If you or a loved one has federal student loans, there’s good news and bad news. You probably already know the bad news: President Biden’s attempt at student loan forgiveness for up to $20,000 got struck down by the Supreme Court in June. Plus, after a suspension of monthly payments since March 2020 for pandemic relief, they’ll be due again starting in October 2023.
But the good news is that the White House created a new and more generous income-driven student loan repayment program known as SAVE, or Saving on a Valuable Education. Some of its benefits begin this summer, and others in July 2024.
This article will review seven benefits of the SAVE program, ways to manage student loans wisely, and how they affect your credit. So, whether you’re shopping for student loans, getting prepared to start repaying them, or worrying that you can’t afford to pay them, read on.
What is the SAVE repayment program?
SAVE opened for enrollment on August 22, 2023, and is one of several income-driven repayment options for those with undergraduate or graduate federal student loans. Income-driven means payments are based on your annual earnings and household size.
The loans qualifying for SAVE repayment include Direct subsidized, unsubsidized, consolidated, and PLUS loans to a graduate student. Parents who took out PLUS loans to help a child pay for college don’t qualify for SAVE; however, there are other income-based programs for parents.
Other loans, like Federal Family Education Loans (FFEL) and Perkins Loans, held by a lender instead of the government, must be consolidated into a Direct loan to qualify for SAVE. Note that private student loans never qualify for federal assistance, including the new SAVE plan.
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7 Benefits of the SAVE repayment program
If you need assistance paying your qualifying federal loans, here are seven benefits of SAVE you should know.
SAVE offers the lowest payments.
SAVE is a big deal because it will give more low-income borrowers the lowest possible payment on their federal student loans. Starting in July 2024, SAVE will replace the Revised Pay as You Earn or REPAYE plan by reducing payments on undergraduate loans from 10% of discretionary income to 5%. Graduate loans are also eligible for SAVE but with payments at 10% of discretionary income.
Under the old REPAYE program, discretionary income was defined as income over 150% of the federal poverty level—but the SAVE program increases it to 225%. That decrease in discretionary income is expected to drop many borrowers’ payments by 40%, with the lowest-income borrowers paying 80% less, a significant reduction.
SAVE allows more borrowers to pay nothing.
SAVE immediately protects more income from repayment calculations, which could reduce more than a million borrowers’ payments to zero. For instance, if you’re single and earn less than $32,805 or have a household of four and earn less than $67,500, you don’t have to make loan payments under SAVE.
SAVE forgives unpaid monthly interest.
SAVE has a new feature allowing unpaid interest to be eliminated, starting in October 2023. For instance, if your monthly interest is $30 but your payment covers only $25, the remaining $5 gets canceled. Those who qualify to pay $0 also get all their interest wiped out.
Remember that interest accrues again on September 1, 2023, with payments starting in October. But if you qualify for the SAVE program, interest never accrues as long as you make timely payments, which is fantastic!
SAVE doesn’t require you to include a spouse’s income.
Married borrowers who file separate taxes no longer have to include their spouse’s income in repayment calculations. That will help more borrowers in two-income households qualify for federal assistance.
SAVE allows some loans to be canceled after ten years.
Generally, if you make payments for either 20 or 25 years, you receive student loan forgiveness on any remaining balance. But starting next summer, if you’re in the SAVE program and originally borrowed $12,000 or less, you only have to make payments for ten years before the balance gets wiped out.
If you borrowed more, every $1,000 above the $12,000 limit adds one year of payments before your balance gets automatically forgiven. While forgiven debt, including student loan forgiveness, is typically considered taxable income, there is a temporary exemption from federal taxes through 2025.
SAVE gives those in default a new start.
If you defaulted on student loans before the 2020 deferment, you can get it wiped off your record if you enroll in SAVE or any other federal repayment program. But first, you must enroll in the free “Fresh Start” program before September 2024. You can log into your loan account at MyEDdebt.ed.gov to enroll.
Then, you must contact the Education Department’s Default Resolution Group to have the default removed from your record and enroll in a repayment plan. It’s a terrific opportunity to rehabilitate your loans and have the delinquency removed from your credit reports.
If your student loans are already in good standing, but you believe you’ll have difficulty paying them going forward, visit StudentAid.gov/SAVE to sign up for SAVE. However, if you were already enrolled in the REPAYE program, you’ll automatically get transferred into the SAVE program, and your payments will get adjusted without doing anything.
However, if you were in a different federal repayment plan before the deferment, consider how much enrolling in the new SAVE program could save you.
SAVE enrollment can be automatic.
Student loan borrowers can now allow the Department of Education to access their latest tax return for annual enrollment in SAVE. That prevents you from manually applying each year with your updated income and family size.
In addition, borrowers who are 75 days late making student loan payments will be automatically enrolled in the best income-driven repayment plan for them if they’ve agreed to allow the Department of Education to access their tax data.
If you need assistance paying your student loans, applying for SAVE sooner rather than later is essential because enrollment could take at least a month. Ensure your application goes through before your first loan payment is due in October.
You can compare repayment options and learn more about student loan forgiveness at StudentAid.gov. Also, remember that you never need to pay anyone for student loan forgiveness or debt relief, so watch out for anyone trying to charge you for assistance because they’re probably a scammer.
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What happens if you don’t repay federal student loans?
If you, or someone you love, can’t pay their federal student loans and doesn’t enroll in a repayment plan, it can really hurt your finances. Your loans get considered delinquent after missing payments for 90 days and are formally in default after 270 days or nine months of missed payments.
Once you have federal student loans in default, it gets reported to the credit bureaus, causing your credit scores to drop. The government can garnish your wages, withhold tax refunds, deny you access to other government-backed loans, charge fees, and impose additional hardships.
But if you enroll in Fresh Start, all collections activities on federal student loans in default get suspended until the program expires. So, there’s no excuse for not contacting your loan servicer for guidance, enrolling in Fresh Start, and choosing a suitable repayment program. Remember that depending on your income and family size, your loan payment could get reduced to zero.