Since March 2020, our financial situations and goals have undergone significant changes. While some individuals have experienced improvements, many are facing greater financial struggles than ever before. The resumption of federal student loan payments in October only adds to the financial stress that millions of people are already dealing with. If you have received your student loan statement and were taken aback by the amount due or if you are avoiding checking your email out of concern for the impending bill, I want to assure you of two things: firstly, you are not alone, and secondly, there are options available to you.
One popular option that borrowers have turned to in order to alleviate the monthly financial burden of repaying student loans is income-driven repayment plans. However, these plans have not always been easy to navigate or as effective as intended. This is where the new Saving on A Valuable Education (SAVE) Plan comes in. Recently introduced by the Department of Education, this income-driven repayment plan is specifically designed to further alleviate the financial burdens that borrowers may face as student loan payments resume. If you are feeling overwhelmed by the pressure of trying to stretch your budget to accommodate a student loan payment, the SAVE Plan may be a helpful solution. Here are some key points to consider:
1. More affordable payments: The SAVE Plan aims to provide the most affordable payments compared to any other income-driven plan for “nearly all student borrowers,” according to the Department of Education. The plan increases the amount of income that is exempted when calculating your payment (referred to as “discretionary income”). Single borrowers earning $15/hour or less can expect to have $0 payments if they enroll in the SAVE Plan, while other borrowers can still anticipate lower monthly payments compared to other plans. Moreover, these payments are expected to be further reduced starting in July 2024, with initial payments being cut in half.
2. No growth in loan balance due to unpaid interest: One common frustration with income-driven repayment plans is that if the monthly payment is unable to cover the accumulated interest each month, the loan balance can actually increase, even if all payments have been made on time and in full. The SAVE Plan addresses this issue by eliminating any remaining interest that is not covered by the monthly payment. For example, if your loans accumulate $100 in interest every month but your SAVE Plan payment is only $75, the $25 difference will be eliminated if you make the payment as agreed. While this means that your loan balance will not decrease (as the payment only covers interest charges), it also means that the balance will not grow, which is a significant advantage of this new plan.