After three and a half years of relief, federal student loan payments are about to start up again. While student loan cancellation was shot down by the Supreme Court, a new income-based repayment plan was introduced that could help lower the payments for millions of borrowers.

The new plan is called the Saving on Valuable Education or SAVE plan. Today we're going to go over the five most important things you should know about this plan.

The SAVE plan is replacing the old REPAYE plan for federal student loan borrowers only. This is not available for private student loans.

1. More Income is Exempt Under The Save Plan

The first big change on this plan compared to the old plans such as REPAYE is that more of your income is exempt from the calculation for figuring out your monthly payment.

The monthly payment is based on what the government calls your "discretionary income".

Under the old plans, discretionary income started at 150% of the federal poverty level.

So for example, the poverty level for a household of 4 in most states is $30,000 in 2023.

Under the old plans then, 150% of $30,000 or $45,000 is exempt, or ignored, in figuring out what your discretionary income is.

Under the new plan though, the exempt amount increases from 150% to 225%.

So that same family of 4 would have $67,500 exempt from figuring out their student loan payment.

That's a big difference that could significantly lower this family's student loan payment.

2. Less Discretionary Income Is Used For Payments Under SAVE

The second big change in the SAVE plan is the amount of your discretionary income that you have to pay towards student loans.

So we just talked about how discretionary income is calculated.

But the payment you make towards your student loans is a percentage of that discretionary income.

On the old income-based repayment plans, that percentage ranged from 10-20%, depending on the plan you were on.

Under SAVE, you'll pay 5% of discretionary income for undergrad loans and 10% for graduate loans.

If you have both undergrad and graduate loans, the payment is going to be somewhere between 5-10% of discretionary income, depending on how much you have of each.

One caveat to note here is that 5% doesn't actually start until July 2024. Until then, it's just going to be a straight 10% on both undergrad and graduate loans.

3. Interest Doesn’t Capitalize Under the SAVE Plan

The third change with the SAVE plan is that interest does not capitalize. Now what does that mean?

It means that if your income-based payment is not enough to cover whatever the interest portion of that payment would have been, that unpaid interest is not going to increase the balance of your loan.

So basically, as long as you're making your required monthly payments, your loan balance isn't going to increase due to unpaid interest, even if your required monthly payment is $0.

4. How Forgiveness Works With The SAVE Plan

The fourth thing to know about the SAVE plan is how to get forgiveness.

Now, I'm not talking about public service loan forgiveness because that's its own separate thing.

Under the SAVE plan, if you only have undergrad loans, your loans are going to be eligible for forgiveness after you make 20 years of payments.

If you have any graduate loans though, that forgiveness is bumped up to 25 years.

The SAVE plan also adds another tier for small balances. If your original loan balance on all combined loans was $12,000 or less, you're going to be eligible for forgiveness after 10 years of payments.

For loan balances over $12,000, there's an additional year added for each additional $1,000 up to a max of 20 or 25 years.

5. Maximum Monthly Payment On The SAVE Plan

The last thing to know about the SAVE plan is there's no cap on your monthly payments.

This is especially important if you have a high income because under the SAVE plan, you can actually end up with a higher monthly payment than just the standard 10-year repayment plan.

So while the SAVE plan is going to make sense for a lot of student loan borrowers, it's not going to make sense for everybody.

We didn't cover all the details of the new SAVE plan today, but we got a good high level summary.

If you have questions about your situation specifically, I would encourage you to reach out to a financial professional. My firm, Trek Wealth Planning, helps families with decisions like this and many more every day.