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New Student Loan Forgiveness Strategy: A Guide for Small-Debt Borrowers

The new SAVE plan has opened the door to small-debt student loan forgiveness for millions of borrowers. If you owe less than $20,000 of federal student loan debt, you might be better off pursuing student loan forgiveness versus sticking with the conventional wisdom of hustling to pay them off. 

Keep reading to learn how the SAVE plan can save you money.

Why the SAVE plan is so much better for small student loan balances, even if you have no degree

The new SAVE plan (short for Saving on a Valuable Education) has become a beacon of hope for borrowers with small student loan balances. Previously, borrowers with small amounts of student debt had no real escape. In a perfect world, they’d refinance to a lower interest rate and then tackle their student debt as fast as possible. But that’s not the reality of the situation.

According to the U.S. Department of Education, most borrowers in default originally borrowed $12,000 or less.

Millions of borrowers took out small student loans, sometimes in the tens of thousands of dollars, to advance their careers. However, for a variety of reasons, they never finished their degree — saddling them with the debt, but no degree. For those who did graduate, many found themselves in a volatile job market or facing other personal or financial barriers that led to delinquency or default of their student loans.

The SAVE plan was specifically designed to help struggling borrowers with small student debt, while also making student loan repayment more affordable for federal borrowers as a whole.

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What are the main benefits of the SAVE plan for small debt borrowers?

The new SAVE plan comes with generous benefits that can cut monthly loan payments in half and fast-track small debt student loan forgiveness. Here’s how the SAVE plan can benefit student loan borrowers:

1. Faster loan forgiveness for smaller principal balances

The SAVE plan speeds up loan forgiveness for small debt borrowers. If you borrowed $12,000 or less, you only have to make 10 years worth of payments to reach forgiveness under the SAVE plan. For every $1,000 over that amount, you’ll add one more year to your forgiveness timeline.

“Giving borrowers with smaller loans a faster path to being debt free will help many borrowers avoid financial distress and have peace of mind.”

Under Secretary of Education James Kvaal

For borrowers with undergraduate loans only, the maximum repayment period is capped at 20 years — regardless of your loan amount. However, if you have graduate loans in the mix, you’re looking at a 25-year timeline for loan forgiveness.

Here are some example forgiveness timelines:

  • If you borrowed $15,000, you can expect to make a maximum of 13 years of payments.
  • If you borrowed $18,000, you’ll max out at 16 years of repayment.

Basically, if you borrowed less than $21,000 for undergrad, you’ll be eligible for forgiveness faster than the normal 20-year timeline.

Note the Department of Education uses your original principal (aka how much you actually took out to attend school) as the baseline for your forgiveness timeline — not your current outstanding balance.

2. Larger amount of income excluded from IDR payment calculation

Income-driven repayment (IDR) is based on a percentage of your discretionary income. This calculation factors in your adjusted gross income (AGI) and a federal poverty line (FPL) deduction based on your family size.

The SAVE plan increased this exemption from 150% to 225% of the poverty line, shielding a larger portion of income and effectively lowering monthly student loan payments.

How family size affects how much you pay under the SAVE plan

The chart below shows how much you can earn before having to pay on the SAVE plan. For example, a family of four could earn anything below $70,000 and have a $0 monthly payment on the SAVE plan.

Family sizeProtected income
Projected income is based on the 2024 federal poverty line amounts.

3. Lower payments for undergraduate loans

Starting in July 2024, SAVE monthly payments will use 5% of discretionary income for undergraduate loans. However, if you have graduate loans, the Department of Education will use a weighted average between 5% to 10% to calculate your monthly payment.

Having the ability to pay only 5% of discretionary income and receive a much larger poverty line deduction means borrowers will be paying very little toward their student loans unless you’re making high five-figures or above.

4. Protection from runaway student loan interest

The SAVE plan comes with a government interest subsidy for borrowers with low monthly payments. If you pay the required amount each month, the government will cover any unpaid interest — meaning your loan balance won’t grow due to accrued interest.

Is student loan forgiveness even possible with small debt?

The Biden-Harris Administration has made it clear that small debt student loan forgiveness isn’t just a goal. As of February 2024, $1.2 billion in loans were automatically discharged for almost 153,000 borrowers under the SAVE plan’s shortened timeline for small debt balances. And more small debt student loan forgiveness is on the horizon due to the structure of the SAVE plan.

When the poverty line deduction was set at 150% for old REPAYE and PAYE, millions fewer borrowers could qualify for small debt student loan forgiveness. But the SAVE plan’s increase to 225% FPL puts a substantial number of borrowers in a position to not have to pay anything for student loan benefits, or they’ll pay very little.

Now, a family of three can earn just shy of $60,000 before having a SAVE payment, with larger families receiving a bigger deduction. And according to 2024 labor market data, most recent college graduates earn anywhere between $41,000 and $76,500. Keep in mind that a lot of small debt borrowers are two-year community college graduates (or weren’t able to finish out their degree), which often results in lower-paying opportunities than a bachelor’s degree.

As a reminder, discretionary income is calculated by deducting your family size’s poverty line deduction from your AGI, which isn’t the same thing as your gross income. Contributions to pre-tax retirement accounts or a health savings account (HSA) can lower your AGI, as well as other above-the-line deductions. You’ll need to be making significantly more income than the corresponding poverty line deduction to not benefit from small debt student loan forgiveness with the SAVE plan.

Small debt student loan forgiveness is possible with SAVE: Example payment calculation

Let’s look at how small debt student loan forgiveness could play out using our SAVE Plan Calculator.

Pretend you’re married with two kids and have $20,000 in undergrad debt. You work a private sector job earning $60,000 a year. The SAVE plan allows you to exclude your spouse’s income when filing taxes separately. Your IDR plan calculation will only be based on your income. But since you filed separately, you’ll also need to exclude your spouse from the family size calculation.

In this case, your federal poverty line deduction for 2024 would be $58,095 based on a family size of three. Here’s the basic math:

IDR Payment: $60,000 – $58,095 = $1,905 * 5% = $95.25 per year / 12 = $8 per month

Your monthly payment would come out to a whopping $8 under the SAVE plan once the remaining benefits kick in at the end of the summer.

Why small debt student loan forgiveness affects millions more borrowers

Small debt student loan forgiveness just wasn’t mathematically possible prior to the changes under the SAVE plan. The typical IDR payment used to be about $300 a month. But now it’s closer to $100 (or less) on the SAVE plan, creating a path to forgiveness for millions of small debt borrowers.

As of the end of 2023, about 24.3 million borrowers owed $20,000 or less. Even if we just look at the number of borrowers who could qualify for small debt loan forgiveness in 10 years, that’s at least 15 million borrowers.

The SAVE plan is truly transformational for small debt loan forgiveness on a large scale.

Take control of your student loan journey

If you have a small student loan balance, you’re probably going to be told to pay the student debt off. And maybe you should. Getting out from under student loan debt can be financially- and emotionally freeing. But thanks to the SAVE plan, you now have additional options for small debt loan forgiveness if you want or need to focus on other financial priorities.

What happens if a future administration decides to repeal the SAVE plan? We’ll have to wait to see what happens in both the White House and Congress. For now, borrowers can take advantage of low monthly payments and interest subsidies under the SAVE plan.

Optimize your student loan repayment by scheduling a consultation with our team of student debt experts. 

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