Last week, the Biden administration announced that 804,000 borrowers will have over $39 million in federal student debt cancelled as a result of the income-driven repayment (IDR) plan account adjustment. IDR plans determine monthly payments for federal student loans based on a borrower’s income, and after 20 or 25 years of making payments a borrower’s remaining balance is cancelled. These plans are some of the most important consumer protections offered for federal student loans; however, due to loan servicer errors, many borrowers’ payments were not accurately tracked — resulting in delayed cancellation. The one-time account adjustment rectifies this issue and provides cancellation to qualifying borrowers who have diligently paid their loans for at least 20 years. But that’s not all.

Starting this October, millions of borrowers will have to start repaying their federal student loans, after more than three years of a necessary payment pause due to the COVID-19 pandemic. Over those three years, borrowers have experienced high unemployment, record high inflation, and a looming recession. Yet, in June, the United States Supreme Court struck down the Biden administration’s plan to cancel up to $10,000 or $20,000 in federal student loans for borrowers who made less than $125,000 or less than $250,000 for married couples and heads of household — denying financial relief for approximately 40 million Americans. As a result, many borrowers will struggle to repay their student loans.

Ahead of this resumption, the Biden administration released a new income-driven repayment plan (IDR) plan, called the Saving on a Valuable Education (SAVE) plan to make federal student loan repayment more affordable. The administration is giving borrowers a 12-month on-ramp to repayment, which will protect borrowers from the negative consequences of late, missed, or partial payments. During that time, payments will still be due and interest will accrue, but unpaid interest will not capitalize after the 12 months. Borrowers who use the on-ramp period will not be reported to credit bureaus, be considered in default, or be sent to collections. IDR plans determine monthly payments for federal student loans based on a borrower’s income. These plans are some of the most important consumer protections offered for federal student loans; however, they often leave many borrowers with payments that are still unaffordable and can result in ballooning balances. And this plan will especially help Black borrowers. Unfortunately, Parent PLUS borrowers, a group that is increasingly struggling with repayment, do not have access to this new plan.

A majority of Black people who participated in the National Black Student Debt Study — a survey of nearly 1,300 Black borrowers and in-depth interviews with 100 borrowers conducted by Jalil B. Mustaffa, Ph.D., co-founder of the Equity Research Cooperative, and Ed Trust researchers — said they felt IDR plans were a lifetime debt sentence. Even though payments on IDR are lower, Black borrowers still struggle to repay their loans while also paying for rent, food, healthcare, childcare, and saving for an emergency or retirement. The SAVE Plan is intended to address some of the issues that make IDR plan unaffordable.

A Brief Overview of Income-Driven Repayment Plans

Income-driven repayment plans are designed to make monthly federal student loan payments more affordable for borrowers and to reduce delinquency and ultimately default, which occurs after a borrower misses 270 days (or approximately nine months) of payments. Unfortunately, IDR plans are insufficient in light of employment discrimination and structural racism, which keeps many Black graduates from ever earning the same salaries and benefits as their White peers. Under these plans, monthly payments are based on a borrower’s income and family size and are usually lower than the standard monthly payment of a typical 10-year repayment plan. After 20 or 25 years of making qualifying payments under an IDR plan, a borrower’s remaining balance is cancelled. The first IDR plan, known as Income-Contingent Repayment, became available in 1995. Today, there are four types of IDR plans: Income-Contingent Repayment (ICR), Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE). These plans have different terms and eligibility requirements.

As currently designed, IDR plans often fail to meet the needs of borrowers, especially Black borrowers. The SAVE plan was created by amending the existing REPAYE plan. Additionally, the administration launched the one-time adjustment of IDR-qualifying payments, which is meant to correct issues with IDR resulting primarily from loan servicer errors. Hopefully, the Biden administration’s proposed improvements to IDR will alleviate some of the biggest challenges borrowers have with IDR plans.

Meanwhile, here are five important ways the SAVE plan helps borrowers:

1. Protects a Greater Share of Borrower’s Income from Being Counted Toward Repayment

Under existing  IDR plans, monthly payments are based on a percentage of the borrower’s discretionary income, which is equal to their federal adjusted gross income (AGI) minus 100% or 150% of the federal poverty threshold for a borrower’s household size. This reduces the amount a borrower must pay monthly. The proposed IDR plan would increase the income protection allowance from 150% to 225% of the federal poverty line.

REPAYE, the most generous IDR plan, protects 150% of the federal poverty line from being counted as income that can be used to pay for student loans. Under this plan, an unmarried borrower without dependents with a federal adjusted gross income of $48,000 in 2023 would have a discretionary income of $26,310. The SAVE plan would reduce discretionary income to $15,195. Borrowers with an AGI below 225% federal poverty line, or $32,805 for an unmarried person without dependents, would have  monthly loan payment of $0. This change recognizes that borrowers need more income excluded from loan repayment, in light of the ever-increasing cost of living.

2. Requires Borrowers to Pay Less of Their Income Every Month

Borrowers in the REPAYE plan must pay 10% of their discretionary income every month. The SAVE plan would cap monthly payments at 5% of discretionary income for undergraduate loans or 10% of discretionary income for graduate loans. Borrowers with both types of loans would pay a weighted average percentage based on their mix of undergraduate and graduate loans.

Under SAVE, the monthly payment for a borrower with an AGI of $48,000 with only undergraduate loans would be $63.31 a month and a borrower with only graduate loans would pay $126.62 compared to $286.75 under REPAYE.

3. Provides IDR Cancellation Sooner for Low-Balance Borrowers

Borrowers currently enrolled in IDR are expected to repay their loans for 20 or 25 years. After that, a borrower’s remaining balance will be cancelled. The new IDR plan would reduce the time to cancellation to 20 years for borrowers with undergraduate loans who originally borrowed more than $12,000, and 25 years for graduate loans. Under SAVE, people who originally borrowed $12,000 or less would only need to repay for 10 years before their remaining balance is cancelled. A 10-year time to cancellation for low-balance borrowers acknowledges that many students who borrowed lower amounts pursued certificates or did not complete their bachelor’s degree. The majority of borrowers in default left college with less than $10,000 in student debt. Certificate holders and borrowers with some college and no degree often struggle with loan repayment because their earnings are typically still low.

4. Limits Ballooning Balances from Capitalization of Unpaid Interest

One of the worst design features of IDR plans is that many borrowers experience ballooning balances because their monthly payments are not enough to cover the interest that accrues on their loans. The unpaid interest in IDR plans then capitalizes meaning it is added to the principal balance and then interest is charged on the higher principal amount. Interest capitalization is one of the biggest reasons why IDR plans feel like a lifetime debt sentence.

The SAVE plan would eliminate interest capitalization by forgiving unpaid interest after a borrower makes their monthly payment. This change will reduce the number of borrowers who pay their loans for years, even decades, and end up with a balance higher than what originally borrowed. Also, this will help borrowers who feel demoralized by regularly making payments but never seeing their balance decrease. For borrowers looking to buy a home or car, reducing ballooning balances can be very important when lenders look at a borrower’s debt-to-income ratio.

5. Automatically Enrolls Borrowers Struggling to Repay in an IDR Plan

Currently, borrowers must elect to enroll in an IDR plan by contacting their loan servicer and completing the required income-certification paperwork. This can be a burdensome and time-consuming process especially for borrowers who may already be delinquent. Borrowers who are delinquent for more than 75 days, would automatically be enrolled in an IDR plan if the U.S. Department of Education has approval to access their income information with the IRS. Additionally, borrowers in default would be eligible to use an income-driven repayment plan.

As millions of borrowers resume paying back their student loans in the fall, SAVE and the 12-month on ramp to repayment are critical consumer protections for borrowers who struggle to repay their student loans. Additionally, the Biden administration continues to fight for student debt cancellation and is planning to reissue their plan using authority granted by the Higher Education Act of 1965.