The Supreme Court recently rejected the Biden administration’s plan to forgive up to $20,000 in student loan debt for 43 million borrowers. With Congress mandating that interest begin accruing on all student loans effective September 1, 2023 and repayments begin in October, the White House hastily pushed out a backup loan forgiveness plan called SAVE.

While a direct application website will be launched later this summer, the White House says that borrowers can get started now in the new plan by enrolling in an existing Income-Driven Repayment (IDR) plan. Those already enrolled in an IDR will automatically be enrolled into SAVE. Any borrower currently enrolled in REPAYE, a Pay As You Earn program, will automatically be enrolled into SAVE.

Under the SAVE plan:

• Payments on undergraduate loans will be cut in half from 10% to 5% of incomes above 225% of the Federal Poverty Level (FPL).
• Those making less than 225% of the FPL, meaning single individuals earning less than $32,805 a year, or $67,500 for a family of four, will no longer be required to make payments.
• Borrowers who pay what they owe under the SAVE plan will no longer see their loan balances grow due to unpaid interest. For example, if $80 of interest accrues on your loan balance each month, but your SAVE payment is set at only $60, you will not be charged the remaining $20.
• Borrowers whose original principal balances were $12,000 or less will receive complete loan forgiveness after 120 payments (10 years of repayment). This will allow nearly all community college borrowers to be debt-free within 10 years. For each additional $1,000 borrowed above $12,000, an additional 12 payments will be added up to a maximum of 20 or 25 years.

While the Biden administration hopes to have the complete plan in place within 12 months, that time frame is highly unlikely due to anticipated political and legal challenges. Since the Supreme Court ruled that the Executive Branch (President) lacked authority to institute debt forgiveness under the HEROES Act, the Biden administration is pushing for these changes under a different law, known as the Higher Education Act, with dubious legal authority.

While the Biden administration was quick to point out the benefits to existing student loan borrowers, it offered no details on the cost of this plan to the U.S. taxpayers. Given the fact that monthly payments will be cut in half, it conceivably could cost even more than the original plan to immediately cancel up to $20,000 of student loan debt.

Hours after the Supreme Court decision, the Biden administration also announced a 12-month grace period to help borrowers who may struggle after payments restart. Biden in effect created another “payment pause” by informing borrowers that if they don’t make payments during the first 12 months after payments resume, they won’t be at risk of default and it will not adversely affect their credit score. Furthermore, after the year-long grace period expires, borrowers who are in a short-term financial bind may qualify for deferment or forbearance, allowing them to temporarily suspend payments. Finally, the Biden administration is working on a plan so borrowers can discharge their student loan debt through bankruptcy.