The Biden administration recently announced a new income-driven repayment plan for federal student loans called the SAVE Plan or SAVE Repayment Plan. Here we look at the Pros and Cons.
As The SAVE plan proposes several changes to the current student loan repayment system let’s look at the pros and cons of the plan:
Pros:
- Reduced Payments: The SAVE plan significantly reduces payments for undergraduate borrowers, cutting them in half from 10% to 5% of their discretionary income. This immediate relief allows borrowers to allocate more funds to other essential expenses.
- $0 Monthly Payments: The plan aims to bring many borrowers’ monthly payments to $0, benefiting low-income borrowers. Payments are based on discretionary income, providing financial breathing room for essentials like food and rent.
- Interest Relief: Borrowers who make their required payments on the SAVE plan will no longer see their loan balances grow due to unpaid interest. This helps prevent additional debt from accruing over time.
- Early Forgiveness for Low-Balance Borrowers: The SAVE plan offers early forgiveness for borrowers with original principal balances of $12,000 or less, with forgiveness after 120 payments (equivalent to 10 years in repayment). This provision allows them to become debt-free sooner.
- Financial Benefits for Various Groups: The plan particularly benefits low- and middle-income borrowers, community college students, and those in public service. It reduces total payments per dollar borrowed, provides substantial savings for graduates, and supports early debt-free status for community college borrowers.
- Equity Impact: On average, Black, Hispanic, American Indian, and Alaska Native borrowers will see significant reductions in their total lifetime payments per dollar borrowed, contributing to greater equity in student loan repayment.
- Automatic Enrollment: Borrowers already on the REPAYE plan are automatically enrolled in the SAVE plan, streamlining the transition process.
Cons:
- Limited Benefit for Higher-Income Borrowers: The plan’s primary focus is on low- and middle-income borrowers. Higher-income borrowers may not experience significant reductions in their payments compared to other IDR plans, with only a 5% reduction per dollar borrowed.
- Gradual Forgiveness for Higher Loan Balances: Borrowers with larger loan balances will have to wait longer for forgiveness, with an additional 12 payments required for each additional $1,000 borrowed above $12,000. This could extend the repayment period significantly for some borrowers.
- Automatic Enrollment: While automatic enrollment may be convenient, it may limit borrowers’ flexibility in choosing the repayment plan that best suits their needs.
- Cost and Funding Concerns: Implementing the SAVE plan may require substantial financial resources, potentially impacting taxpayers through increased government spending or adjustments to tax policies.
- Potential Moral Hazard: The plan’s provisions, such as reduced payments and early forgiveness, could incentivize borrowers to take on more debt or not prioritize repayment, possibly creating a moral hazard.
- Impact on Loan Servicers: Implementing the SAVE plan may necessitate adjustments and additional resources for loan servicers, potentially leading to administrative challenges and delays.
- Long-Term Financial Impact: While the plan offers immediate relief, borrowers may end up paying more in the long run due to extended repayment periods, potentially accruing more interest.
- Impact on Future Borrowers: There may be concerns about how the plan could impact future borrowers, potentially leading to higher costs or changes in loan terms and conditions in the student loan market.
It’s important to note that the pros and cons mentioned above are based on the information provided about the SAVE plan by The White House. As with any policy, the actual impact and effectiveness can only be fully assessed once the plan is implemented and its effects are observed over time.
