Four Things to Know About the Saving on a Valuable Education (SAVE) Repayment Plan

In July 2023, the Department of Education issued final regulations for the Saving on a Valuable Education (SAVE) Plan. SAVE is President Biden’s new income-driven repayment (IDR) plan, replacing the Revised Pay as You Earn (REPAYE) program.

Alphabet soup aside, the Department of Education estimates that the SAVE Plan will cut student loan payments in half compared with other IDR programs and provide borrowers with many other cost-saving benefits, too.

But even good news requires attention when it comes to student loan repayments. Depending on your circumstances, you may need to make timely decisions about your own repayment strategy. With some SAVE Plan changes starting immediately, others slated for July 2024, and payments scheduled to restart in October 2023, let’s take a look at what to expect with the onset of this new income-driven repayment program.

1. Changes to Student Loan Interest

Under previous IDR plans, if your monthly payment were less than what you owed in interest for that month, the excess would be capitalized and added to your balance. This was a big pain point for borrowers: many would make payments for years only to see their balance stay the same — or worse, increase.

With the new SAVE plan, the excess payment is no longer capitalized and will not be subject to additional interest charges. This eliminates the costly outcome of an increased loan balance due to negative amortization.

2. Increased Income Exemption

Starting immediately, the income exemption will increase from 150% to 225%, which means more income is excluded from your maximum monthly student loan payment calculation.

When student loan servicing companies calculate your repayment options, they often use the federal poverty threshold as a base figure for their calculations. With the new SAVE program, this new calculation will produce a zero payment if your adjusted gross income is under $32,800 for a single filer and $67,500 for a family of four. Without this change, the income exemption would be limited to $21,870 and $45,000, respectively. In other words, you can earn a lot more — and still pay a lot less.

3. Discretionary Income Requirement Reduced

After the 225% income exemption is applied to your payment calculation, if there is any excess over the exemption amount, this number will be used to determine your discretionary income. Starting in July 2024, the percentage of discretionary income from which your payment will be determined will decrease from 10% to 5%.

For context, a single taxpayer who makes $100,000 annually will see a monthly payment of just $280 — compared to a monthly payment of more than $650 under the old IDR plan.

4. Spousal Income Excluded

The new SAVE plan excludes spousal income for borrowers who are married and file separately. This change also removes the requirement for your spouse to co-sign your IDR application and excludes them from your family size when calculating your repayment.

This removes another major pain point — factoring in future marriage plans, finances, and filing statuses can be difficult, not to mention emotionally fraught.

Does SAVE Make Sense for You?

Even though the SAVE Plan presents some helpful changes, student loan borrowers should conduct a thorough analysis of their current and potential repayment strategies to make sure they select the best plan for their personal financial goals.

When selecting a payment option, borrowers typically choose the lowest monthly payment. But a more holistic picture includes many other factors, like taxes on forgiven debt, total cost repaid (principal and interest), and how long it will take for you to pay off the loan in its entirety.

There are plenty of great online resources, like student loan calculators, that can help you navigate this complex decision and compare your loan repayment options.

But there’s no substitute for working with a certified financial planner who has the knowledge and expertise to help you customize your strategy. Feel free to schedule a consultation with us today to get started — we’re here to help!

Malik S. Lee, CFP®, CAP®, APMA®
Malik Lee is the Managing Principal of Felton & Peel Wealth Management. A CERTIFIED FINANCIAL PLANNER™ with more than 15 years of financial services experience, he is a Guest Lecturer at Morehouse College, serves on the CFP Board Council of Examinations, and is a Board Member for the FPA of GA.
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