The Federal Government announced a new wave of student debt forgiveness, especially for those who are financially burdened. In a complicated election year, in which the government of Joe Biden and the Democratic Party are seeking to form coalitions with a view to re-election, the White House intends to press ahead with new initiatives for student loan forgiveness. This happens after the Supreme Court of Justice declared unconstitutional the broad program proposed by the president.
According to the White House, this new forgiveness package will benefit about 4.75 million borrowers, who will have an average debt of $35,000 forgiven per person. In this latest phase, 160,000 borrowers will see relief through the SAVE Plan, which targets public service workers such as teachers, nurses and law enforcement officers, in addition to those approved for corrections in income-based repayment.
Student Debt Relief: Saving on a Valuable Education (SAVE) Plan
The Biden-Harris administration introduced the Saving on a Valuable Education (SAVE) plan in August 2023 to study various factors that have impacted the quality of life of student loan borrowers. Although a university degree has traditionally been a sure way to climb economically and socially into the middle class, in the last 40 years university tuition has increased more than family income.
The most indebted students are those who come from disadvantaged backgrounds, from low-income families or from vulnerable socio-economic situations. College graduates who are the first in their family to attend a university tend to get into more debt than those whose families already have graduates in their recent and not so recent ancestors.
The idea of the Biden-Harris administration’s SAVE plan is the creation of an income-based payment system that is voluntary. The monthly payments of the borrowers are calculated according to their net income. The new formula introduced in this program excludes more income from the calculation and waives the monthly unpaid interest, which often becomes part of the indebted capital, increasing the debt.
Simulations of the SAVE Plan: How Will It Contribute to Student Debts?
In general, the program offers more flexibility and more liquidity at the beginning of the career, reduces the total payments and forgives the remaining balance after 20 or 25 years of payments. Finally, it shortens the repayment period to 10 years for those with less than $21,000 in loans.
The thematic report on the federal government’s SAVE scheme demonstrates how this scheme reduces the monthly payments of a typical bachelor’s degree holder and highlights the significant loan forgiveness and wealth accumulation potential it offers. The simulations compare the benefits of SAVE with those of the REPAYE plan, a previous payment plan. In general, SAVE provides more liquidity in the first few years than the standard plan.
Low-Income and Typical-Income Borrowers
The simulations consider three types of borrowers with different initial incomes: low, typical and high. It is projected that, by the year 20, low-income borrowers will earn almost $70,000 a year, the typical more than $102,000 and the high-income more than $170,000. Each simulation assumes a loan balance of $31,000 and an interest rate of 5.5%.
For low-income borrowers, down payments are zero until their income increases. Unpaid interest is subsidized and the principal remains unchanged. As income increases, so do payments, but they remain affordable. After 20 years, the low-income borrower has paid approximately $3,000, benefiting from a forgiveness of $31,000 in interest and 100% of the principal. Borrowers with typical incomes also receive significant forgiveness, although less compared to those with low incomes.
High-Income Borrowers
The high-income borrower, however, receives no forgiveness and pays off his loan in 17 years. Although the monthly payments are lower with SAVE, the borrower pays more in nominal terms due to the longer repayment period. This borrower may prefer payments spread over more years to maintain greater monthly liquidity.
The SAVE plan offers potential wealth-generating benefits due to the time value of money. Borrowers who invest the savings in a savings account or in the stock market can significantly increase their savings over time. For example, a low-income borrower could have $74,000 more if they invest in the stock market in 20 years, adjusted for inflation.
In addition to the financial benefits, SAVE reduces the financial burden and the probability of default, improving the financial security and mental health of borrowers. As of February 20, 2024, 7.5 million borrowers were enrolled in SAVE, with 4.3 million making zero-dollar payments due to their income levels. This suggests that SAVE is already providing greater liquidity to borrowers, facilitating consumption and reducing the negative impact of student debt on the economy.
