Unveiling the Saving on a Valuable Education Plan (SAVE)

The Biden administration has introduced the Saving on a Valuable Education (SAVE) repayment plan, a new income-driven repayment (IDR) option for federal student loan borrowers. This plan aims to make student loan repayment more affordable and accessible, with the potential to cut borrowers' monthly payments in half and save them thousands of dollars a year. But is the SAVE plan the best option for you? Let's dive into the details and explore the pros and cons of this new repayment plan.



Pros of the SAVE Repayment Plan

1. Affordable monthly payments: The SAVE plan caps monthly payments at 10% of your discretionary income, with a new income floor of 225% of the federal poverty line. This means that borrowers earning $32,800 a year or less (or $67,500 for a family of four) would have a monthly payment of $0. Starting next summer, that payment cap will drop to 5% of your discretionary income, further reducing the financial burden on low-income borrowers.
2. Cap on interest: The SAVE plan cuts additional interest charges after you've met your monthly payment. This means that if your monthly payment is $0, you won't be charged additional interest. If $50 in interest accumulates on your loans in a month, but your payment is only $30, you won't be charged the additional $20. This interest subsidy can be particularly beneficial for borrowers who expect to significantly increase their salaries in the future.
3. Forgiveness after as little as 10 years: Beginning in 2024, those with principal loan balances of $12,000 or less can have remaining balances forgiven after just 10 years of payments on the SAVE plan. You'll need to make payments for an additional year for every $1,000 you borrowed above $12,000 up to 20 or 25 years, depending on the degree. An undergraduate borrower with a principal balance of $15,000 would need to make payments on SAVE for 13 years in order to qualify for loan forgiveness.



Cons of the SAVE Repayment Plan

While the SAVE plan offers numerous benefits, it's essential to consider the potential drawbacks as well:

1. Potential deferral of student loan repayments: The SAVE plan's increased income floor for payments could lead to a large-scale deferral of student loan repayments, straining federal resources in the long run. Critics worry that this could result in a reduction in repayment rates over the years, which could have broader economic challenges.
2. Income tax on forgiven debt: While the SAVE plan offers loan forgiveness after 10 years for low-balance borrowers, it's important to note that you may owe income tax on any amount of debt you have forgiven. Several states treat forgiven debt as taxable income, and while there is currently a waiver on federal income taxes on forgiven debt, it's scheduled to expire in 2025. This could create a significant financial burden for low-income borrowers who go the full 20 or 25 years with low or no monthly payments and have relatively large amounts of debt forgiven.
3. Limited forgiveness for graduate borrowers: While the SAVE plan offers loan forgiveness after 10 years for undergraduate borrowers with low balances, graduate borrowers must wait 25 years for loan forgiveness. This longer timeline could make it more challenging for graduate borrowers to manage their student loan debt and achieve financial stability.

In conclusion, the SAVE repayment plan offers numerous benefits for federal student loan borrowers, including affordable monthly payments, a cap on interest, and the potential for loan forgiveness after as little as 10 years. However, it's essential to consider the potential drawbacks, such as the potential deferral of student loan repayments and the income tax implications of loan forgiveness. Before applying for the SAVE plan, carefully evaluate your financial situation and consult with a financial advisor to determine the best repayment option for your specific needs.