New Federal Student Loan Repayment Plan Offers Lower Monthly Payments
Washington, CNN — The Biden administration has introduced a new federal student loan repayment plan that could benefit millions of borrowers by reducing their monthly payments. The plan, known as Saving on a Valuable Education (SAVE), calculates monthly payments based on the borrower’s income and family size, regardless of the amount of student loan debt owed.
This new repayment plan comes as student loan payments are set to resume in October after a long pause due to the pandemic. By using the SAVE plan, borrowers can determine how much their monthly payments would be this year by enrolling in the program.
While there are other federal student loan programs that also tie monthly payments to income and family size, the SAVE plan is expected to provide the smallest monthly payments for low-income borrowers. Additionally, under this plan, unpaid interest will not accumulate if the borrower makes full monthly payments. This means that the borrower’s balance will not increase, even if the monthly payment does not cover the accumulated interest.
Furthermore, the SAVE plan includes a forgiveness component. Once fully phased in next year, borrowers who have made at least 10 years of payments may have their remaining balance wiped away. However, it’s important to note that while most borrowers with federal student loans will qualify for the new repayment plan, it may not be the best option for everyone. The lower monthly payments may result in a longer repayment period, potentially leading to higher overall payments with accumulated interest.
To apply for the SAVE plan, borrowers can submit an application for income-driven repayment plans on the Federal Student Aid website. Starting from July 2024, enrolled borrowers can expect their monthly payments to be cut in half. This year, payments will equal 10% of discretionary income, but next year, payments for undergraduate school loans will be further reduced to 5% of discretionary income.
For borrowers with loans from both undergraduate and graduate school, payments will be a weighted average of 5% to 10% of their income based on the original principal balances of their loans. It’s important to note that payments under the SAVE plan, as well as any other income-driven repayment plan, are recalculated annually and adjusted for changes in income or family size.
In general, if borrowers receive a raise or get married and their spouse has an income, their monthly payment may increase. However, married borrowers have the option to potentially lower their monthly payment by filing taxes separately, excluding their spouse’s income from the calculation.
The new federal student loan repayment plan offers a promising solution for many borrowers, providing lower monthly payments and the potential for loan forgiveness. It is important for borrowers to carefully consider their options and assess which repayment plan works best for their individual financial circumstances.