Why millions of student loan borrowers will have lower payments starting in July

By Katie Lobosco, CNN

Washington (CNN) — Millions of borrowers will see their monthly student loan payments reduced starting in July, thanks to one of the Biden administration’s biggest changes to the federal student loan system to date.

Last year, following the Supreme Court decision that knocked down President Joe Biden’s signature student loan forgiveness program before it took effect, his administration rolled out a new repayment plan known as SAVE (Saving on a Valuable Education) that will be fully phased in this summer.

For most borrowers, the SAVE plan requires a lower monthly payment than other federal student loan repayment plans, and it cancels student debt for some borrowers after they make as few as 10 years of payments. More than 8 million people have enrolled in the SAVE plan to date.

Most of the benefits offered by the SAVE plan are already in place, but one significant provision will take effect in July. The change could cut payments in half for some borrowers.

How payments will be reduced

Under the SAVE plan, monthly payments are calculated based on a borrower’s income and family size, regardless of how much student debt they have.

Starting in July, monthly payments on loans borrowed for undergraduate school will be reduced from 10% to 5% of discretionary income.

Borrowers who have loans from both undergraduate and graduate school will pay a weighted average of between 5% and 10% of their income based upon the original principal balances of their loans.

For example, a borrower with $20,000 from his or her undergraduate education and $60,000 from graduate school will pay 8.75% of his or her income, according to a fact sheet provided by the Biden administration.

The payment recalculation will happen automatically and does not require any action from borrowers enrolled in SAVE.

A delay for some borrowers

Even though the Department of Education said lower payment amounts would go into effect in July, the agency is behind and has not finished recalculating borrowers’ lower payment amounts.

But affected borrowers won’t be required to continue to make the bigger monthly payments. If a borrower’s payment is not recalculated by July, he or she will be placed in a forbearance, during which no payment will be due and no interest will accrue. The month will still count toward student loan forgiveness.

“As the department finalizes preparations for the full universe of borrowers eligible for lower monthly payments, some borrowers may be placed in a brief processing forbearance to ensure they can access the full benefits of the SAVE Plan and that their new payment amounts are accurate,” the Department of Education said in a statement.

The delay was first reported by The New York Times.

How the SAVE plan works

Before the SAVE plan launched last year, the federal government already offered several income-driven repayment plans, which tie monthly payments to a borrower’s income and family size. But SAVE offers the most generous terms, especially for low-income borrowers.

There are two main ways the SAVE plan can lower monthly payments for enrolled borrowers. In addition to cutting the payment from 10% to as low as 5% of discretionary income, SAVE also changes the way discretionary income is calculated. It shields a bigger portion of a borrower’s income, resulting in lower payments when compared with other income-driven plans. Payments can be as low as $0, and more than half of borrowers currently enrolled in SAVE are not required to make a monthly payment.

The SAVE plan also prevents balances from ballooning due to interest when a borrower has a small monthly payment. If enrolled in SAVE, unpaid interest does not accrue if a borrower makes a fully monthly payment. For example: If $50 in interest accumulates each month and a borrower’s full required payment is just $30, the remaining $20 would be waived.

Borrowers enrolled in SAVE may also be eligible for student debt relief in a shorter amount of time than under other income-driven plans. Those who borrowed $12,000 or less will see their debt forgiven after paying for just 10 years under SAVE. Every additional $1,000 borrowed above that amount would add one year of monthly payments to the required time a borrower must pay. Under other repayment plans, borrowers must make at least 20 years of payments before receiving debt forgiveness.

Initially, debt relief delivered under the SAVE plan was scheduled to begin this summer. But the Biden administration began canceling some eligible borrowers’ debt early, in February. So far, $5.5 billion has been canceled for 414,000 people enrolled in the plan.

Legal challenges

Two groups of Republican-led states have sued to overturn the SAVE plan, arguing that the Biden administration is overstepping its legal authority.

Some of the states, including Missouri, are among the same plaintiffs that sued the Biden administration two years ago over its sweeping one-time student loan forgiveness program.

“Yet again, the President is unilaterally trying to impose an extraordinarily expensive and controversial policy that he could not get through Congress,” reads the lawsuit filed in April by attorneys general in Missouri, Arkansas, Florida, Georgia, North Dakota, Ohio and Oklahoma.

The estimated cost of the SAVE plan varies, depending on how many borrowers end up enrolling, ranging from $138 billion to $475 billion over 10 years, according to different studies.

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