In the midst of ongoing legal disputes, the Education Department has decided to make two student loan repayment plans available again. This decision comes as their new repayment program, known as the Saving on a Valuable Education (SAVE) plan, faces legal challenges.
The conflicts primarily stem from Republican attorneys general in Kansas and Missouri, who contend that President Joe Biden is attempting an indirect method of achieving student debt forgiveness. This debate follows the Supreme Court’s decision to halt a broad debt cancellation initiative in June 2023.
The SAVE plan has attracted attention because it offers lower monthly payments than other federal student loan repayment options. Additionally, it promises faster debt forgiveness for those with smaller loan balances, both of which have been points of contention in the lawsuits.
From the world of personal finance, there’s a fascinating uptick in the number of millennial 401(k) millionaires, rising by an impressive 400%. Meanwhile, there’s still some uncertainty surrounding certain student loan forgiveness initiatives, and we’re witnessing a shift from the ‘great resignation’ to the ‘great stay.’
Currently, SAVE plan participants find themselves in an interest-free forbearance period. While not having any monthly payments might sound appealing, there’s a catch: the time spent in forbearance doesn’t count toward loan forgiveness programs. For instance, Public Service Loan Forgiveness (PSLF) requires a decade of payments before forgiving the debt of qualifying public servants.
However, borrowers who join either of the newly reopened repayment plans will still receive credit for their payments, according to experts.
James Kvaal, the U.S. Under Secretary of Education, expressed the department’s commitment to defending the SAVE plan’s provisions in court. “We aim to provide more options to low-income borrowers, teachers, servicemembers, and other public servants, enabling them to choose what best suits their financial needs,” he stated.
When contemplating the ideal repayment plan, some borrowers already in the SAVE program’s interest-free forbearance might opt to stay put, suggests higher education expert Mark Kantrowitz. This period without payments could offer some relief to those facing financial difficulties. However, Kantrowitz also points out, “There’s a possibility that the forbearance may end under the Trump administration,” suggesting that months without payments won’t necessarily bring borrowers closer to debt forgiveness.
For those seeking credit toward PSLF or an income-driven repayment (IDR) plan, it may be wise to consider switching to one of the Education Department’s other options, such as the recently reopened Pay As You Earn (PAYE) Plan or the Income-Contingent Repayment (ICR) Plan.
Kantrowitz advises checking eligibility for PAYE first, as it often proves to be the most cost-effective choice. For instance, monthly payments can be capped at 10% of discretionary income, and debt may be forgiven after 20 years. The Education Department’s December 18 press release highlights that under this plan, no payments are required on the first $22,590 of an individual’s income, or $46,800 for a family of four.
In comparison, the ICR plan allows for $0 payments for single individuals earning up to $15,060 or $31,200 for a family of four, according to the department. Above this threshold, payments could be set at 20% of income.
Fortunately, there are numerous online tools available to help borrowers determine their potential monthly payments under different plans.
For those not seeking loan forgiveness or who can comfortably manage the payments, experts often recommend the Standard Repayment Plan. With fixed payments, borrowers typically expect to pay off their loans over a 10-year period.
