On July 1, millions of federal student loan borrowers will experience a significant reduction in their monthly payments — some by as much as half — thanks to the Biden administration’s new income-driven repayment plan, known as SAVE.
This new plan, SAVE, aims to provide much-needed relief to borrowers. Starting next month, those with only undergraduate loans will see their monthly payments capped at just 5% of their discretionary income, a substantial decrease from the current 10% limit. For those with graduate school loans, the payment cap will remain at 10%. Borrowers with a mix of undergraduate and graduate loans will have a weighted payment calculation.
However, before these benefits can take effect, the government and its four loan servicers must overcome a significant challenge.
The loan servicers depend on the Education Department to provide the new loan amounts for each borrower. Unfortunately, the department has not yet completed these calculations, according to three sources familiar with the process. These individuals chose to remain anonymous as they were not authorized to discuss the issue publicly.
- Borrowers with only undergraduate loans will benefit from a reduced cap of 5% on their discretionary income.
- Graduate school loan payments will continue to be capped at 10%.
- Those with a mix of undergraduate and graduate loans will have a weighted payment.
This new plan represents a significant shift in the federal student loan repayment landscape, promising to ease the financial burden for many borrowers. However, the timely implementation of these changes is crucial for borrowers to start seeing the benefits.
In a bid to buy some time, the department has directed its servicers to place borrowers with payments due in early July into an administrative forbearance for the month, meaning no payment will be required from them.
Over 8 Million Borrowers Affected student loan
More than 8 million borrowers have enrolled in the SAVE plan. Many were taken aback this month when they received notices stating their accounts had been placed into forbearance, leading to widespread surprise and confusion.
Borrower Reactions
“I was freaking out a little bit,” expressed Iván Barragán, who received a letter from his servicer, MOHELA, last week. “I thought I had done something wrong. Then I quickly went on Twitter and saw that a bunch of people were also getting the notices.”
The letter Iván received from MOHELA did not explain why his account status had been changed. He only got an explanation after reaching out to the company, which sent back a note saying that the one-month forbearance was a timeout to allow for the recalculation of his payment rate.
Clarifying the Forbearance Notice
If you received a similar notice, it’s important to know:
- You are not required to make payments for the month of July.
- Your account has been placed into administrative forbearance temporarily.
- This is a measure to recalculate your payment rate.
This proactive move is intended to ease the transition for borrowers and ensure that their payment rates are accurately adjusted. If you have any concerns or questions, do not hesitate to reach out to your loan servicer for clarification.
The recent recalculation delay in student loan payments has raised many questions among borrowers. While a MOHELA spokesperson redirected inquiries to the Education Department, Vanessa Harmoush, a spokesperson for the Education Department, confirmed the situation.
Recalculation Delay Acknowledged student loan
Vanessa Harmoush assured borrowers that the delay is temporary and part of a broader effort to provide more accurate payment amounts. She stated, “We look forward to providing millions of borrowers with lower monthly payments.”
Temporary Processing Forbearance
Harmoush explained that some borrowers might experience a brief period of processing forbearance. This step is essential to ensure that borrowers can fully benefit from the SAVE plan and that their new payment amounts are correctly calculated.
Qualifying Payments During Forbearance
She also clarified that these forbearances would still count as a qualifying month of payment. This is particularly important for borrowers on the SAVE plan and other plans that lead to loan forgiveness after a set number of payments. Harmoush highlighted that individuals on SAVE could have their remaining loan balances eliminated after 10 to 20 years of monthly payments.
Relief for Borrowers student loan
This news comes as a relief for many, including Barragán, an administrator for the Los Angeles County Department of Public Health. Understanding that the recalculation delay will not negatively impact their journey to loan forgiveness provides significant peace of mind.
As the Education Department works to ensure accuracy and fairness in payment calculations, borrowers can remain hopeful for a smoother, more beneficial repayment process.
He is currently pursuing the Public Service Loan Forgiveness program, which aims to discharge the remaining loan balance for government and nonprofit workers after a decade of qualifying payments.
Public Service Loan Forgiveness: A Path to Financial Freedom
For borrowers like him, this month becomes essentially a freebie; they can pay nothing and still receive credit. Barragán, who recently married, plans to use the $430 he’ll save this month towards a planned wedding celebration.
The Turbulent Return of Student Loan Payments
Restarting the $1.6 trillion federal student loan payment system last fall—after a three-year pause due to the economic turmoil caused by the coronavirus pandemic—has been a turbulent process. The Biden administration has been working tirelessly to overhaul the system, implementing new rules and numerous fixes for long-troubled loan forgiveness programs.
Efforts and Achievements
These efforts have led to significant achievements:
- Elimination of $167 billion in debt for nearly 5 million borrowers
- The SAVE payment plan has allowed more than 4 million low-income borrowers to qualify for $0 monthly payments
These changes have brought much-needed relief to millions of borrowers, helping them navigate their financial futures more confidently.