The SAVE Plan is the newest income-driven repayment (IDR) option available for borrowers repaying Direct Loans. It has faced significant scrutiny due to its lower payments and quicker forgiveness compared to other IDR plans, which critics argue could ultimately impose higher costs on taxpayers. Nevertheless, many student loan borrowers view the plan as a beacon of hope. The reduced payments and forgiveness opportunities enable them to manage their debt without overwhelming financial strain.
Since the end of the pandemic relief period, the SAVE Plan has been an available repayment option for Direct Loan borrowers. The plan is being rolled out in multiple phases—initially two, but now seemingly three.
According to a Penn Wharton Budget Model, the SAVE Plan could cost $475 billion. Despite this, the Biden administration aims to assist millions of borrowers through this initiative.
How the SAVE Plan Was Created
The foundation of an IDR plan is rooted in law. This legal basis has led to the creation of many existing IDR plans. The 1993 Reauthorization of the Higher Education Act empowered the Secretary of Education to develop a student loan repayment plan based on borrower income, resulting in IDR plans. Older plans like Income-Contingent Repayment (ICR), Income-Based Repayment (IBR), Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE) were established under this authority. These plans allow for loan terms of up to 25 years, incorporating forgiveness into their structure.
The SAVE Plan was specifically designed to address some criticisms of previous IDR plans. Earlier IDR plans could reduce a borrower's monthly payment to $0, but the interest rate and accruing interest remained unchanged. Borrowers often faced a situation where their monthly payments did not cover the accruing interest, causing their overall balance to increase—a phenomenon known as negative amortization. Consequently, after a decade of making payments, borrowers could see their loan balances grow. Additionally, repayment terms were based on the plan rather than the amount of debt, meaning someone with an original principal balance of $7,000 could be repaying over 25 years. This situation often led borrowers with smaller debts to repay far more than they borrowed due to negative amortization and extended repayment terms.
Some view this plan as a means for borrowers to manage their repayment, while others see it as a way to exploit the law's intent. Furthermore, the plan fails to address the root issue—the rising costs of college and affordability. Representative Virginia Foxx, chairwoman of the House Committee on Education and the Workforce, criticized the SAVE Plan and its early implementation of forgiveness opportunities as a "desperate attempt to buy votes before the election."
Opponents fear that allowing borrowers to repay less than they borrowed could lead to a "borrow to borrow" mentality, where borrowers have no intention of repaying. This could incentivize colleges to increase their costs, knowing students might seek forgiveness of their loans.
The core debate remains: Was the law's intent to facilitate mass forgiveness, or was it to provide an alternative repayment option tied to income, allowing for extended repayment terms and the collection of at least the principal amount borrowed?
The Biden Administration Student Loan Debt Relief Journey
The Biden administration has committed to offering student loan debt relief, a central political promise. Although their initial attempt at mass forgiveness was overturned by the Supreme Court, the administration has introduced the SAVE Plan as an alternative method to aid millions of borrowers. This plan addresses some of the criticisms of existing Income-Driven Repayment (IDR) plans, such as eliminating negative amortization that can increase debts over time.
Additionally, the SAVE Plan is just one of the administration's strategies for achieving debt forgiveness. President Biden recently announced a “Plan B” for student loan forgiveness, which is currently moving through the negotiated rulemaking process. During this period, the public has the opportunity to comment on the draft regulations. This effort, however, is also facing significant scrutiny from opponents of mass federal student loan forgiveness.
State Responses
Currently, two legal challenges against the SAVE plan are being spearheaded by the attorneys general of Kansas and Missouri.
The first challenge, led by Kansas and involving 11 states, argues that the plan represents an attempt by the Biden administration to implement mass loan forgiveness, a move previously overturned by the Supreme Court.
The second challenge, led by Missouri and involving 7 states, contends that the administration lacks the authority to execute the SAVE repayment plan. Together, these challenges represent a total of 18 states opposing the initiative.
These legal battles are still ongoing. Meanwhile, Senate Democrats have proposed including the plan in upcoming legislation, although it remains uncertain whether the bill will survive a filibuster.
Repayment in the SAVE Plan
The SAVE plan is a repayment option currently available to borrowers, providing potential benefits through manageable monthly payments. Borrowers should evaluate if this plan aligns with their repayment goals. For those pursuing Public Service Loan Forgiveness, the SAVE plan may offer lower monthly payments compared to other options, thereby maximizing forgiveness.
The plan is available now, with the complete Phase 2 launch anticipated on July 1, 2024.