Do you have student loans? Are you having difficulties paying it back? Back in August 2022, the Biden administration announced a three-part plan to help federal loan borrowers.

Part 1 – Final extension of the student loan repayment pause. Student loan interest will resume on September 2023 and payments will be due starting October.

Part 2 – Debt relief to low and middle-income families. The secretary of education will use the HEROES Act to forgive up to $20,000 in student loans.

Part 3 – A new income-driven plan to lower payments for many borrowers.

One Year later…

Okay, it has been a year. Let’s see how everything worked out. The repayment pause extension went into effect and repayment will resume soon. Borrowers used the money for other things instead of paying down the student loans. It was good for the economy.

However, the debt relief plan ran into a stone wall a.k.a. the Supreme Court. The HEROES Act permits the secretary of education to modify provisions of student debt in the event of war or a national emergency. The national crisis in this case was the pandemic. However, the Supreme Court put the kibosh on the Biden administration’s student debt relief plan. They decided 6-3 that the secretary of education doesn’t have the power to erase $400 billion in student debt.

Many borrowers were disappointed by the Supreme Court’s decision. However, the Biden administration is forging ahead with part 3. They are rolling out a new income-driven repayment plan, the Saving on a Valuable Education (SAVE) plan. The SAVE plan will help many low and middle-income borrowers. It’ll lower payment, minimize interest, and eventually forgive the loans. It isn’t instant like the debt relief plan, but many loans will be forgiven in due time. Don’t sleep on this if you have outstanding student loan debt.

The SAVE Plan

Like other income-driven repayment plans, the Save Plan calculates your monthly payment amount based on your income and family size. The big differences from previous IDR plans are the payment amount and income exemptions. The SAVE plan lowers the payment requirement and increases the income exemption. Here are the details.

  • Borrowers pay no more than 5% of their discretionary income on undergraduate loans. This is down from 10% under the previous IDR plan. Many low and middle-income households may see a big reduction in their monthly payment.
  • Increase the income exemption from 150% to 225% of the poverty line. If you are a single borrower earning $32,805 or less, you won’t have to make a payment. This is a nice break for low-income households.
  • Minimize interest. If you make your minimum monthly payment, your balance won’t’ grow due to unpaid interest. Example: Your loan accumulates $50 in interest every month. Your minimum payment is $30 according to the new SAVE program. You pay $30 and the remaining $20 will be written off. Your balance won’t grow.
  • The SAVE Plan excludes spousal income for borrowers who are married and filed separately.
  • Forgive loan balances after 10 years of repayments. Student loan debt of $12,000 or less will be forgiven after 10 years of repayment. The maximum repayment period before forgiveness rises by one year for every additional $1,000. For example, if your original balance is $14,000, you will see forgiveness after 12 years.

Borrow borrow borrow!

Oh wow, this is a great deal for anyone who wants to go to college. Now, there is no reason to avoid student loans. Go to college and borrow! If you get a good job, you will be able to repay the debt. If you flunk out and don’t make much money, you can make the minimum payment and be forgiven in 10-20 years. The cost of higher education shouldn’t be an obstacle for low and middle-income kids. Statistically, college grads earn more and are much less likely to be unemployed than their peers who only have a high school degree. Of course, there are exceptions, but why swim against the current if you don’t have to? Go to college if you can.

We have been saving for our son’s education with the 529 college savings plan. I haven’t checked the balance for a while, let me take a look. Oh wow, his education fund increased in value quite a bit with the recent stock market gains. Currently, he has $130,000 earmarked for higher education. We have 6 more years to save so he should be in great shape for college. He can borrow if he needs more money.

Anyway, keep an eye on this and sign up for the SAVE plan if you have any student loan debt.

You can apply for the new SAVE Plan now at the Federal Student Aid website.

What do you think about the SAVE plan? I think this is much better than the one-time student loan debt forgiveness program. Borrowers should pay back if they’re doing well. If they don’t make much, then they can use the SAVE program. Maybe their income will increase later and they’ll be able to pay more at some point.

*Passive income is the key to early retirement. These days, I’m investing in multifamily properties with CrowdStreet. They have many projects across the United States. Go check them out!

image credit MD Duran

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Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.

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