ICYMI: Washington Post (Column): "Why Biden's new SAVE student loan income-driven plan is a game changer"

Today, the Washington Post wrote a piece on why President Biden's new SAVE student loan income-driven plan is a game changer. The Biden-Harris Administration believes that education beyond high school should unlock doors to opportunity, not leave borrowers stranded with debt they cannot afford. That's why, from day one, President Biden and Vice President Harris have been working to fix the broken student loan system and make college more affordable.

Last week, the Biden-Harris Administration launched of the most affordable repayment plan ever created – the Saving on a Valuable Education (SAVE) plan and kicked off an outreach campaign to encourage eligible borrowers to sign up for the plan.

The SAVE plan is an income-driven repayment plan that calculates payments based on a borrower's income and family size – not their loan balance - and forgives remaining balances after a certain number of years. The SAVE plan will cut many borrowers' monthly payments to zero, will save other borrowers around $1,000 per year, will prevent balances from growing because of unpaid interest, and will get more borrowers closer to forgiveness faster. The SAVE plan builds on the actions the Biden Administration has already taken to support students and borrowers, including cancelling more than $116 billion in student loan debt for 3.4 million Americans.

Borrowers can sign up today by visiting StudentAid.gov/SAVE

Read full story below:

Washington Post: Why Biden's new SAVE student loan income-driven plan is a game changer
[Michelle Singletary, 8/30/23]

For many student-loan borrowers, interest capitalization has been the bane of their existence.
It's why loans that might have been reasonably affordable become financially debilitating after years of deferment or forbearance.

Balances balloon when a borrower's monthly loan payments do not cover the interest because it's tacked onto the principal. Interest is then applied to the new, larger loan amount. This is how the debt grows over time and can make the monthly payment unmanageable.

But under a new income-driven repayment plan — the Saving on a Valuable Education (SAVE) Plan — borrowers won't see their balances grow even if their payments don't cover the interest they owe. This could be a game changer for folks who would otherwise be trapped in loan payments for decades.

Like other income-driven repayment plans, SAVE calculates monthly payments based on a borrower's income and family size. It is now the most affordable repayment plan, according to the Education Department.

There are many great features of SAVE — some that were implemented this summer and others that begin July 1, 2024.
But the one about interest capitalization in effect now is significant.

Here's how interest works on a SAVE plan.

Let's start with the amount of income protected from payments: That benchmark will increase from 150 percent to 225 percent of the federal poverty guidelines.

This means a single borrower earning $32,805 or less ($67,500 for a family of four) will not owe a loan payment. Borrowers who earn more would save more than $1,000 a year on their payments compared with other income-driven repayment plans.

The Education Department estimates that more than 1 million low-income borrowers will qualify for a $0 payment. Over 20 million borrowers overall could benefit from the SAVE plan, according to a White House fact sheet.

You may wonder, as I did, what about the interest that isn't being paid?

The Education Department will not charge any monthly interest not covered by the borrower's payment. This means borrowers who pay what they owe on the SAVE plan — even if it's zero dollars every month — will not see their loan balances grow because of unpaid interest.

Here's how interest works on a SAVE plan.

Let's start with the amount of income protected from payments: That benchmark will increase from 150 percent to 225 percent of the federal poverty guidelines.

This means a single borrower earning $32,805 or less ($67,500 for a family of four) will not owe a loan payment. Borrowers who earn more would save more than $1,000 a year on their payments compared with other income-driven repayment plans.

The Education Department estimates that more than 1 million low-income borrowers will qualify for a $0 payment. Over 20 million borrowers overall could benefit from the SAVE plan, according to a White House fact sheet.

You may wonder, as I did, what about the interest that isn't being paid?

The Education Department will not charge any monthly interest not covered by the borrower's payment. This means borrowers who pay what they owe on the SAVE plan — even if it's zero dollars every month — will not see their loan balances grow because of unpaid interest.

"This will allow them to focus on food, rent, and other basic needs instead of loan payments," the department said in an explainer about the plan features.

Defaulting on a student loan can unleash some tough collection efforts. Lenders and debt collection companies can come after federal loan defaulters with a vengeance.

Loan payments can be deducted from a borrower's wages, income tax refunds can be snatched, or the account can be turned over for collection, which of course adds more fees to the loan. Even your Social Security payment may be reduced. On top of this, it's extremely hard to erase the debt in bankruptcy.

Faced with those types of consequences, many struggling borrowers chose forbearance or deferment to avoid defaulting on their student loans.

A deferment or forbearance allows borrowers to stop making their monthly payments if they meet certain criteria, such as economic hardship. In the short term, a deferment or forbearance can be useful if you're struggling and need some financial breathing room. But in the long term, it can be brutal because interest accrues and capitalizes.

I have counseled many borrowers who left loans in deferment or forbearance status for years, causing their loans to swell. Some who had experienced a hardship such as a layoff or were stuck in a low-paying job didn't restart their loan payments even after the hardship ended.

After 3½ years of student loan pauses because of the coronavirus pandemic, millions of borrowers will see their repayments resume on Oct. 1. But interest starts building again Sept. 1.

Many borrowers surveyed by the Pew Charitable Trusts in late 2022 were worried about the financial challenge of restarting their loan payments.

"Pew's research has shown that before the repayment pause, borrowers were very concerned about repayment plan affordability, balance growth, and ease of enrollment," said Brian Denten, an officer on the Pew Charitable Trusts' student loan initiative. "Each of these issues is addressed in a positive way with the new SAVE plan, and we anticipate these improvements will make a big difference, especially for the borrowers who struggle most and have seen their balances continue to increase over time."

If you have a federal loan and are concerned about affording your payments, find out whether you qualify for the SAVE plan. And do it now.

You can sign up at studentaid.gov/SAVE. The Education Department is hosting a free webinar on Sept. 14 from 7 p.m. to 8 p.m. Eastern time. There will be an opportunity to ask questions.

Go to Eventbrite.com and search for "Repayment 101: Get Help with Your Federal Student Loans."

SAVE replaces the Revised Pay As You Earn, or REPAYE income driven plan. Borrowers who were on the REPAYE plan will be automatically enrolled in SAVE.

Interest capitalization on student loans has haunted borrowers for decades. SAVE can spare them of this one grief.