With the new year underway, millions of student loan borrowers are either trying to escape the federal loan repayment plan that they are currently in, or are trying to figure out what move they should make with their college debt. The loan repayment migration and confusion can be chalked up to the relatively short yet turbulent existence of the federal Saving for a Valuable Education program.
SAVE, which the Biden administration originally rolled out in August 2023, was instantly popular with former college students who faced repaying their debt. SAVE became the favorite option for borrowers who eschewed the standard 10-year federal repayment program and instead favored an income-driven repayment option that would allow them to repay based on what they were earning and not what they owed. SAVE’s repayment terms were significantly more generous than those of other federal IDR plans, which is why so many borrowers embraced SAVE. Because of those generous terms, it wasn’t a surprise when the plan was hit with lawsuits.
While the legal battle wound through the legal system, the 7 million SAVE borrowers were placed in forbearance. Borrowers didn’t have to make payments, and interest did not accrue on their loans since SAVE was caught up in legal challenges.
While SAVE borrowers can still avoid payments for now, the incentive to do so has disintegrated.
The federal government began charging interest on SAVE accounts back in August, so skipping payments is now increasing balances. In addition, the parties in the SAVE legal fight reached a proposed settlement in December that will officially end SAVE. This means borrowers will soon have to move to a different repayment plan.
The federal government’s move has led many SAVE borrowers to take steps to switch to a different repayment method. The question, however, is which option will be the best.
The Options
SAVE borrowers must choose among these three alternatives:
-
Stay in SAVE forbearance and watch their balances rise during the continued nonpayment until they are forced to change plans.
-
Switch to the standard 10-year repayment plan with fixed payments over the life of their loans.
-
Transfer to a different federal income-driven repayment plan.
Repayment Alternatives
Let’s look closer at these options.
Staying in SAVE
This option might make sense for borrowers who literally don’t have the cash flow right now to pay down their debt.
The period these borrowers will be able to sit tight, however, is narrowing. The federal government plans to roll out its new IDR plan on July 1. The new program is called Repayment Assistant Plan, or RAP for short, and individuals and the government are interested in moving borrowers over to this plan. All IDR repayment that starts in July 2026 will be enrolled in RAP.
Standard 10-year Repayment
This option works for borrowers who want to pay the least interest and eliminate their debt as quickly as possible. This is the choice that borrowers are automatically enrolled in if they don’t designate an IDR option. Historically 50% to 60% of borrowers are repaying this way.
Switching to a Different Income-Repayment Plan
While three federal income-driven plans remain, only Income-Based Repayment is a realistic choice. That’s because the government will shutter the other two—Pay As You Earn and Income Contingent Repayment—in 2028.
Tool to Help Borrowers Choose
The federal loan simulator is an excellent resource for borrowers trying to decide how to handle their college debt. After inputting information such as the types of federal loans, balances, the borrower’s income and financial goals, the simulator generates options and recommends the ideal choice.
The only downside to this otherwise excellent tool is that the RAP program is not yet included as an option. The tool can only provide advice on the current lineup of federal repayment options.
Tax Bomb
Individuals need to understand that they could face a tax bomb for the forgiveness of any debt left at the end of an IDR repayment period. Tax-free forgiveness of remaining debt expired in 2026.
Borrowers are realizing that paying off their debt in 10 years under the standard plan is often cheaper than paying a smaller amount over 20 years and then getting hit with a massive IRS bill.
Of course, terms of IDR plans could change over the years of repayment.
Moving to a New Plan
To switch to the standard 10-year repayment, borrowers must contact their loan servicer such as MOHELA, Nelnet and Aidvantage. Recently, borrowers were experiencing a 30 to 60-day wait.
The wait can be even longer for borrowers who want to switch to a different IDR. The U.S. Department of Education is experiencing a massive backlog of applications. To apply, borrowers need to complete an application at StudentAid.gov.
