Here’s what to know about new federal policies for repaying student loans

WASHINGTON — Following the Supreme Court’s summer ruling against 40 million federal student loan borrowers who would have qualified for debt relief, the Biden administration crafted a year-long delay in repayments.

The policy, known as an on-ramp, is set to begin next month.

Additionally, hours after the Supreme Court’s decision, the Department of Education unveiled a new repayment plan for those with federal student loans, known as Saving on a Valuable Education, or SAVE.  The new income-driven repayment plan calculates payments based on a borrower’s income and family size and forgives balances after a set number of years.

It’s estimated by the administration that more than 20 million borrowers will benefit. Borrowers can apply here. A campaign is being launched to publicize the new program, by the Department of Education in collaboration with groups like the Student Debt Crisis Center, UnidosUS and the NAACP.

“This plan is a game changer for millions of Americans, many of whom are putting off having children, buying their first home, or even starting a business because they can’t get out from under their student loans,” said White House Domestic Policy Advisor Neera Tanden on a call with reporters on Monday. “Student loans will be manageable.”

Last year, the Biden administration rolled out a debt forgiveness plan for borrowers with federal student loans that would have been a one-time cancellation of up to $10,000. Borrowers who had received Pell Grants — federal aid to help low-income students pay for higher education — could qualify for an additional $10,000 in forgiveness.

The conservative bloc of the Supreme Court on June 30 ruled that the Biden administration did not have the legal authority to enact that one-time student debt relief program. The case was filed by Republican attorneys general of Nebraska, Missouri, Arkansas, Iowa, Kansas, and South Carolina, and they argued the Biden administration overstepped its reach.

Following that decision from the court, the Biden administration initiated rulemaking through the Higher Education Act to try again to enact debt relief, and finalized a rule for the new repayment plan known as SAVE.

Here are some questions and answers about the on-ramp policy and SAVE plan.

When does the on-ramp program start?

Federal student loan repayments are set to resume in October, but while borrowers have a year of leniency to begin repayments, interest will continue to accrue starting in September. The on-ramp program starts Oct. 1 and will extend until Sept. 30 of next year.

“Financially vulnerable borrowers who miss monthly payments during this period are not considered delinquent, reported to credit bureaus, placed in default, or referred to debt collection agencies,” according to a fact sheet released by the White House.

The Department of Education did not respond to questions from States Newsroom asking how the agency would prevent loan servicers from reporting borrowers to credit bureau or debt collectors.

How is the on-ramp policy different from the pause on federal student loan repayments?

The pause on federal student loan repayments was first put in place by the Trump administration in 2020 at the start of the coronavirus pandemic, and has been extended several times.

The pause meant those with federal student loans did not have to repay, and no interest accrued. With this new policy, interest will still accrue, but borrowers have a year before having to start paying back their loans.

What does a final rule for the SAVE plan mean?

This is an income-driven repayment plan that the Department of Education said will cut borrowers’ monthly payments in half. The official launch of the application was Tuesday.

“This is a giant step forward in decreasing the burden of crushing debt that rests on so many borrowers’ shoulders,” Senate Majority Leader Chuck Schumer said in a statement. “Low-income students, whose burdens will be cut in half, and most other students, who will never pay more than 5% of their income, will breathe a sigh of relief across every corner of America.

“While there will be those that will challenge this in court, the administration has carefully crossed the legal t’s and dotted the legal i’s. The fight to cancel student debt is far from over, but this is a massive step in the right direction. President Biden deserves accolades and support for this action.”

A borrower could save more than $1,000 per year on payments, compared to other income-driven repayment plans. And, depending on income levels, it will allow more than 1 million additional borrowers to make $0 monthly payments without their interest accruing, the Department of Education estimates.

How does the SAVE plan work?

Borrowers with undergraduate loans will pay 5% of their discretionary income, rather than the 10% required under previous income repayment plans. Borrowers with undergraduate and graduate loans will pay a weighted average between 5% and 10% of their incomes.

The White House said a borrower’s monthly payment will be based on their discretionary income, defined in the plan as the difference between their adjusted gross income and 225% of the U.S. Department of Health and Human Services poverty guideline amount for the family size. Borrowers who earn a minimum wage of $15 an hour will not have to make a monthly payment.

According to the Department of Education, that means borrowers will not owe loan payments if they are a single person earning $32,800 or less or a family of four earning $67,500 or less, though the amounts are higher in Alaska and Hawaii.

The plan also forgives loan balances after as little as 10 years of payment, rather than 20 years under previous income repayment plans. The plan also does not charge borrowers with unpaid monthly interest, as long as those borrowers are making their monthly payments.

Who qualifies for the SAVE student loan repayment plan? 

Most federal student loan borrowers are going to qualify for this plan. However, those with Direct PLUS loans to parents and certain other loans will not qualify for it; the list can be found here.

Borrowers signed up for the current Revised Pay as You Earn (REPAYE) plan will automatically be enrolled in SAVE.

How is SAVE different from previous federal student loan repayment plans?

With this plan, if your calculated payment ends up to be less than the amount of interest that accrues every month, that remaining interest will be forgiven. The previous plan did not have that element, so borrowers were continuing to see their balances grow.