4 Reasons to Delay Enrolling in Biden’s New Student Loan Repayment Plan

More than 5 million student loan borrowers have signed up for President Biden’s new “Saving on a Valuable Education,” or SAVE, plan. 

This new income-driven repayment (IDR) option is designed to be the most affordable repayment plan ever, according to Biden Administration officials. Under SAVE’s generous repayment formula, a single borrower making less than $32,800 per year would have a $0 monthly payment. A borrower with a family size of four earning $60,000 per year would also have no monthly payment obligation. In addition, SAVE features a unique interest subsidy that waives any interest that accrues in excess of a borrower’s payments, effectively halting ongoing balance growth associated with interest accrual and negative amortization. 

SAVE also allows borrowers to make progress toward student loan forgiveness. Borrowers with graduate student loans can become eligible for loan forgiveness after 25 years of repayment, while undergraduate student loan borrowers can receive student loan forgiveness after 10 to 20 years in repayment, depending on the size of their initial balances. Furthermore, the SAVE plan allows borrowers to make progress toward Public Service Loan Forgiveness (PSLF), which provides federal student loan forgiveness for people working in nonprofit or government jobs after 120 qualifying payments.

Those who had previously been in repayment under the Revised Pays As You Earn (REPAYE) plan were automatically enrolled in SAVE during the last several months. Other borrowers – including those who were in repayment under other IDR plans such as IBR or PAYE –  would need to affirmatively apply. 

But while enrolling in the SAVE plan may make sense for millions of borrowers, it may not make the most sense right now. For some people, delaying enrollment in SAVE may be a smarter move. Here’s why.

Student loan borrowers may have low payments now, due to old income data

Millions of borrowers were already enrolled in IDR plans when the student loan pause first went into effect in 2020. Normally, borrowers must recertify their income for IDR plans every 12 months. But during the pandemic forbearance, most borrowers were not required to submit updated income information. When the student loan pause officially ended and repayment began earlier this fall, their monthly payments should have reverted to what they were paying back in 2020. 

That means that for many student loan borrowers, current IDR payments are based on income information from several years ago. And under Biden Administration policy, no one will be required to recertify their income again until March 2024 at the earliest. The process will be staggered, so some people will not have to recertify their income for their IDR plan until the summer or fall of 2024. 

Borrowers who choose to leave their current IDR plan for SAVE now may, thus, inadvertently increase their student loan payments prematurely. Even though SAVE is a more affordable IDR plan in most situations, if you’ve experienced a significant increase in income since 2019 or 2020, and your current IDR payments are based on that old income data, you may see a big jump in payments, even under SAVE. While higher payments are ultimately inevitable if you have consistently higher income, it may make more sense for some borrowers to wait to enroll in SAVE until it’s time to recertify their income for their current IDR plan. That way, they can have a longer period of relatively lower monthly payments.

Student loan borrowers with marital tax status changes

All IDR plans factor in the combined income of married borrowers who file their federal taxes jointly. But unlike the REPAYE plan, the SAVE plan allows married borrowers to exclude spousal income by filing taxes separately, much like IBR and PAYE. 

Borrowers who got married during the pandemic pause, or who filed their most recent federal tax return jointly with their spouse, may want to hold off on enrolling in SAVE for the moment. If you enroll now, your SAVE payments might be based on your joint income with your spouse, increasing your payments. Instead, it may make sense to first evaluate filing taxes as married-filing-separately with a tax advisor in early 2024. Filing taxes separately may lower your student loan payments under SAVE, although it also may increase your total tax liability. So, it’s important to evaluate the numbers with a professional to determine the optimal course of action.

Student loan servicing problems are leading to errors and processing delays

Student loan servicers are currently experiencing significant problems due to understaffing, inadequate funding, and the unprecedented situation of 40 million borrowers simultaneously returning to repayment. As a result, borrowers are experiencing processing delays and long call hold times when trying to reach their loan servicer.

In addition, millions of borrowers have been placed into administrative forbearances as a result of billing mistakes, payment calculation errors, and other irregularities. Many borrowers are, thus, stuck in limbo with no payments due, and no word on whether they were approved for the SAVE plan or what their payments will be.

Borrowers who don’t need to immediately enroll in SAVE now may want to wait a few months for these problems to work themselves out.

Student loan borrowers eligible for the PAYE plan should be cautious

For most student loan borrowers, the SAVE plan will be the best and most affordable IDR option. However, the situation can be a bit more complicated for borrowers eligible for Pay As You Earn (PAYE).

PAYE can be more expensive than SAVE in terms of monthly payments, particularly for borrowers with mostly undergraduate student loan borrowers. However, for borrowers with graduate student loans, there is an important distinction between the two plans. SAVE has a 25-year student loan forgiveness repayment term for borrowers with graduate school debt; in contrast, PAYE has a 20-year term for all borrowers. That five-year difference can be a big deal, especially for higher income earners. Paying somewhat higher payments for 20 years could actually end up being less expensive for some borrowers than paying lower payments for 25 years.

Critically, the Education Department will begin limiting access to the PAYE plan next year. Borrowers already enrolled in PAYE will be able to remain in that plan. But no new borrowers will be permitted to enroll in PAYE after July 1, 2024. That means that borrowers in PAYE can switch to SAVE at any time – but if they choose to do that and then change their mind, they won’t be able to get back into the PAYE plan after that cutoff date. Borrowers eligible for PAYE should, thus, carefully evaluate which plan is better before choosing to switch to SAVE.