Biden’s new income-driven repayment plan could be boon for those with student loans

We’re on the cusp of the season for college graduation commencement speeches and graduation parties. Congratulations!

But sad to say, now is also a good time for soon-to-be college graduates and their families to research how best to pay off their student loans.

The student loan system is in turmoil. The Supreme Court blocked the Biden administration from pursuing its planned massive student loan forgiveness program. Unbowed, the administration has chipped away at existing student debts and to date has canceled almost $144 billion in loans for nearly 4 million borrowers. It recently announced a new plan that would eliminate student debt for many millions more, assuming the initiative survives various challenges.

Still, the most dramatic change in the student loan ecosystem might not be the administration’s loan-forgiveness maneuvers, but its new income-driven repayment (IDR) plan called SAVE (Saving on a Valuable Education). IDR plans offer borrowers greater repayment flexibility, reducing the risk of default. Manageable payments tied to income can reduce financial stress and improve overall well-being. The SAVE option is an improvement on the other IDR plans.

SAVE changes the definition of discretionary income to increase the number of low-income borrowers eligible for $0 payments, a report from Pew Research Center noted. The plan also subsidizes any unpaid interest that remains after a borrower makes a payment. In other words, so long as you make your monthly payments, interest won’t build up on your student loan balance.

To put some numbers on the benefits of SAVE, a single person will pay nothing if their annual income is less than $32,800 a year. At $40,000 annually, they would owe $720 a year and at $50,000, the yearly tab would come to $1,700. These are far from onerous sums. Most undergraduates are likely to benefit from the SAVE choice, especially those with lower earnings and tight budgets early in their careers (so almost everyone!).

In addition, students who borrowed $12,000 or less will see their remaining balances forgiven after 10 years of payments with SAVE, instead of 20 to 25 years typical with IDR plans.

There are many more details to research in the SAVE program and other repayment options. But SAVE looks to be an improvement for many college graduates looking to reduce the financial burden of repaying their education debts as they launch their careers and set up their own households.

Chris Farrell is senior economics contributor, “Marketplace”; commentator, Minnesota Public Radio.