Student loans: Why millions can skip their July payment

(NEXSTAR) — If you’re one of the millions of federal student loan borrowers on the newest income-driven repayment plan, you could be in for a pleasant surprise — a payment-free July.

Last summer, the Biden administration rolled out the Saving on a Valuable Education Plan, otherwise known as the SAVE Plan. The student loan repayment plan takes into account your income and family size to determine your monthly bill.

In July, early forgiveness and other benefits related to the SAVE Plan are set to take effect. That includes cutting payments on undergraduate loans in half and borrowers receiving credit toward forgiveness for certain periods of deferment and forbearance.

Because many borrowers on the SAVE Plan will see their payments recalculated and/or reduced, the Biden administration has instructed loan servicers to put those impacted into “a brief processing forbearance,” according to reports from Forbes and Newsweek.

If you’re among those borrowers placed in forbearance, you won’t have to make a payment on your federal student loans in July. Your interest rates will also, temporarily, be at 0%.

You will, however, likely still owe on any private student loans you have.

Additionally, this processing forbearance will count toward income-drive repayment forgiveness and Public Service Loan Forgiveness (PSLF), the Department of Education says.

A spokesperson for the Education Department told The New York Times that the 4.6 million borrowers on the SAVE Plan who have $0 monthly payments will not be placed into the processing forbearance.

If you are on the SAVE Plan and have monthly payments above $0, you should receive a notice from your loan provider regarding the forbearance, according to the Education Department.

What is the SAVE Plan?

The SAVE Plan now serves as the main income-driven repayment plan for federal student loans. It’s also intended to be the most affordable, as it increases the income exemption to 225% of the poverty line, up from 150%.

This means a single borrower making $32,800 or less would owe no loan payments, according to the Federal Student Aid Office. For a family of four, that level is $67,500 or less.

If you’re making your monthly payments, you will not see your loan balance rise because of unpaid interest — a common complaint when it comes to federal student loans.

Do you qualify for the SAVE Plan?

When the Biden administration rolled out the SAVE Plan in 2023, the Education Department said any borrower with eligible loans, seen below, may qualify.

If you were on the Revised Pay As You Earn Repayment Plan, or REPAYE, you automatically qualify for the SAVE Plan, since it replaced REPAYE.

Loans that qualify for the SAVE Plan are:

• Direct subsidized and unsubsidized loans
• Direct PLUS loans (used for graduate or professional students)
• Direct consolidation loans that did not repay any PLUS loans made to parents

There are five additional loans that can qualify but they must be consolidated into a direct consolidation loan first: subsidized and unsubsidized federal Stafford loans (both from the FFEL Program), FFEL PLUS loans (for graduate and professional students), FFEL consolidation loans that did not repay PLUS loans made to parents, and federal Perkins loans. 

Loans in default, direct PLUS loans, direct consolidation loans that repaid PLUS loans, FFEL loans, and FFEL consolidation loans do not qualify for the SAVE Plan.

Who qualifies for $0 payments under the SAVE Plan?

Generally speaking, a borrower on the SAVE plan will owe 10% of their discretionary income, according to the Department of Education. 

A single borrower making roughly $30,000 will have an estimated monthly payment of $0 on the SAVE plan. A borrower in a family of five making roughly $60,000 or less will also owe $0 monthly. 

It can increase quickly, though. A single borrower making about $40,000 could owe $60 a month. If their income increases to $50,000, their monthly payment could reach $143, according to estimates from the Federal Student Aid Office.

Ultimately, the easiest way to determine how much you could owe is to apply for the plan online. The Department of Education says applying takes about 10 minutes. You’ll need an FSA ID (which you most likely have if you have federal student loans), personal information, financial information, and your spouse’s information, if applicable.