To be clear, many borrowers would end up paying the same cumulative amount regardless of this interest benefit, because the SAVE plan (like REPAYE) forgives remaining undergraduate loans after 240 months of payments (or less, for some borrowers). By the end of the 20-year repayment period, total balances are nearly $10,000 lower for the median-earning graduate, and nearly $25,000 lower for the lower-earning graduate, than they would be without this interest benefit. After five years, the median-earning graduate saves over $5,500 in interest that would otherwise be added to their remaining obligation, while the lower-earning graduate saves over $8,400. Figure 1 illustrates what this excess interest benefit means for three hypothetical single undergraduate borrowers, who enter repayment with $31,000 in loans and starting salaries equivalent to the 25th, 50th, or 75th percentile of initial earnings for bachelor’s degree graduates. Under SAVE, this will no longer occur: any interest not covered by a borrower’s monthly payment is not charged as long as the borrower makes their minimum required payment in that month. Beyond creating anxiety, rising balances can limit access to further credit, and can interfere with successful repayment if borrowers are deterred from IDR enrollment, or if they stop making payments altogether. Research indicates that growing balances create stress and discouragement. When monthly payments amounted to less than interest costs, that unpaid interest would accumulate-and in some cases would become part of the principal, upon which interest could further compound. Under previous IDR plans, some borrowers making their required monthly payments still saw their total loan balances grow, especially in the early years of repayment. One of the biggest new benefits to borrowers is how the SAVE plan handles unpaid interest. The new SAVE plan lowers barriers that previously stood in the way of higher take-up, by streamlining repayment options, automatically enrolling delinquent borrowers who have given consent to access their tax information, and eliminating the need to manually re-certify income each year. Enrollment in previously-available IDR plans has lagged among low-income borrowers in particular, even as they stand to benefit the most from the protections IDR offers against loan delinquency and default. Lower payments alone, however, are not always sufficient to induce borrowers to enroll. IDR enrollment has been shown to reduce the risk of default and increase household liquidity to finance other essentials, including car and home payments. More than 1 million low-income borrowers will newly qualify for a $0 monthly payment, and the rest will save at least $1,000 per year compared to previous IDR plans. Second, once fully implemented, SAVE will cut in half the rate that borrowers (with incomes above the minimum threshold) have to pay each month on their undergraduate loans-from 10 percent to 5 percent of discretionary income. The SAVE plan lowers monthly payments relative to the most similar previous IDR plan (known as REPAYE) in two ways: First, it raises the minimum income level below which monthly payments are set to $0. It also makes other critical improvements-like the interest benefit explained in this blog- to ensure borrowers who enroll and make timely payments do not experience growing loan balances. The new plan, known as SAVE (Saving on a Valuable Education), substantially reduces monthly payment amounts compared to previous IDR plans, and reduces time to forgiveness to as little as 10 years for borrowers who enter repayment with up to $12,000 in loans (as does the typical community college borrower). Income-driven repayment plans enable borrowers to make monthly payments based on their income and family size, with any remaining balance forgiven at the end of the repayment period (typically 20 to 25 years).
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