Laura answers a listener's question about managing student loans in forbearance and reviews seven things about the SAVE Plan to know.
Laura answers a listener's question about managing student loans in forbearance and reviews seven things about the SAVE Plan to know.
Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.
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Welcome back to Finance Friday, another special edition of Money Girl, where I answer your burning money questions! Today's topic comes from Faith F., who says:
"I have student loans and work in a non-profit organization. I'm working toward public service loan forgiveness (PSLF) and have made about 80 qualifying payments. I'm in the SAVE (Saving On a Valuable Education) Plan and have been on administrative forbearance since April 2024.
While not making loan payments or accruing interest has been a relief, the forbearance
months don't count toward my loan forgiveness. However, I have been able to contribute more to my Roth 403(b).
Since we don't know what will happen with loan forgiveness under the new administration, should I stay in the SAVE program or switch to another one, like PAYE (pay as you earn) or IBR (income-based repayment)? Also, does being in forbearance on student loans hurt my credit score?"
Thank you for your well-timed question, Faith! If you're a student loan borrower, this post will review recent legal developments that may affect you. I'll explain what's happening and what actions you may need to take.
Thanks for downloading episode 895 of the Money Girl podcast! I'm Laura Adams, an award-winning author, money speaker, on-camera spokesperson, and founder of The Money Stack, a free Substack newsletter.
You can learn more and connect with me at LauraDAdams.com. That's also where you can email your money question and sign up for The Money Stack, which gives subscribers a terrific Money Success Toolkit. You can also record a brief question or comment on our voicemail at 302-364-0308.
What is the Saving on a Valuable Education (SAVE) Plan?
Due to the pandemic, federal student loan payments were temporarily suspended. However, that relief was supposed to expire at the end of October 2023.
Instead of letting the financial assistance end, the White House created a new and more generous income-driven student loan repayment program known as SAVE, or Saving on a Valuable Education. Some of its benefits began in 2023, and others in 2024.
SAVE replaced an existing plan called REPAYE or Revised Pay As You Earn Plan. The new program gives borrowers unique benefits, like ten-year loan forgiveness and a new calculation that significantly reduces their payments. There are about 8 million federal loan borrowers enrolled in SAVE.
To learn more about the program, listen to podcast 789, 7 Benefits of SAVE for Student Loans and Your Credit.
What's happening to the SAVE Plan?
While the SAVE Plan has lowered or eliminated federal loan payments for millions of borrowers, it has opponents challenging its legitimacy. In the fall of 2024, they sued the Biden administration, saying it never had the authority to enact the SAVE Plan.
The opponents say that SAVE could cost taxpayers hundreds of billions of dollars over ten years and that Congress, not the President, must approve such a massive program.
So, a federal court has frozen SAVE, preventing the U.S. Department of Education (ED) from implementing parts of the plan and components of other income-based programs giving relief to federal student loan borrowers.
However, some legal experts say that years ago, Congress gave power to the President to create new federal student loan repayment plans. Since the 1990s, every administration has used that authority to develop or continue repayment plans, and they've done it without any legal drama.
So, until this gets battled out in court, specific student loan relief programs are caught in limbo. Their future is even more uncertain because the Trump administration has mentioned upcoming sweeping changes to the Department of Education, such as "returning education back to the states."
What should I do if I have student loans?
What does a frozen SAVE or other income-based repayment program mean if you're like Faith with federal student loans in forbearance? First, be sure you understand if and when your loan payments resume. It could devastate your finances if you don't know your payment deadlines or choose to ignore them and default.
The government can take aggressive action to collect federal debt, such as garnishing your wages or taking your tax refund. Garnishment is a legal process that requires an employer to withhold a portion of an employee's paycheck and send it to a creditor instead.
If you're unsure about the status of your federal student loans or haven't had any communication from your lender, check in with them and find out the alternatives to SAVE. Also, be sure your email and mailing addresses are up-to-date so you don't miss any important announcements from a student loan servicer.
7 things SAVE borrowers should know
As of Education Department guidance from January 15, 2025, borrowers should know the following seven things about the SAVE Plan.
1. You don't owe monthly loan payments. Your loan will likely stay in forbearance until December 2025 if you remain in the SAVE plan. However, the Trump administration could change that timeline, so check in with your loan servicer.
Also, Faith asked whether being in forbearance hurts your credit. Any loan in forbearance can appear on your credit report, but if you follow the program guidelines, a forbearance won't hurt your credit scores.
2. No interest is accruing on your debt.
3. You aren't earning credit toward forgiveness. Faith mentioned this downside, which I'll talk more about.
4. You can switch to another income-driven repayment plan. If you enroll in an older student loan repayment plan that isn't affected by the lawsuits–including IBR (Income-Based Repayment), ICR (Income-Contingent Repayment), or PAYE (Pay As You Earn)--you can earn forgiveness credit again. So that's something Faith should explore.
5. You may be able to "buy back" forgiveness credit. If you're eligible for PSLF and have completed ten years of public service, you may qualify to make a payment to get credit for time you've missed during forbearance. Again, if Faith has worked that long, it's something to look into.
You must submit a buyback request and make an extra payment on your loan. The amount equals what you would have owed if you had been on a repayment plan that qualified for forgiveness. You can learn more at Studentaid.gov.
6. You can still make payments. If you can afford to make loan payments during forbearance, it helps you pay off your debt faster while no interest is accruing.
Reducing your loan balance sooner rather than later could be helpful if the courts revoke SAVE permanently, causing your monthly payments to increase. In other words, reducing your balance now means lower future payments under a revised repayment plan.
7. Your monthly payments could increase if you switch plans. Be sure to choose a new repayment option based on your financial situation and budget. You can use the Education Department's loan simulator to estimate your payments and forgiveness timeline on different income-driven repayment plans.
What will happen to the SAVE Plan?
We don't know if the SAVE Plan will exist in the future because it depends on court decisions, the Education Department, and the Trump administration. But here's what the Education Department recently published:
"The Department is working to build a version of the SAVE plan that complies with the Eighth Circuit's injunction. That plan would generally have the same terms as the 2015 REPAYE rule with respect to the monthly payment amounts for borrowers. At this time, the Department anticipates that such work will not be completed until at least the early fall of 2025."
The Education Department says borrowers will remain in the interest-free SAVE forbearance until the revised plan is available. You can see their updates at ED.gov/SAVE.
To sum up, Faith may benefit from switching her repayment plan from SAVE to one that allows payments to count toward PSLF. That may be a good move for anyone getting close to qualifying for Public Service Loan Forgiveness and wanting debt relief as soon as possible.
You can log into your federal student aid account or contact your loan servicer to learn more and submit an application to switch repayment plans.
Getting out of SAVE may also be wise if you have a low student loan balance or you can afford to make monthly payments. That would allow you to eliminate your debt faster.
But if you're not in PSLF or can't afford to make monthly payments, staying in the SAVE Plan for as long as possible may be best.
LEARN MORE: SAVE Plan Court Actions: Impact on Borrowers
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That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
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