On July 1, millions of federal student loan borrowers will see their monthly bills cut by up to half as the Biden administration's new income-driven payment plan, known as SAVE, goes into full effect.
But first the government and the four lenders must solve a big problem.
Starting next month, the monthly payment limit for borrowers enrolled in the SAVE Plan with only undergraduate loans will be lowered from a cap of 10% of discretionary income to 5%. (Graduate student loan repayments remain at a maximum of 10%, with mixed undergraduate and graduate loans weighted).
Loan servicers rely on the Department of Education to send new loan amounts to all borrowers. But the department has not yet completed its calculations, according to three people familiar with the process. They spoke on condition of anonymity because they were not authorized to speak publicly about the matter.
To buy time, the department directed servicers to apply that month's administrative forbearance to borrowers whose payments were due in early July. This means no payment is required from them.
More than 8 million borrowers are enrolled in the SAVE Plan. Many people were notified this month that their accounts had been placed on hold, sparking widespread surprise and confusion.
“I was a little scared,” said Iván Barragán, who received a letter from service provider MOHELA last week. “I thought I did something wrong. “Then I quickly accessed Twitter and saw that many people were receiving notifications as well.”
The letter he received from MOHELA did not explain why his account status had changed. He received an explanation only after contacting the company and receiving a note from the company informing him that the one-month grace period had expired and the payout rate could be recalculated. (A MOHELA spokesperson contacted the Ministry of Education about this issue.)
Department for Education spokeswoman Vanessa Harmoush confirmed the delay in the recalculation.
“We look forward to providing lower monthly payments to millions of borrowers,” she said. “Some borrowers may be able to take advantage of the full benefits of the SAVE Plan and receive a brief deferral to ensure their new payment amounts are accurate.”
The moratorium would count as a qualifying month for borrowers on SAVE and other plans that lead to loan forgiveness after a certain number of payments, Mr. Harmoush said. (People who use SAVE can eliminate their remaining loan balance after making monthly payments for 10 to 20 years.)
That's fortunate for Barragán, who works as an administrator for the Los Angeles County Department of Public Health. He is pursuing Public Service Loan Forgiveness, a program that forgives remaining loan balances for government and nonprofit workers after 10 years of qualifying payments.
For those borrowers, this month becomes essentially free. They can still get credit without paying anything. Ms. Barragan, who recently got married, plans to spend $430 of her savings on her wedding celebration.
The process of essentially restarting the $1.6 trillion federal student loan payment system last fall was tumultuous after a three-year hiatus due to economic disruption caused by the coronavirus pandemic.
The Biden administration has sought to overhaul the system with new rules and numerous revisions to the long-troubled loan forgiveness program. These efforts eliminated $167 billion in debt for nearly 5 million borrowers. The SAVE Payment Plan has helped more than 4 million low-income borrowers qualify for $0 monthly payments.
But making too many changes too quickly was difficult, and glitches and errors that affected hundreds of thousands of people were common.
Representatives of loan servicers, speaking anonymously because their contracts with the Department of Education prohibit them from speaking publicly, said they were frustrated by last-minute SAVE calculation delays and necessary confusion.
But borrowers are hoping to see their payments cut next month. Discounts are automatically applied to those who sign up for SAVE.