The Education Department has officially launched a new student loan repayment program that the Biden administration is touting as the most affordable plan ever. The new initiative, called SAVE, will have a number of features including lower student loan payments and accelerated student loan forgiveness for certain borrowers.
“Borrowers will see their total payments per dollar borrowed fall by 40%” under the new program, said the department in a statement issued last week. “A typical graduate of a four-year public university will save nearly $2,000 a year,” says the department.
But while attention has focused primarily on SAVE’s lower monthly payments — which are particularly relevant as the student loan pause comes to an end and millions of borrowers prepare for student loan payments to resume — there are other, lesser-known features of the plan that will have significant impacts, as well.
Interest Benefits Will Result In Rolling Student Loan Forgiveness
Under previous income-driven repayment plans, there has been no historical requirement that payments cover all accruing interest each month. Consequently, many borrowers with low monthly student loan payments relative to interest accrual have watched their loan balances increase over time, even while they make their required monthly payments. This process of balance growth despite ongoing payments — called negative amortization — has been one of the most significant downsides of income-driven plans, leaving borrowers feeling trapped in debt as they owe increasingly more than what they originally borrowed.
But the SAVE plan ends negative amortization. Each month, the government will waive any interest accrual that exceeds a borrower’s monthly student loan payment. This essentially amounts to rolling forgiveness of student loan interest, and will prevent borrowers’ loan balances from ballooning over time.
To illustrate, a borrower with a total federal student loan balance of $50,000, an interest rate of 6%, and a monthly income-driven payment amount of $100 per month would see their balance increase at the rate $150 per month. Over the course of a 20-year repayment term, their loan balance could reach $86,000. But under SAVE, that $36,000 in interest accrual over time would have been waived.
No More Interest Capitalization Under Biden’s Student Loan Plan
Borrowers who have already accrued interest will also be far less likely to experience interest capitalization under SAVE. Capitalization is the process by which accrued interest is added on to the loan principal, which can have a compounding effect over time. New regulations that went into effect in July will curtail future instances of interest capitalization. These benefits will also be available to borrowers in certain other IDR plans, such as the PAYE and ICR plans.
“As of July 1, 2023, unpaid interest on your loans won’t be added to your principal when you leave any IDR plan, except the Income-Based Repayment (IBR) Plan (where capitalization is required by statute),” says Education Department guidance.
Accelerated Student Loan Forgiveness Under SAVE
While much attention has been focused on SAVE’s affordable repayment formula, the program will also accelerate student loan forgiveness for some borrowers.
SAVE is similar to other IDR plans in that any remaining student loan balance would be forgiven after 20 or 25 years (depending on the type of loans that the borrower has). But SAVE also offers an accelerated student loan forgiveness track for borrowers with smaller initial loan balances.
“Borrowers with original principal balances of $12,000 or less will receive forgiveness of any remaining balance after making ten years of payments, with the maximum repayment period before forgiveness rising by one year for every additional $1,000 borrowed,” says current Education Department guidance. “For example, if your original principal balance is $14,000, you will see forgiveness after 12 years.”
This particular feature of SAVE won’t go live until July 2024. But the department notes, “Payments made previously (before 2024) and those made from now on will count toward these maximum forgiveness timeframes.”
Additional Periods Can Count Toward Student Loan Forgiveness
The general rule under prior IDR plans was that only time spent in an IDR program can count toward student loan forgiveness. Most periods of deferment and forbearance would not count. And consolidating loans could reset the clock.
But under SAVE, starting next year additional periods can count toward student loan forgiveness. These includes cancer treatment deferments, military service deferments, post-active-duty deferments, national service forbearances, National Guard Duty forbearances, Department of Defense student loan repayment program forbearances, and certain administrative forbearances. In addition, borrowers in other types of deferment and forbearance that normally don’t count toward student loan forgiveness will be able to make “catch-up” payments to get credit for those periods.
Notably, under SAVE, borrowers who consolidate their loans will no longer lose all of their credit toward student loan forgiveness. “They will receive credit for a weighted average of payments that count toward forgiveness based upon the principal balance of the loans being consolidated,” says Education Department guidance.
Automatic Income Recertification For Student Loan Payments
One of the biggest historical problems with IDR plans has been the requirement that borrowers affirmatively recertify their income every year. Failure to recertify resulted in interest capitalization, a sudden increase in monthly payments, and lost credit toward student loan forgiveness. These problems were compounded by loan servicing issues, including processing delays and failure to send timely notices to borrowers.
But under SAVE, borrowers will have the option to enroll in automatic annual income recertification by consenting to allow the IRS to share their income information with the Education Department.
“If you agree to the secure disclosure of your tax information, we and your loan servicer will automatically recertify your enrollment in IDR and adjust your monthly payment amount once a year. You’ll be notified when your payment is changing and you’ll always be able to recertify your plan manually,” says the department. While this feature technically won’t be available until next year, borrowers can consent to the disclosure now when they first enroll, so that they’ll be set up for automatic income recertification next year.
Enrolling in automatic income recertification may also prevent some borrowers from defaulting on their loans. “Borrowers who are 75 days late will be automatically enrolled in IDR if they have agreed to allow the U.S. Department of Education to securely access their tax information,” according to guidance from the department.
Further Student Loan Forgiveness Reading
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