Reduced Student Loan Payments: The New Federal Repayment Plan

Updated: Feb 22

On August 24, 2022, President Biden announced the forgiveness of $10,000 in Federal student loans for singles with incomes of no more than $125,000 and couples with incomes of no more than $250,000. What many people overlooked was that a new income-driven repayment plan was announced the same day--a new income-driven repayment plan. The new plan, which is called the Saving on a Valuable Education (SAVE) plan, resulted in the US Department of Education forgiving $1.2 billion on February 21, 2024.

What’s An Income-Driven Loan Repayment Plan?

An income-driven loan repayment plan is one that caps your loan payments at a given percentage of income. A base level of income is typically protected to ensure that people in or near poverty are not required to make loan payments.

Who Can Benefit from the Saving on a Valuable Education (SAVE) Plan?

The new income-driven repayment plan will be restricted to:

· undergraduate students

· Federal student loans

How Much Income Do Borrowers Pay Under the New Repayment Program?

Borrowers pay no more than five percent of their disposable income towards repaying their undergraduate student loans. Under the current income-driven repayment plans, borrowers pay as much as ten or 15 percent of their income towards their student loans.

Does Interest Accrue?

No, interest does not accrue under the new loan repayment program as long as borrowers make on-time payments. Under the other income-driven loan repayment programs, interest accrued if it was not paid. Consequently, loan balances could grow after the borrower had stopped borrowing to attend college.

Is The Loan Forgiven After a Certain Number of Years?

Yes, under the new income-driven loan repayment program, the loan is forgiven after ten years, provided that the original loan balance was $12,000 or less. Under most of the other income-driven loan programs, the loans were not forgiven until 20 years.

Will I Have to Pay Taxes on the Balance of the Forgiven Loan?

Perhaps. There is currently a moratorium on Federal taxation of forgiven loans. That moratorium expires after the tax year covering 2025. States might tax forgiven student loans.

Will the Program Comply with the Department of Education’s Written Guidance?

Not necessarily.

The program is not clearly authorized by statute. Typically, programs are created explicitly by Congress in statute. This program is being created by a regulation issued by the current Presidential Administration. The next administration could just as easily decide to eliminate or alter it without first getting Congressional approval.

Past loan forgiveness programs have not complied with the U.S. Department of Education’s guidance. The US Department of Education’s employees have complained about how the Public Service Loan Forgiveness (PSLF) program was administered for their own student loans. The complaints include:

The loan servicer failed to credit payments made during deferment even though the US Department of Education’s written guidance at the time explicitly stated that those payments would count towards the required ten years of repayment.
The failure of a loan servicer to credit timely loan payments after a loan was transferred from one servicer to another servicer. (The two loan servicers kept data in different formats.)

On the positive side, this new income-driven loan repayment program should be far more common than PSLF. Given its likely widespread use, the program will likely receive oversight and attention. The oversight increases the likelihood that the program will be administered consistent with the US Department of Education’s written guidance.