President Joe Biden's new backup student loan forgiveness plan, called Saving on a Valuable Education (SAVE), hopes to find another way to provide debt relief to millions of borrowers following the Supreme Court ruling in Department of Education v. Brown .
The central theses
- Biden said the “fight isn't over” when he announced a new student loan forgiveness plan following the Supreme Court ruling in the Department of Education v. Brown case.
- The Saving on a Valuable Education (SAVE) program will replace the Revised Pay-As-You-Earn (REPAYE) plan.
- The White House claims the SAVE program will halve student loan payments compared to other income-based repayment plans.
- A new initial on-ramp grace period will halt the worst aspects of loan defaults.
According to the White House, the SAVE plan will cut student loan payments in half compared to other income-based repayment plans. The new plan will replace the existing revised Pay-As-You-Earn (REPAYE) plan.
Anyone registered with REPAYE is automatically registered with SAVE. And any borrower with a good direct loan is eligible. The application website is already online.
The Department of Education claims the new plans will relieve millions of people of debt. This could mean that a single borrower earning less than $15 an hour would not have to make student loan repayments. It also said that borrowers' total payments per dollar borrowed will fall by 40% under the new plan. And payments per dollar will fall 83% for those with the lowest projected lifetime earnings, while those with the highest projected lifetime earnings would see a 5% drop.
A new reprieve
Biden announced a plan that would allow borrowers to enroll for a “temporary 12-month ramp-up period” from October 1, 2023 to September 30, 2024. While this isn't officially called a pause in student loan debt, the spike would mean missed payments wouldn't immediately hurt a borrower's creditworthiness, result in wage garnishment, or risk a loan default.
In practice, this means that interest on student loan debt begins accruing on September 1st and payments are due beginning in October. But borrowers have a one-year grace period that avoids the harshest penalties for late payments. The Ministry of Education is still working on the rules for this program.
The Wall Street Journal, citing analysis by Wells Fargo, said yesterday that a typical student loan payment would range from $210 to $314 a month once payments resumed. But that predated the White House announcement.
The President also announced changes to caps on the amount of discretionary income paid to cover student debt. Under the new plan, borrowers will not have to pay more than 5% of their discretionary income on loans, which is lower than the previous 10% cap.
SAVE plan details
Under the new plan, the amount of income protected from payments under the SAVE plan will increase from 150% to 225% of the federal poverty guideline (FPL), meaning a family of four earning less than US$67,500 -Dollars earned per year, will not be required to pay bills.
The Department of Education will stop charging monthly interest not covered by the borrower's payment under the SAVE plan, so borrowers will no longer face mounting credit due to unpaid interest. Additionally, married borrowers who file their taxes separately are not required to include their spouse's income in their payment calculation.
Borrowers pay between 5% and 10% of their income based on the original principal balance of their loans, and those whose original balance was $12,000 or less are forgiven after 120 payments, with an additional 12 for each additional $1,000 borrowed above Payments are added to this level. However, the full SAVE regulations will not come into effect until July 1, 2024.
Higher Education Act
In a 6-3 decision Friday, the Supreme Court blocked Biden's original plan to cancel $430 billion in student loan debt. The President said his administration will take a different route to achieve his goal.
“I believe the court's decision to abolish my student debt relief program was a mistake, wrong,” Biden said. “We will use every means at our disposal to get you the student debt relief you need.”
The new student loan debt relief workaround relies on the Higher Education Act (HEA) as the basis for its authority. The 1965 law was designed to support post-secondary students and institutions. Biden added that using the HEA would allow Secretary of Education Miguel Cardona “to compromise, forego credit, or release credit in certain circumstances.”