The U.S. Education Department said on Wednesday that it would resume applying interest on Aug. 1 to federal student loans held by nearly eight million borrowers in the Biden-era repayment plan known as SAVE, which has been in limbo after being halted by legal challenges.
The shift is likely to take borrowers by surprise, giving them just weeks to consider their options at a time when loan servicers face significant backlogs in processing repayment plan applications. The entire student loan landscape is about to undergo even more upheaval — the domestic policy bill signed into law last week created new repayment options that will take effect next year.
SAVE borrowers’ payments have been on hold since last summer, and they will remain paused for now. But the Education Department is encouraging enrollees to move into another repayment plan.
The Saving on a Valuable Education plan, an income-driven repayment program that ties borrowers’ monthly payment amounts to their income, was a centerpiece of former President Joseph R. Biden Jr.’s agenda, and it was more generous than its predecessor plans. Because of its cost, two groups of Republican-led states challenged it in federal court in the spring of 2024, arguing that the Biden administration had overstepped its authority in developing the plan. It was blocked while the litigation worked its way through the courts, miring borrowers in uncertainty.
The Trump administration’s wide-reaching domestic policy law provides some clarity: Regardless of what happens in the courts, it will eliminate the SAVE plan and two other plans — Pay as You Earn, known as PAYE, and Income Contingent Repayment, or I.C.R. — by June 30, 2028. Those will generally be replaced by two new repayment options next July, though advocates say they will generally cost many borrowers more.
For now, SAVE borrowers will need to make some decisions if they want to avoid accumulating interest. The Education Department will begin reaching out to SAVE enrollees on Thursday with instructions on switching plans, and advises borrowers to use its loan-simulator tool to calculate monthly payments and figure out which plan may best meet their goals.
Though several income-driven repayment options are still available, the department is encouraging SAVE enrollees to consider the Income-Based Repayment plan, since that program will remain open to existing borrowers as long as they do not take out new loans or consolidate after July 1, 2026. And it will enable SAVE enrollees to resume making qualifying payments and earn credit toward any potential loan forgiveness down the road.
The Income-Based Repayment plan requires borrowers to pay 10 percent of their discretionary income toward their balance for 20 years — and any remaining balance is forgiven. (That formula applies to borrowers with loans made after July 1, 2014. For loans taken before that, borrowers pay 15 percent of income over 25 years.)
Abby Shafroth, director of the Student Loan Borrower Assistance Project at the National Consumer Law Center, said that moving to Income-Based Repayment, or I.B.R., was sound advice, but that some people might not be in a position to pay that amount.
“Borrowers who cannot afford payments in I.B.R. should consider other options, such as seeing whether they would qualify for an economic hardship or unemployment deferment,” Ms. Shafroth said. She added that neither of those options charged interest on subsidized loans (and economic hardship deferments also count as qualifying time toward loan forgiveness). Borrowers can also remain in SAVE for the time being, and payments will remain in forbearance, though interest will pile up.
Loan servicers are facing a backlog of 1.5 million applications, advocates said, so people enrolling in the next few weeks may not be immediately processed. “Be prepared to wait awhile,” said Mike Pierce, executive director and co-founder of the Student Borrower Protection Center, a policy and advocacy group.
Borrowers who previously submitted applications for the I.B.R., PAYE or I.C.R. plan do not need to submit a new application, the Education Department said. But keep in mind that PAYE and I.C.R. will be phased out in 2028 (enrollees will need to switch to new plans).
It was not entirely clear why the department made this change now, and it did not immediately respond to requests seeking comment. In its statement, the department said it “lacks the authority to put borrowers into a zero percent interest rate status.” But borrower advocates said that nothing had changed in the court cases, and that the department’s authority to pause interest was not based in the regulations that created SAVE.
“Since Day 1 of the Trump administration, we’ve focused on strengthening the student loan portfolio and simplifying repayment to better serve borrowers,” Education Secretary Linda McMahon said in the statement. “As part of this effort, the department urges all borrowers in the SAVE plan to quickly transition to a legally compliant repayment plan.”
Tara Siegel Bernard writes about personal finance for The Times, from saving for college to paying for retirement and everything in between.
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