On July 1, millions of federal borrowers will see their monthly bills drop — some by as much as half — as the Biden administration plans. new income-based payment planknown as SAVE, takes full effect.
But first, the government and its four loan managers must solve a major problem.
Starting next month, borrowers enrolled in the SAVE plan and receiving only undergraduate loans will have their monthly payments capped at 5 percent of their discretionary income, down from the current limit of 10 percent. (Graduate loan payments will remain at a maximum of 10 percent, while those with a combination of undergraduate and graduate loans will receive a blended payment.)
Loan servicers rely on the Department of Education to send them new loan amounts for each borrower. But the ministry has not yet finished making its calculations, according to three people familiar with the matter, who requested anonymity because they are not authorized to speak publicly on the subject.
To save time, the department has directed its officers to place borrowers whose payments are due in early July into an administrative forbearance for the month, meaning no payments from them will be required.
More than eight million borrowers have enrolled in the SAVE plan. Many received notices this month that their accounts had been placed on forbearance, sparking widespread surprise and confusion.
“I was panicking a bit,” said Iván Barragán, who received a letter last week from his agent, MOHELA. “I thought I did something wrong. Then I quickly went to Twitter and saw that a number of people were also receiving the notifications.
The letter he received from MOHELA does not specify why his account status was changed. He only got an explanation after contacting the company, which sent him back a note saying the one-month forbearance was a waiting period to recalculate his payment rate. (A MOHELA spokesperson directed questions on the matter to the Ministry of Education.)
Vanessa Harmoush, spokesperson for the Ministry of Education, confirmed the delay in the recalculation.
“We look forward to offering millions of borrowers lower monthly payments,” she said. “Some borrowers may be placed on a brief processing forbearance to ensure they can access all of the SAVE plan benefits and that their new payment amounts are accurate.”
These forbearances will count as one month’s qualifying payment for borrowers in the SAVE program and other plans that lead to loan forgiveness after a set number of payments, Ms. Harmoush said. (People with SAVE can have their loan balance eliminated after 10 to 20 years of monthly payments.)
That’s a relief for Mr. Barragán, who works as an administrator for the Los Angeles County Department of Public Health. It continues the Public Service Loan Forgiveness program, a program that releases the remaining loan balance for government and nonprofit workers after a decade of qualifying payments.
For these borrowers, this month essentially becomes a gift; they can’t pay anything and still get credit. Mr. Barragán, who recently got married, plans to put the $430 he saves toward a planned wedding celebration.
The process of restarting the $1.6 trillion federal student loan repayment system last fall — after a three-year pause brought on by the economic turmoil that accompanied the coronavirus pandemic — has been rocky.
The Biden administration has worked to overhaul the system with new rules and a plethora of solutions for long-troubled loan forgiveness programs. These efforts led to the elimination of $167 billion in debt for nearly five million borrowers; The SAVE payment plan has brought $0 monthly payments to more than four million low-income borrowers.
But making so many changes so quickly has been a challenge, and problems and errors – some affecting hundreds of thousands of people – are common.
Representatives of the loan servicers, speaking anonymously because their contracts with the Department of Education prohibit them from speaking publicly, said they were frustrated by the last-minute delay in calculating the SAVE and the scrambling that this required.
Borrowers, however, are eager to see their repayments reduced next month. Discounts will happen automatically for those enrolled in SAVE.
