November 2, 2023 by Rachel Ryan
Following the SCOUTS decision to strike down the Biden administration's student loan forgiveness plan, most borrowers began making student payments last month after the three-year COVID freeze. The Biden administration announced a new income-driven repayment (IDR) plan for federal student loans called the Saving on a Valuable Education (SAVE). The SAVE program is the government’s most generous student loan repayment plan to date and even affords high-income earners some benefits.
The program is expected to be fully implemented in July 2024 and is available to borrowers with Federal Direct Loans in good standing. SAVE is replacing REPAYE, and current borrowers in REPAYE will automatically be placed into SAVE.
Here are some of the key features borrowers can expect.
Protecting more income: Increases the amount of income protected from payments, going from 150% to 225% of the Federal poverty guidelines. A doctor earning $200,000 a year with $300,000 in medical school loans would see their monthly payment go from $1,496 a month to $1,411, saving a little over $1,000 a year with SAVE.
Cutting undergrad payments in half: Payments on undergraduate loans will be cut in half (from 10% to 5% of incomes above 225% of FPL). Borrowers who have undergraduate and graduate loans will pay a weighted average of between 5% and 10% of their income based on the original principal balances of their loans.
Eliminates negative amortization: If borrowers make their full monthly payments under the SAVE program, the government will cover any remaining interest that accrued that month. This means that borrowers' loan balances will not grow due to unpaid interest.
Spousal income and spousal student debt relief: Married borrowers who file their taxes separately will no longer be required to include their spouse’s income in their payment calculation for SAVE. These borrowers will also have their spouse excluded from their family size when calculating IDR payments. This will most benefit households where both spouses have similar incomes, and one spouse has a very large outstanding student loan balance.
Tax implications of loan forgiveness: Typically, under IDR plans, when a borrower has debt forgiven, the amount forgiven is treated as earned additional income, increasing the borrower’s AGI for that tax year. However, the American Rescue Plan Act (ARPA) temporarily exempted student loan forgiveness under IDR plans from federal taxation through 2025. We will have to wait and see if Congress decides to make this exemption permanent.
Eliminated consolidation penalty: Borrowers will receive credit for payments made prior to a consolidation based upon a weighted average of the principal balances in the loans being consolidated rather than having their progress toward forgiveness reset.
For those who owe more than they earn, like medical residents and recent graduates, the SAVE program is a clear winner. It is also prudent for borrowers take advantage of qualified savings accounts like 401(k), 403(b) and defined benefit plans as they reduce their AGI thus lowering their monthly loan payment.