Many people have heard about some changes coming to student loans specifically the repayment side of student loans. The major change for students entering repayment is that a new repayment plan has been added. This is the SAVE plan which stands for “Saving on a Valuable Education” Plan. The hope for this plan is to make it easier for people who have taken out loans to pay off said loans. The way that this plan is different from the original repayment plan is that it is supposed to make monthly payments more manageable for individuals and families.
The SAVE plan is in the form of an Income-Driven Repayment plan which essentially means that your monthly payment is determined as a percentage of your income. The SAVE plan will take the place of the REPAYE plan which stood for the “Revised Pay as You Earn” plan. With the new SAVE plan, monthly payments are based on income and family size. This will make it so your monthly payment changes if you have more members of your family. Through this action, people with families should have an easier time making student loan payments every month. The SAVE plan is a good option for lots of people but make sure that you check to see if the SAVE plan is right for you.
Not all loans are eligible for the SAVE plan so make sure to check and see if yours are eligible. The loans that are eligible include:
- Direct Subsidized Loans.
- Direct Unsubsidized Loans.
- Direct PLUS Loans made to graduates or professional students.
- Direct Consolidation Loans that did not repay any PLUS loans made to parents.
The SAVE plan began being rolled out this month to individuals already in repayment. Some other updates to the Income-Driven Repayment plan loan forgiveness guidelines also changed. The main change is the length of time that it takes for loans to be forgiven. Loan forgiveness used to take anywhere from 20-25 years, with the updates loan forgiveness can take as little as 10 years depending on your total loan amount. The terms of loan forgiveness are described as if a borrower has $12,000 in loans or less then their forgiveness timeline will be 10 years. Every additional $1,000 that borrowers add to total loans taken out a year gets added to their forgiveness timeline with a maximum of 20 years for undergraduate loans. For example, if an individual takes out $20,000 in loans their forgiveness timeline will be 18 years. The maximum forgiveness for graduate students will be 25 years as these balances tend to be higher.
Another change that is coming later this year with the SAVE plan is that monthly payments for borrowers will be cut in half. This change will take effect in July of this year and will generate monthly payments based on 5% of the borrowers’ discretionary income as opposed to 10% with the current plan. Along with this, those borrowers with a mix of graduate and undergraduate loans will have a rate between 5-10% weighted based on the total of each classification of loan.
The main question an individual may ask is what happens to the extra interest that is not paid with the decreased monthly payment? For example, if an individual has a monthly payment of $60 and their total interest accumulated for the month is $100 there would still be $40 left in interest to be covered. With other IDR plans, this $40 would have been added to their loan balance but with the SAVE plan, this extra interest is actually forgiven by the government. Although this means that your loan balance will not decrease it also means that it will not increase.
The most complicated part of the SAVE plan is the portion on determining the monthly payment. For this example, we will say we are a recent graduate with the average salary coming out of K-State which is $53,500 as of a release in January of 2023. The equation to determine your monthly payment is equal to:
- Calculate your Protected Income: First, you will go through and calculate your poverty level in regard to your family size. For 2024 a single person’s poverty level measures in at $15,060. For most other income-driven repayment plans you would multiply this number by 1.5 or 150% but for the SAVE plan, you multiply this by 2.25 or 225%. This would mean your Protected Income would be equal to $33,885.
- Calculate Annual Discretionary Income: The next step would be to go through and calculate your Discretionary Income which is your Adjusted Gross Income minus your Protected Income. Meaning you will subtract $33,885 from $53,500 which is equal to $19,615.
- Calculate Estimated Monthly Payment: The final step will be to calculate your monthly payment. To do this you will take the discretionary income of $19,615 and multiply it by 10% then divide it by 12 to calculate for each month. The percentage will change in July so in this example we will look to see what the monthly payment will look like at 5% as well. For the 10% example, the monthly payment would equal out to about $163.46. For the 5% example which will be more applicable for upcoming graduates, the monthly payment will be equal to about $81.73.
Students looking to calculate their monthly payments can also use Loan Simulator located on the Student Aid Website. If you have any questions about loans and repayment, make sure to make an appointment with us at Powercat Financial.
Keaton Verdict
Peer Financial Counselor I
Powercat Financial
