afford to repay their liabilities, they usually have access to only the most expensive ones.salary based on incomea plan, called means-tested repayment, which requires borrowers to repay 20 percent of their discretionary income over 25 years; all that remains has been forgiven.
How does the new SAVE plan work?
All income-based payment plans generally work the same way. Payments are based on your income and household size and are reset every year. After making monthly payments for a certain number of years, usually 20, the remaining balance is written off. (The remaining amount is taxed as income, although:temporary tax ruleexempt balances redeemed through 2025 from federal income tax).
The SAVE plan, which replaced the revised Pay as You Earn (REPAYE) scheme, is more generous in several ways. For starters, this would reduce paymentsstudy loansat 5 percent discretionary income compared to 10 percent in REPAYE (and 15 percent in other plans).
Graduate debt is also eligible, but borrowers pay 10 percent of discretionary income on this portion. If you have both undergraduate and graduate debt, your payment will be weighted accordingly.
The new rules also modify the payment formula, protecting more income for basic needs, which in turn results in lower payments overall. This change will also allow more low-income workers to qualify for the $0 payment.
What is discretionary income?
After paying for basic needs such as food and rent, any other income is considered discretionary;income-based payment plansrequire borrowers to repay a percentage of this discretionary income.
The SAVE plan modifies the payment formula to secure more income for basic needs, generating less discretionary income and a lower payment.
SAVE increases the amount of income protected against the payment to 225 percent of the federal poverty guidelines, which is roughly the equivalent of $15 per hour for a single borrower. If you earn less than this amount, you won't have to make any monthly payments.
In other words, a single person earning less than $32,805 a year will pay $0 a month. The same applies to someone in a household of four with an income of less than $67,500. The Department for Education said this should help an additional million low-income borrowers qualify for zero-amount payments.
Under the old REPAYE program, lower income was protected, up to 150 percent of the federal poverty guidelines.
Will this change the way interest is treated?
Yes, this is one of the most attractive features of the new plan. If the borrower's monthly payment does not cover the interest owed, the Department of Education will cancel the unpaid portion.
In other words, if a borrower owes $50 in interest each month, but the repayment is only $30, the remaining $20 will disappear after the payment is made. And monthly interest will be waived for those who are not required to make payments because their income is too low.
This new rule will provide relief to those who have made payments but their balance has skyrocketed because they did not pay enough to cover the interest owed.
Does the plan go into effect immediately?
Big threeplan componentsare now available, including securing more income from the payment formula, which will bring payments down to zero for more borrowers. There is also a new approach to unpaid interest. Finally, married borrowers who apply separately will no longer need to include their spouse's income when calculating their monthly payment. (They will also exclude your spouse from your family size.)
But other benefits, including a reduction in payments to 5 percent of the 10 percent discretionary student loan income, won't take effect until July.
When the plan goes into effect next summer, many borrowers' monthly bills on a dollar basis will drop by 40 percent compared to the REPAYE plan. But those earning less could see their payments fall by 83 percent, while those earning more would only get a 5 percent reduction.
Are there any changes for borrowers with small loan balances?
Yes, but this feature will go live next summer.
People who received smaller loans — or those with an original balance of $12,000 or less — would make monthly payments for 10 years before repayment, instead of the more typical 20-year repayment period in other loan-based repayment plans. Every $1,000 over $12,000 borrowed will add one year of monthly payments before the balance is forgiven, up to a maximum of 20 or 25 years.
Will a new plan always be the best option?
The SAVE plan is expected to provide the lowest payment for most borrowers and is likely to be the best option for most. Loan simulation tool inStudentAid.govcan help you analyze which payment plan makes the most sense given your situation and goals.
Once logged in, it should automatically include your loans in its calculations. (You can add other federal loans if they are missing.) You can also compare the plans side by side: how much they will cost over time, both monthly and cumulatively, and whether any debt will be forgiven.
What about borrowers who defaulted before the payment was suspended?
Borrowers who were in arrears before the break in repayment, which occurs when the arrears are at least 270 days, werea new beginningand are considered current in their payments. This means they can sign up for SAVE or any other payment plan.
but they needtake some stepsdo so and complete them by September 2024 to prevent loan defaults in the long run.
Here's how: Contact the Department of EducationThe default resolution group- Byphone,online or by post and apply for Fresh Start Debt Repayment. The default pool can also help you sign up for an income-based payment plan, including SAVE.
The group will transfer your loans to a regular loan servicer and remove the default record from your credit report.
"Your new admin will put you on I.D.R. plan with the lowest monthly payment they are entitled to," a Department of Education spokesman said. "For most borrowers, this is SAVING."
Can delinquent borrowers register?
Borrowers who defaulted on their monthly student loan payments prior to the repayment break will also be given a fresh start and will be able to enroll in the SAVE program just like any other borrower.
In the future, borrowers who fail to make payments for 75 days will be automatically enrolled in the SAVE plan, provided they have consented to sharing their federal tax information with the Department of Education. The policy will come into force in July next year.
How to register?
You can register online atStudentAid.gov/SAVE; Borrowers will be able to see the amount of their payment before signing up. Administration officials said the process should take no more than 10 minutes. After submitting your application, you can check the status of your application by visiting your account panel.
For the next few months, credit counselors will also be able to help borrowers register and "self-certify" their income without having to provide tax documentation, either through the servicer's website or over the phone, said Scott Buchanan, general manager ofStudent Loan Service Alliance, an industry trade group.
Those who have already signed up for REPAYE do not need to do anything: they will automatically be transferred to SAVE and their deposit amounts will be adjusted. It is also possible to switch from another income-based payment plan to SAVE without resetting the payment clock.
More information on how to start paying can be found hereour guide.
What if I try to register but my application is not processed in time and I cannot make my first payment?
Forbearance will be applied to you, meaning no payment will be due on your next billing cycle.
Do I have to do anything to stay enrolled?
Your payment amount is adjusted annually based on your income and your income must be updated annually.
However, if you allow the Department of Education to access your income information through Revenue (you can do this now during the registration process), you will not need to re-certify your income each year as this will be done automatically.
Tara Siegel Bernardincludes personal finance. Prior to joining The Times in 2008, she was associate editor at FiLife, a personal finance website, and editor at CNBC. He also worked at Dow Jones and contributed regularly to The Wall Street Journal. More about Tara Siegel Bernard
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