New Income-Driven Repayment Plan Will Promote Successful Repayment Restart

Forthcoming improvements will increase payment affordability, limit balance growth

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New Income-Driven Repayment Plan Will Promote Successful Repayment Restart

Federal student loan payments are resuming, and many borrowers remain concerned about their ability to restart repayments. In a November 2022 survey conducted for The Pew Charitable Trusts by the opinion and market research company SSRS, many people reported experiencing economic insecurity, including more than half of student loan borrowers who reported feeling “not too” or “not at all” financially secure. Additionally, over one-third of these borrowers said that they have expenses and bills that varied “a lot” each month, which could make planning for payments difficult.

These rates of economic insecurity have increased since a similar Pew survey in 2021, suggesting that some borrowers could be at risk of experiencing negative outcomes such as default once repayment resumes. One important tool in easing this transition will be the prompt and complete implementation of the Department of Education’s Saving on a Valuable Education (SAVE) income-driven repayment (IDR) plan, which has replaced the previous Revised Pay as You Earn (REPAYE) program and aims to help struggling borrowers make more affordable monthly payments while keeping their total balances from growing each month.

Borrowers are interested in lower payments—but may not be receiving information about IDR options

By tying monthly payments to annual income and family size, IDR plans help reduce delinquency and default rates for enrolled borrowers. Yet Pew research finds that such plans could be further improved to help additional borrowers afford their monthly payments. The SAVE plan’s final implementation will address these concerns by ensuring that payments are affordable for low-income borrowers and stopping balance growth for borrowers making on-time payments. For borrowers whose payment does not fully cover accrued interest, a subsidy will pay the remaining unpaid interest, resulting in a steady balance.

Figure 1 summarizes the differences between SAVE and REPAYE.

Figure 1

Revisions to REPAYE Would Increase Affordability and Limit Balance Growth

Comparison of current REPAYE versus the new SAVE

REPAYE SAVE
Percentage of discretionary income used for payment calculation 10%
  • 5% (for undergraduate loans)
  • 10% (for graduate loans)*
This component of SAVE will be implemented in July 2024.
Definition of discretionary income Calculated as the difference between a borrower’s annual income and 150% of the poverty guidelines, depending on family size and state. Calculated as the difference between a borrower’s annual income and 225% of the poverty guidelines, depending on family size and state.
Interest treatment The government pays all of the remaining interest not covered by the payment that accrues each month for the first three years of repayment for subsidized loans, and half of the remaining interest once the three-year period concludes.

The government will pay for half of the remaining interest on unsubsidized loans during all periods.
The government pays all of the unpaid interest that remains each month on loans after borrowers make their payment.
Forgiveness timeline
  • 20 years for undergraduate loans
  • 25 years for graduate loans
  • Borrowers who originally borrowed $12,000 or less receive forgiveness after making loan payments for the equivalent of 10 years. For every $1,000 of additional borrowing, forgiveness would be granted after one additional year.
  • Outside of that provision, forgiveness timelines remain the same as in REPAYE. The forgiveness component of SAVE will be implemented in July 2024.
Marital status Spouse’s income is included, regardless of whether they file taxes jointly or separately. Spouse’s income is excluded for borrowers who are married and file separately, which may lower payments for such borrowers.
*Borrowers with both undergraduate and graduate loans will repay a percentage of their discretionary income based on a weighted average calculated from the share of their original loan balances used for undergraduate versus graduate education. Note: This table reflects only a comparison between REPAYE and SAVE. Other IDR plans have different terms that may lead them to be more beneficial for certain borrowers. However, the department plans to limit or eliminate future access to some other plans.

These IDR reforms are well timed to enhance affordability for borrowers who will be juggling the resumption of student loan payments while facing the increased financial strain reported in the 2022 survey. The reforms also address issues in the student loan system that borrowers identified in other Pew research. For example:

  • When asked in a 2022 survey which of several structural changes to student loans they’d like to see, the largest share (50%) said they’d prefer lower payments over lower interest rates, fewer repayment options, or less paperwork.
  • A previous Pew survey found that nearly half of borrowers previously or currently enrolled in an IDR plan reported that their monthly payments were still too high.
  • Focus groups conducted with student loan borrowers in 2019 found that balance growth caused by unpaid interest accrual discouraged borrowers from engaging with their servicer and the repayment system.

In addition to exploring how IDR plan design could be improved, Pew research also indicates that borrowers who would benefit most from an IDR plan are less likely to be enrolled in one. Successful outreach, then, will be important for both the October restart and the implementation of the SAVE plan, in order to offer borrowers timely and consistent information about repayment expectations and options for flexibility or support should they have difficulty affording payments.

Sample borrower scenarios show SAVE’s dramatically increased affordability

In Figure 2 below, four sample borrower scenarios illustrate how the launch of the SAVE plan could affect borrowers, comparing the outcomes of borrowers with different levels of educational attainment under SAVE’s design with the same borrowers’ outcomes under the current design of REPAYE. The sample scenarios use median incomes and loan balances at each level of attainment: a borrower who attempted but did not complete a degree, an associate degree holder, a bachelor’s degree holder, and a graduate degree holder. This simulation assumes that all of SAVE’s components—including the forthcoming reduction in payment amounts from 10% to 5% for undergraduate borrowers and a shortened forgiveness window for lower-balance borrowers—have been implemented.

Figure 2

New SAVE IDR Plan

Borrower scenarios under SAVE compared with REPAYE

No degree Associate Bachelor's Graduate
REPAYE SAVE REPAYE SAVE REPAYE SAVE REPAYE SAVE
Lowest monthly payment $0 $0 $29 $0 $80 $55 $404 $131
Highest monthly payment $0 $0 $52 $0 $308 $91 $851 $831
Total repaid $0 $0 $10,180 $0 $55,697 $17,222 $112,176 $126,293
Remaining forgivable balance $15,655 $10,116 $26,089 $20,149 $0 $33,093 $0 $0
Repayment period (in months) 240 120 240 228 231 240 172 211

Starting income $18,704 $25,377 $41,964 $79,577
Starting balance $9,800 $19,520 $32,060 $65,210
Annual income growth 0.50% 1.50% 2.50% 3.50%
Interest rate 5.50% 5.50% 5.50% 7.05%
Key: Decreasing amounts in SAVE compared with REPAYE are noted in green and increasing amounts are noted in orange. Note: For details on the data used to generate these estimates, see Methodology.

The chart shows that bachelor’s degree borrowers appear to benefit most, as they would experience the greatest decrease in payments and total amount repaid. These lower monthly payments contribute to a slightly longer repayment period, with the typical bachelor’s degree borrower repaying for the full term in SAVE. Associate degree borrowers also experience a significant benefit by enrolling in SAVE, with their monthly payments and total amount repaid decreasing substantially compared with REPAYE. Although typical borrowers with no degree do not obtain a lower payment in SAVE, as their payment was already calculated at $0 under REPAYE, they would benefit from earlier balance forgiveness because of SAVE’s accelerated forgiveness timeline for low-balance borrowers.

The accelerated forgiveness timeline and increased interest subsidy may prove to be key for communicating IDR’s benefits to struggling borrowers and helping them successfully enroll. In past focus groups, borrowers expressed frustration that their balance continued to grow even while they were making payments.

In contrast, effects of the plan revisions could lead to graduate borrowers repaying a higher total amount over a longer period. The typical graduate borrower enrolled in SAVE would pay more over time compared with the previous version of REPAYE, despite having slightly lower monthly payments. In addition, typical graduate borrowers do not benefit from the increased interest subsidy because their payments fully cover the amount of interest that accrues month to month. Other IDR plans may be more beneficial to some graduate borrowers, though some plans will not be available for new enrollees once the revisions to income-driven repayment are fully implemented.

These simulations indicate that several new features of SAVE will benefit borrowers in different ways, including through lowered payments, higher interest subsidies, and shortened repayment periods for those who originally borrowed less than $12,000 in loans. The added protections of the new plan will be crucial given the decreases borrowers have reported in their financial security and may incentivize borrowers to remain more engaged with repayment over time.  

Although the Department of Education does not expect all of SAVE’s features to be available until 2024, certain elements became available before repayment resumed, including the provisions limiting balance growth and increasing the amount of income protected by the discretionary income definition. The changes to the definition of discretionary income available this year are particularly important because they will increase the number of low-income borrowers eligible for making a $0 payment. Such protections will be crucial for struggling borrowers amid their self-reported ongoing economic insecurity.

Although these changes are significant, the more affordable SAVE plan design does not fix the existing problem of borrowers with the lowest incomes not enrolling in an IDR plan. Though many borrowers would benefit from such a plan—especially SAVE—information about the plans may not be reaching borrowers who would benefit most.

That makes targeted outreach about IDR’s benefits, especially to borrowers most likely to struggle to afford payments, a key element in preventing borrowers from eventually experiencing the serious consequences of default. But this tailored outreach can be expensive, so the Department of Education’s Office of Federal Student Aid will need to ensure a smooth transition for borrowers back into repayment.

Lexi West is a principal associate and Brian Denten is an officer with The Pew Charitable Trusts’ student loan initiative.

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