July SAVE Plan Changes: Student Loan Bills Halved for Millions

Editor’s note: On the evening of June 24, a U.S. federal judge in Kansas blocked the SAVE updates from occurring as planned on July 1. This is a developing story.

A generous federal student loan repayment plan is about to get even more affordable.

On July 1, the Education Department will roll out the last remaining features of the Saving on a Valuable Education (SAVE) plan — and millions of borrowers with undergraduate loans could see their monthly bill slashed by half.

SAVE debuted to borrowers last summer, but only some of the plan’s features were available at that time, like $0 payments for lower- and middle-income borrowers and an automatic interest subsidy. In February, the White House began forgiving SAVE borrowers’ remaining debt after 10 years of repayment if they took out $12,000 or less — compared to 20 or 25 years on other repayment plans. Nearly 8 million borrowers have enrolled in SAVE and 4.6 million qualify for $0 payments, as of May.

If you’re not enrolled in SAVE yet, take another look and see if you can get a lower payment starting in July. You can gauge your payoff journey with the Education Department’s loan simulator; the Community Service Society of New York also offers a SAVE calculator that estimates payments before and after the July recalculation.

“There’s no downside to seeing what’s available to you,” says Devin McCombs, a Denver-based certified financial planner and certified student loan professional. Apply for SAVE on StudentAid.gov/IDR, or reach out to your student loan servicer directly.

And if you’re already enrolled in SAVE, the smaller bills and other changes will be automatic. You also could get a payment pause in July as servicers implement the changes.

SAVE is an income-driven repayment (IDR) plan, which means that it calculates your monthly payments based on your income, rather than how much you owe. Starting in July, borrowers with undergraduate loans only will see their monthly SAVE payments cut in half, from 10% down to 5% of their discretionary income. So, if you previously had a $400 SAVE bill, that could shrink to $200. Borrowers who enroll in SAVE for the first time will also have access to that new, lower payment.

Borrowers who only have graduate school debt will be unaffected by this change. Their payments will remain 10% of their discretionary income.

Borrowers who have both undergraduate and graduate loans will pay a weighted average between 5% and 10% of their income, based on the original principal balances of the student loans they took out.

For example, if you borrowed $10,000 for your undergraduate degree and $15,000 for your master’s degree, your monthly SAVE payment would be 8% of your income. If you took out $10,000 for undergrad and $10,000 for grad school, your payment would be 7.5% of your income.

Under the SAVE plan, borrowers can get their remaining debt forgiven after 10 to 20 or 25 years of payments, depending on their original loan balance and whether they have undergraduate or graduate school debt. Borrowers eligible for Public Service Loan Forgiveness (PSLF) can get forgiveness after 10 years, regardless of amount or type of debt.

In the past, periods of deferment and forbearance didn’t usually count toward this forgiveness clock. But starting July 1, SAVE borrowers will automatically get forgiveness credit for specific payment pauses — like those related to unemployment, cancer treatment, military service and natural disasters. Credit for deferments also can be retroactive.

​Borrowers will be allowed to make additional “buyback” payments to get credit for most other periods of deferment or forbearance that don’t qualify for automatic credit.

“If someone was on an income-driven repayment plan, then went into forbearance and then went back into the income-driven repayment plan, they can actually buy back those months, or go back and make those payments,” explains Jantz Hoffman, executive director of the Certified Student Loan Board of Standards, a nonprofit that helps financial planners and their clients make student loan decisions.

This is significant for borrowers eligible for Public Service Loan Forgiveness, who can get forgiveness after 10 years of payments while working a qualifying job. However, there’s currently a PSLF program transfer underway from the servicer MOHELA to the Education Department — so it’s unclear how exactly this buyback process will work in practice, Hoffman says.

“It’s ‘to be determined’ on how it will actually take place,” Hoffman says. “But, in theory, the borrower should be able to make payments which equate to the lower of the two income-driven repayment calculations, either when they went into forbearance or when they came out of it, which creates an opportunity for borrowers to actually have an even lower payment longer.”

Borrowers with payments at least 75 days late will be automatically enrolled in the SAVE plan if they previously agreed to give the Education Department access to their tax information.

Many borrowers in this situation may qualify for $0 SAVE payments, based on their income. A borrower must have an income below $32,800 as an individual or $67,500 as a household of four to qualify for $0 payments.

If you’re already enrolled in SAVE, you might be allowed to skip your July bill without consequences.

The Education Department directed federal student loan servicers to place some SAVE borrowers into an administrative forbearance in July as they apply the smaller payment amounts to borrowers’ accounts, according to the department.

“While borrowers are in this specific forbearance, no payment is required, their interest rate will be set to 0%, and they will receive credit toward IDR forgiveness and Public Service Loan Forgiveness (PSLF),” a department spokesperson said in a statement.

Borrowers put into the July forbearance will begin making their recalculated SAVE payments in August. All other SAVE borrowers will start making their recalculated SAVE payments in July.

However, a July payment pause isn’t guaranteed if you’re enrolled in SAVE. Affected borrowers received emails from their servicers earlier this month with the subject line: “Your Student Loans Have Been Placed into A Forbearance,” according to a copy of the email reviewed by NerdWallet.