Here’s What Students Need to Know About Biden’s New Income-Driven Repayment Plan

President Joe Biden swung for the fences in his attempt to lower federal student loan payments, but the courts may soon rob him of the home run he was aiming for.

The Biden administration has been working since late 2021 to develop a new income-driven repayment (IDR) plan. That plan — dubbed the Saving on a Valuable Education (SAVE) plan — seemingly crossed the finish line when the Department of Education (ED) submitted it to the Federal Register in January 2023.

The proposal’s goal was clear: Simplify the four existing IDR plans to create a clear best option for federal student loan borrowers.

Federal courts have thrown these plans out of whack in recent months.

On July 18, 2024, the 8th U.S. Circuit Court of Appeals temporarily blocked the implementation of the new SAVE plan, meaning borrowers could no longer take advantage of its lower monthly payments. It later clarified that the department also couldn’t forgive debt through any hybrid IDR plans.

ED quickly placed these borrowers into forbearance, which halts interest from accruing.

It remains unclear how court battles will unfold. In the meantime, let’s examine what the SAVE plan would do if allowed to operate as intended.

Federal student loan borrowers, by default, have 10 years to pay back their loans. Monthly payments depend on the total amount owed, with interest tacked on based on the remaining balance.

That monthly payment may be unaffordable for many borrowers. Typically, this is because the balance has ballooned due to interest or because the borrower doesn’t have a high-paying job.

That’s where IDR comes in.

Instead of a monthly payment based on the amount owed, IDR monthly payments are a percentage of a borrower’s discretionary income. Federal Student Aid calculates discretionary income differently depending on each IDR plan — there are four — but it’s always determined using the federal poverty level. The different plans also charge different percentages of discretionary income.

In some cases, a borrower may qualify for $0 monthly payments.

Unlike the standard repayment plan, IDR borrowers don’t have to repay the entire debt balance. Borrowers who make 20-25 years of qualifying payments — depending on the IDR plan and what the loans were used for — can have their remaining debt erased, no matter the balance.

Biden’s administration heavily amended the Revised Pay As You Earn (REPAYE) repayment plan, which was one of the four existing IDR plans.

To understand how this new plan differs, it’s helpful to know how the previous four plans differed.

Confused?

That’s part of the reason Biden’s action not only amended the REPAYE plan but effectively sunset some of the existing plans. If the new plan goes into full effect, borrowers will no longer be able to enroll in the PAYE or ICR plans unless they are Parent PLUS loan borrowers consolidating into ICR. Only those with limited circumstances will be able to enroll in IBR.

The new SAVE plan raises the amount of income not counted as discretionary income from 150% of the federal poverty guideline to 225%.

If the loan balance comprises only undergraduate student loans, then the borrower pays just 5% of their discretionary income under the SAVE plan.

If there are graduate loans mixed in, then the borrower pays between 5% and 10%. The exact percentage is calculated using a weighted scale dependent on how much of the debt is undergrad debt versus graduate debt.

Like other IDR plans, borrowers can qualify for $0 monthly payments under SAVE if their annual income is low enough.

The threshold depends on the federal poverty guidelines each year and family size.

Because all income under 225% of the federal poverty guideline is excluded from discretionary income, households with the following salaries in most states can qualify for $0 monthly payments under the 2024 guidelines:

Alaska and Hawaii have slightly higher federal poverty guidelines.

The Biden administration announced in November 2023 that of the 5.5 million borrowers enrolled in SAVE at the time, 2.9 million had $0 monthly payments.

The timeline for forgiveness under the SAVE plan will remain 20 years of qualifying payments for borrowers with undergraduate loans only.

Technically, it’s 240 months of qualifying payments. That means if a borrower puts their loans in forbearance for one year, for example, the time in forbearance will not count. It will take that borrower 21 years for their debt to be erased.

Borrowers with graduate loans must make 300 months of qualifying payments; the equivalent of 25 years.

The proposal also grants complete forgiveness for borrowers who make 10 years’ worth of payments if their original loan balance was $12,000 or less.

Borrowers are currently unable to enroll in the SAVE plan due to ongoing litigation.

The SAVE plan was originally set to go into effect on July 1, 2024. However, ED instituted some aspects of the plan early, beginning on July 30, 2023. This included increasing the income exemption to 225% of the poverty guideline — lowering monthly payments — and not charging accrued interest on a loan when a borrower makes a payment under IDR.

ED released the official application for the SAVE plan on Aug. 22, 2023, soon after the resumption of student loan payments after a three-year pandemic payment pause.

Approximately 5.5 million borrowers enrolled in the SAVE plan in the first three months, according to the department.

It’s important to note that Parent PLUS borrowers are not able to enroll in the SAVE plan as proposed.

For this exercise, let’s compare the SAVE plan to the previous REPAYE plan. We’ll also use a few different income levels to exemplify the differences.

Just assume the borrower in this example only has undergraduate loans and lives in a solo household where the federal poverty line is pegged at $15,060, which is the 2024 standard for all states except Alaska and Hawaii.

In short: yes and yes, if it’s made available again.

Carolina Rodriguez, director of the Education Debt Consumer Assistance Program, told BestColleges that this new plan is the best option for students hoping for debt forgiveness 20 years down the line. This plan is also the best option for those who hope to have debt erased through the Public Service Loan Forgiveness (PSLF) program.

Additionally, those enrolled in a different IDR plan should not be worried about losing progress on their timeline to forgiveness. Rodriguez said borrowers maintain any credit they’ve earned toward a forgiveness program if they switch.

She said the easiest way to switch plans is through the Federal Student Aid website. If the SAVE plan is made available again, borrowers may also call their loan servicer to enroll in or switch IDR plans if they prefer that option.

The application can take as little as 15 minutes to complete, Rodriguez said.

It’s been a long road to arrive at this new IDR plan.

ED officials first met with higher education stakeholders in late 2021 to develop a new IDR plan in a process called negotiated rulemaking. However, most negotiators — which included student borrower advocates and institutional representatives — were unhappy with the department’s December 2021 proposal, saying it didn’t go far enough to create affordable monthly payments.

That 2021 proposal would have protected all income below 200% of the federal poverty line. Borrowers would have to pay 5% of their discretionary income between 200% and 300% of the line and 10% of income above 300%.

The plan also completely excluded all graduate student debt, perturbing negotiators. The new plan, meanwhile, includes graduate debt but forces borrowers to pay a higher percentage of their discretionary income on that debt.

ED cannot implement any part of the SAVE plan due to an administrative stay issued by the 8th U.S. Circuit Court of Appeals.

The court decision means that the department must halt implementation of the SAVE plan until the appeals court issues a final decision in the case or the U.S. Supreme Court takes up the case. Around a dozen attorneys general from Republican-led states filed lawsuits against ED and Biden over the IDR plan in April 2024.

In the meantime, those already enrolled in SAVE won’t have to make loan payments.

ED placed all borrowers enrolled in SAVE into administrative forbearance on July 19, 2024. Interest will stop accumulating on borrowers’ loans while in forbearance, but time spent in forbearance won’t count toward the timeline to forgiveness.

The court later clarified that ED cannot forgive student loan debt for any borrowers who benefited from the SAVE plan, even if they reached the 20- or 25-year timeline toward forgiveness.

The department did not state how long this forbearance may last.