These student loan payments can still be halved this month. What Californians should know

Californians and other borrowers using the Biden administration’s new federal student loan repayment plan can still have their monthly payments cut in half after a pair of court rulings last week cast the program’s future into doubt.

Millions of borrowers on President Joe Biden’s Saving on Valuable Education (SAVE) plan have been paying 10% of their discretionary income monthly since the program started last year. The administration’s eventual plan was to reduce that amount to 5% for borrowers of undergraduate loans beginning July 1, 2024.

Federal judges in Kansas and Missouri temporarily suspended the 5% payment change and another provision related to debt cancellation last week for the period of time those courts are considering separate legal challenges to SAVE, however long that may take.

But a federal appellate court lifted one of those blocks on Sunday, ruling that the Biden administration’s plan to reduce SAVE monthly payments to 5% of undergraduate borrowers’ discretionary income this month can go into effect, cutting some monthly payments in half.

The U.S. Department of Education said that borrowers on SAVE would fall into one of these groups following the appellate and federal courts’ actions:

Borrowers who qualify for no payments won’t be impacted.

Borrowers who get a July bill that’s lower than the monthly 10% versions they were used to should pay it.

Borrowers who were placed in forbearance, or a temporary pause on payments, prior to the court rulings while their servicers recalculate their monthly amount will have their first payment in August. That payment could be half the previous month’s.

Borrowers whose servicers put them in forbearance as a result of the court rulings will remain as such in July with their new, lower payment due in August. The Education Department said this might apply to a very small number of people.

The court pause on SAVE’s unique debt forgiveness remains in effect, meaning that enrolled borrowers who might have soon become eligible to have their remaining loan balances wiped away won’t get relief at least until after the federal judge in Missouri rules in the lawsuit challenging SAVE.

By simply ruling to halt aspects of the program while considering Republican-led legal challenges, the two federal judges signaled last week that SAVE could potentially be overturned, raising concern for millions of borrowers using the plan.

Almost 670,000 Californians were enrolled in SAVE as of April, according to the White House.

Here’s what California borrowers need to know about SAVE and related court rulings:

What is the SAVE plan?

The Biden administration launched the SAVE plan last year when millions of people resumed paying on federal student loans. Payments had been paused for more than three years because of the coronavirus pandemic.

SAVE is considered a more generous version of other income-driven repayment plans, featuring lower monthly payments and faster routes to debt forgiveness.

An income-driven repayment plan sets a borrower’s monthly payment at an amount that’s meant to be affordable based on income and family size. Monthly payments under an income-driven repayment plan are a percentage of someone’s discretionary income, or money that an individual has after paying for necessities and taxes.

Since SAVE launched, borrowers have made monthly payments on their federal student loans that amounted to 10% of their discretionary income. The administration’s plan from the start was to reduce the amount people paid on their undergraduate loans from 10% to 5% of their discretionary income beginning in July 2024. That change will take effect.

Graduate-school-only borrowers will continue to pay 10% and borrowers with both undergraduate and graduate loans pay a weighted average between 5% and 10%.

In addition, SAVE decreased borrowers’ monthly payments compared to other income-driven repayment plans by redesignating discretionary income to be the difference between a borrower’s adjusted gross income and 225% of the poverty level. Other plans use 150% of the poverty line.

The federal poverty line in 2023, when SAVE started, was $14,580 a year for a single person. The 2024 federal poverty threshold for a one-person household is $15,060.

Ultimately, this lowered the monthly payment for millions of federal borrowers and eliminated them entirely for low-income borrowers. Individuals earning less than about $32,800 a year have no monthly payments under the SAVE plan.

About 8 million people are enrolled in SAVE, the Secretary of Education said. More than half of these borrowers on SAVE are low income and have no monthly payments.

If borrowers on SAVE make their monthly payments, unpaid interest won’t pile up on their balance.

What loan forgiveness does SAVE offer?

Another part of the SAVE plan offers a quicker route to forgiveness than other income-driven repayment plans. Further debt cancellation under SAVE is blocked pending the legal challenge in Missouri.

Typically, federal student loan borrowers on income-driven repayment plans must make payments for 20 to 25 years before having the remainder of their debt discharged.

Under the SAVE plan, people who initially borrowed less than $12,000 could have their remaining debt canceled after a 10-year period of repayment.

Borrowers on SAVE who originally took out less than $21,000 can have debt forgiven before the 20-year mark: They must make payments for an additional year for every $1,000 borrowed above $12,000, so someone who initially took out under $13,000 could have loans forgiven in 11 years.

The Education Department had already used parts of the plan to erase $5.5 billion in debt for 414,000 borrowers using SAVE. Borrowers who have already been approved to have their loan balance wiped out will not be impacted, but anyone else in line for forgiveness must wait for the outcome of the Missouri case.

Borrowers can still enroll in SAVE, the Education Department said, and the administration is continuing to fight legal challenges.

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