On Borrowed Time?
THE CONTROVERSY over student loans has caught up with the latest federal government repayment program. That program is known as SAVE, or Saving on A Valuable Education.
SAVE is an income-driven repayment plan, or IDR. It’s the sixth iteration of an IDR plan. Due to the favorable terms and the high estimated price tag, it was recently halted by legal challenges.
IDR plans follow the same general formula to determine the monthly payment on student loan debt. The formula is:
Adjusted gross income
Minus a poverty line deduction that’s multiplied by 150% for all plans, except SAVE, which is multiplied by 225%
Equals discretionary income
Borrowers are then expected to pay a certain percentage of their discretionary income, depending on which IDR plan they’re on. SAVE has the most generous terms of all IDR plans due to four key provisions:
Bigger deduction. SAVE has a 225% multiplier on the poverty line deduction, which means a bigger amount of a borrower's income is protected from required payments. In 2024, the poverty line for a single individual is $15,060. This means that a single borrower's first $33,885 of income is protected from loan payments with the SAVE plan, compared to $22,590 with other IDR plans.
Lower payments for undergraduate borrowers. Depending on the plan, IDR plans have had a formula that required paying 10% to 20% of discretionary income. Starting July 1, the SAVE plan requires just 5% of discretionary income be put toward undergraduate debt and 10% toward graduate debt, or a weighted average of the two if the borrower has both types of debt. This means that, if a borrower has equal undergraduate and graduate debt, his or her required payment would be 7.5% of discretionary income.
Bigger interest subsidies. The unique thing about IDR plans, relative to other debt payments, is that the payment amount is determined by discretionary income, not by the size of the loan, interest rate, term of the loan and so on. This means that student loan debt balances can—and often do—increase over time.
To combat this, some earlier IDR plans have had limited interest-rate subsidies. But to eliminate the chance of ballooning loan balances, SAVE has a 100% interest subsidy on all unpaid interest.
Take a single individual making $30,000 a year with $100,000 of student debt at 7% interest. If this borrower is on the SAVE plan, her required payment would be $0 because she falls below 225% of the poverty line. Her $100,000 of student loans would have $7,000 a year of interest. That interest would be fully forgiven each month and thus never get added to the $100,000 debt balance.
Quicker forgiveness for certain borrowers. If you're on an IDR plan for a certain amount of time, you’re eligible for forgiveness. The IDR plan determines how long until forgiveness, which is either 20 or 25 years.
But the SAVE plan allows for forgiveness in as little as 10 years, depending on how much was originally borrowed. If the borrower took out a total of $12,000 or less, he'd get forgiveness in 10 years. If he borrowed between $12,000 and $21,000, he could get forgiveness between 10 and 20 years.
Some of these policies were set to go into effect on July 1. But about a week before, they were blocked due to court injunctions. The states of Missouri and Kansas argue that the SAVE plan is illegal, and specifically that two pieces of the SAVE plan are too generous: the 5% payments on undergraduate debt and the quicker forgiveness for smaller original debt balances.
Only time will tell what’s next for the student loan world and for the SAVE plan, and how much of the plan survives, if any. And if it does survive these court cases, it may have a whole new set of challenges pending the results of the upcoming election. What should borrowers do in the meantime? For now, borrowers’ best bet is to keep paying on their loans as usual.
Logan Murray is a solo financial advisor. His company Pocket Project offers subscription-based financial planning services to young professionals. He’s also a consultant for StudentLoanPlanner.com, which helps borrowers make a plan for their student loans. For more financial insights, check out Logan’s blog, connect with him on LinkedIn and check out his earlier articles.
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