Navigating the world of student loans can be a daunting task for recent graduates and borrowers. With several repayment plans available, staying informed about the latest options is crucial. The newest plan is the SAVE, which is designed to help borrowers manage their student loan debt more effectively. In this blog post, we will dive into the SAVE plan and how it differs from the old REPAYE plan, shedding light on the benefits it offers to student loan borrowers.
Understanding the Old REPAYE Plan
Before we delve into the specifics of the SAVE plan, let's take a brief look at the old REPAYE plan. REPAYE, or Revised Pay As You Earn, is an income-driven repayment plan introduced to assist borrowers in managing their federal student loan payments. Here's a quick overview of REPAYE:
Income-Driven: REPAYE calculates your monthly payments based on your discretionary income, making it an attractive option for borrowers with varying incomes. You pay 10% of discretionary income, generally based on the previous year’s tax returns, and must include your spouse's income whether you file together or jointly.
Interest Subsidy: One of REPAYE's notable features is its interest subsidy. If your monthly payments do not cover the accruing interest on your loans, the government may cover 50% of the unpaid interest on subsidized loans.
Loan Forgiveness: After 25 years of qualifying payments, depending on your loan type, REPAYE offers loan forgiveness. However, the forgiven amount is considered taxable income.
The New SAVE Plan - A Game-Changer
The new SAVE plan, which stands for Student Achievement and Vocational Education, has garnered attention for its innovative approach to student loan repayment. Here's how it differs from the old REPAYE plan:
Loan Forgiveness Timeline: If you have federal grad school debt, it is a 25-year repayment period before loans are forgiven just like REPAYE (20 years if only undergrad federal loans).
Raised Unpaid Interest Subsidy: Unlike REPAYE, no one will get charged unpaid interest each month when your payment is less than the monthly interest accrued amount under the SAVE plan. This is a significant advantage, as it prevents borrowers from falling further into debt. In other words, interest will never accrue - this is an enormous advantage to the new plan.
Lower Monthly Payment: The SAVE plan goes a step further by protecting 225% of the HHS poverty guidelines in your payment. SAVE now has the lowest monthly payment of any income-based plan.
Option to File Separately: The SAVE plan allows borrowers who file their taxes separately to determine their payment solely on their taxable income.
Automatic Transition: Everyone currently on the REPAYE plan will automatically be transitioned over to the SAVE plan in October 2023
Switching to IBR Plan: After 60 months of payments on New REPAYE/SAVE after July 2024, you will be unable to switch to the IBR plan. As a rule of thumb, the higher your income, the more likely IBR may benefit you vs. SAVE since there are 5 fewer years of qualifying payment before loan forgiveness and the “tax bomb.” Please consult us if you are unsure of your best plan - Zoom meetings are free for AVMA members:
What if I am on PAYE?
If you are currently on this plan, you are grandfathered and can stay on that schedule if it makes financial sense. Generally speaking, the higher your annual income, the more beneficial remaining on PAYE/IBR 2014. This is because loans are forgiven 20 credited years instead of 25 as with SAVE that is replacing REPAYE.
What if I am on IBR 2014 or IBR 2009?
If you are on IBR 2014, you also have the option to remain on the plan with the shorter 20-year forgiveness option. You can also switch to SAVE if it makes good financial sense but will have 5 more years of payments before the loans are forgiven.
If on the old IBR 2009, you should switch to SAVE since the monthly payment will be lower and interest cannot accrue on the balance. Both SAVE and the old IBR 2009 have the same 25-year forgiveness plan. The old IBR 2009 requires a 15% of discretionary income monthly payment, whereas SAVE is only 10%, plus a higher income allowance.
Conclusion
The introduction of the SAVE plan represents a significant development in the world of student loan repayment. While the old REPAYE plan provided valuable options for borrowers, the SAVE plan offers more enhanced benefits. If you are eligible, the SAVE plan might be the game-changer you've been waiting for. However, it's essential to carefully consider your options and consult with a financial advisor to determine the best repayment plan for your unique circumstances. Stay informed, and take control of your student loan journey.
Mason B. Gumm, Author
Bartels, Tony. “A ‘new’ Income-Driven Repayment Plan? Federal Student Debt Proposal Would Change Repaye, Phase out Paye.” VIN Foundation, 25 July 2023, vinfoundation.org/a-new-income-driven-repayment-plan/.
Hornsby, Travis. “Save / New Repaye Guide.” Student Loan Planner, 3 July 2023, www.studentloanplanner.com/new-repaye-biden-idr-save/.
Melanie LockertMelanie Lockert is the founder of the blog and author of the book. “Student Loan Forgiveness in 2023 - 20+ Programs Available Now.” Student Loan Planner, 29 July 2023, www.studentloanplanner.com/student-loan-forgiveness/.