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THE CONTROVERSY over student loans has caught up with the latest federal government repayment program. That program is known as SAVE, or Saving on A Valuable Education.
SAVE is an income-driven repayment plan, or IDR. It’s the sixth iteration of an IDR plan. Due to the favorable terms and the high estimated price tag, it was recently halted by legal challenges.
IDR plans follow the same general formula to determine the monthly payment on student loan debt. The formula is:
Borrowers are then expected to pay a certain percentage of their discretionary income, depending on which IDR plan they’re on. SAVE has the most generous terms of all IDR plans due to four key provisions:
Bigger deduction. SAVE has a 225% multiplier on the poverty line deduction, which means a bigger amount of a borrower’s income is protected from required payments. In 2024, the poverty line for a single individual is $15,060. This means that a single borrower’s first $33,885 of income is protected from loan payments with the SAVE plan, compared to $22,590 with other IDR plans.
Lower payments for undergraduate borrowers. Depending on the plan, IDR plans have had a formula that required paying 10% to 20% of discretionary income. Starting July 1, the SAVE plan requires just 5% of discretionary income be put toward undergraduate debt and 10% toward graduate debt, or a weighted average of the two if the borrower has both types of debt. This means that, if a borrower has equal undergraduate and graduate debt, his or her required payment would be 7.5% of discretionary income.
Bigger interest subsidies. The unique thing about IDR plans, relative to other debt payments, is that the payment amount is determined by discretionary income, not by the size of the loan, interest rate, term of the loan and so on. This means that student loan debt balances can—and often do—increase over time.
To combat this, some earlier IDR plans have had limited interest-rate subsidies. But to eliminate the chance of ballooning loan balances, SAVE has a 100% interest subsidy on all unpaid interest.
Take a single individual making $30,000 a year with $100,000 of student debt at 7% interest. If this borrower is on the SAVE plan, her required payment would be $0 because she falls below 225% of the poverty line. Her $100,000 of student loans would have $7,000 a year of interest. That interest would be fully forgiven each month and thus never get added to the $100,000 debt balance.
Quicker forgiveness for certain borrowers. If you’re on an IDR plan for a certain amount of time, you’re eligible for forgiveness. The IDR plan determines how long until forgiveness, which is either 20 or 25 years.
But the SAVE plan allows for forgiveness in as little as 10 years, depending on how much was originally borrowed. If the borrower took out a total of $12,000 or less, he’d get forgiveness in 10 years. If he borrowed between $12,000 and $21,000, he could get forgiveness between 10 and 20 years.
Some of these policies were set to go into effect on July 1. But about a week before, they were blocked due to court injunctions. The states of Missouri and Kansas argue that the SAVE plan is illegal, and specifically that two pieces of the SAVE plan are too generous: the 5% payments on undergraduate debt and the quicker forgiveness for smaller original debt balances.
Only time will tell what’s next for the student loan world and for the SAVE plan, and how much of the plan survives, if any. And if it does survive these court cases, it may have a whole new set of challenges pending the results of the upcoming election. What should borrowers do in the meantime? For now, borrowers’ best bet is to keep paying on their loans as usual.
Logan Murray is a solo financial advisor. His company Pocket Project offers subscription-based financial planning services to young professionals. He’s also a consultant for StudentLoanPlanner.com, which helps borrowers make a plan for their student loans. For more financial insights, check out Logan’s blog, connect with him on LinkedIn and check out his earlier articles.
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I think the root problem to be solved is aligning the financial interests of the colleges or other lenders with those of the students and getting the government out of the student loan business. One solution I read about is to make student loan re-payment tied to the graduate’s salary. For example, the graduates are obligated to repay their loans at the rate of say 5% of their annual pay. So, if the graduate has 50K salary and 100K loan, they will be paying it off at the rate of $2500 a year. There could be a cap of say 15 years and anything after that is wiped out. Once again, the incentives should be aligned — success of the graduate translates into student loan repayment. No success – less money paid back.
The institution of higher learning (college , university, vocational school) should have skin in the game – be the lender! Then they have the incentive to counsel and not allow certain majors to borrow too much ($30K income with $100k debt is CRAZY).
“Take a single individual making $30,000 a year with $100,000 of student debt”
I found the problem!
Yep. There should be some required counseling before they give tens of thousands of dollars to a 19 year old. I spent my early years in community college (which is now cheaper in some states than in my day – free) before going to university. So while state schools are certainly more expensive than “in my day”, even today one would not end up $100K in debt. My son currently pay $14K/year tuition, add to that room and board, one still does not get near $100K assuming they are contributing by working part time.
I believe that college and technical colleges should be viewed as an investment in the next generation. The data from the GI bill following WWII showed that for every $1 invested in an education the taxpayer recouped $7 due to higher taxes on the higher earned income.
When I went to college I worked on the farm during the summer for low wages but was able to save enough money to pay for tuition for the whole year. Tuition was around $200 per semester. It is IMPOSSIBLE for a kid to work their way through college like I did and we should recognize that. Put provisions in place like taking out the student loans and with exceptions for hardships forgive those loans on completion of the degree. That increases the likelihood that the taxpayer recoups our investment plus extra benefits as an educated individual is more likely to pass those values on to their kids so a multi-generational societal benefit as well.
Everyone who works at a college strives to maximize their income, just like everyone in the business world – so they too can send their kids to outrageously expensive colleges…This is, in part, how we get the bloat that drives up the tuition. Vicious cycle… non-profit status should be revoked.
The more the government “plans,” the harder it is for me to plan. (Hat tip to Friedrich Hayek.)
Colleges can get away with charging what they under the structure they do because we view the need for, seek quality unsubstantiated we do and are seduced by our desire to give the best for our children.
There are many parallels to how we view healthcare and paying for it.
The providers of Higher Education have no incentives to reduce costs. So tuition, room & board, textbooks and other fees increase faster than income.
College debt IS a burden. But the students take it on themselves. With colleges being complicit for THEY have no downsides.
Will the parents who helped their kids out to reduce their debt get any of the goodies?
“The providers of Higher Education have no incentives to reduce costs.”
One reason the cost of a college education is so high is instead of providing basic room and board (like in the good old days) colleges have raced to provide amenities such as fancy gyms, various specialty eateries etc. providing such does not increase the student populations’ knowledge, just their level of debt!
I believe that in Europe tertiary education is free. It may also be true that fewer people go to university, and more become apprentices.
My undergraduate degree cost my father 300 GBP, as my local education authority paid my fees and provided a means-tested living allowance, but not a lot of people made it to university in the UK in the 60s. British university students are now charged fees, but they are lower: “Average tuition is approximately £9,250 per year for home students”. ($11,820)
I believe that an educated workforce is a national benefit, but I do not believe that everyone needs an undergraduate, never mind a graduate, degree.
Having a degree is conducive to becoming a high earner. The degree is a proof of your competency in the subject matter.
In an environment where all your competitors hold degrees or/and decades of experience, you will have an inherent disadvantage without one(lowering your human capital).
Blue collar jobs can offer the same pay(the lower ranges of a well paying white collar job), but the work is chock full of danger with gruelling work hours.
College students will just have to take the plunge into debt if they wish to be in the 1%.
Very few of them will be in the 1%. If they were it would be the 10%, or the 20%.
Logan, thanks for an interesting and informative article. I have not kept up with this topic, and I appreciate the clear explanation.