Alice Morgan, Photo Illustration for Investopedia by Getty Images
The Key Takeaways
- Federal student loan borrowers enrolled in the Saving for a Valuable Education (SAVE) plan will be able to apply for two previously closed repayment plans starting in mid-December.
- Borrowers of the SAVE plan are currently on forbearance, and they cannot make any payments towards forgiveness. Borrowers eligible for Public Service Loan Forgiveness plan (PSLF) may choose to stop forbearance in order to make progress toward loan forgiveness.
- These two revived plans offer borrowers more options and more generous monthly payments than a standard repayment plan or the Income-Based Repayment (IBR) plan.
- The Department of Education anticipates the lawsuit will last for at least another five months. There are some who may wish to change their repayment plan in an effort to lessen the uncertainty they feel about SAVE.
To give more options to borrowers who are stuck, the Department of Education plans to release applications next week for two repayment programs that were created in previous years.
As ongoing lawsuits have frozen the department’s Saving for a Valuable Education (SAVE) plan, millions of borrowers under the repayment plan were placed into forbearance and unable to make progress toward loan forgiveness.
The Department of Education has reinstituted repayment plans, which may not offer as much as the SAVE program but can still help in different situations.
What Are My Options
Due to the Eighth Circuit Court of Appeals ordering the government in July to pause SAVE, IBR and Standard Repayment Plan are the only two active options for borrowers. The SAVE program was available to enrollees, however their loans were put on hold while their applications were processed.
Starting next week, borrowers can apply to the Income-Contingent Repayment (ICR) and Pay As You Earn (PAYE) plans to get out of the SAVE plan.
The following are details about each plan available:
- Standard Repayment PlanThis plan is automatically selected for borrowers who don’t choose a plan. Because the monthly payment is fixed, and spread over 10-30 years, it’s usually higher than other repayment plans.
- Rent-Based Repayment Plans: The monthly payment is equal to 15 percent of your income discretionary (the difference between the annual income you earn and 150 percent of poverty guidelines), divided by 12
- The Pay as You Earn PlanPayments are generally 10% of discretionary income, (the difference in your income between 150% and your poverty guideline), multiplied by 12.
- Income-Contingent Repayment Plan: You would choose the less expensive of two plans. This plan allows you to pay monthly payments based on the repayment amount that you would have paid under a 12-year standard repayment schedule, adjusted for your life situation and income. The formula is based on a number of different factors, and it’s calculated differently depending on the person. You can also pay 20% of your discretionary earnings (the difference in your income between 100% poverty guidelines and your annual income) divided by 12
Depending on your situation, some options might be more suitable than others.
Public Service Loans
For several months, borrowers enrolled in the SAVE plan have been unable to make qualifying payments toward total loan forgiveness under the Public Service Loan Forgiveness (PSLF) program.
You can continue to make progress towards PSLF forgiveness by applying for another repayment plan. Borrowers would be closer to the forgiveness if they made payments under one of the plans available. You may still be able pay your loan off before making the 120 payments required under the 10-year Standard Plan, but it will depend on where you stand in relation to the forgiveness.
If You're Enrolled in the Standard Repayment Plan
Even though the income-driven repayments plans ICR or PayE are not as generous, they would still reduce monthly payments of borrowers on a standard repayment plan.
The estimated monthly payment must be lower than that of a 10-year standard repayment plan. If you want to be considered for a PAYE Plan, your loan must have been received after October 1, 2011. Or you can consolidate your loans.
Are You Making Big Decisions and Want More Clarity?
SAVE Plan borrowers will remain in forbearance while the litigation surrounding the plan is settled. According to the Department of Education, borrowers are expected to be under forbearance at least for five months.
Some borrowers are also concerned about Donald Trump’s victory and the future of SAVE or PSLF.
The uncertainty caused by the lack of clarity has left many in a state of limbo, and prevented others from making any significant financial plans. You can apply for one of the options if you need to make major decisions about your finances and want to know how much you will pay in student loans over time. PAYE, or ICR, would result in the least amount of payments for you if you qualify.
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