The current student loan default rate is already elevated. Discontinuing the SAVE program may further increase it.

Millions Face Student Loan Repayment Challenges

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A significant number of Americans have already defaulted on their student loans, and that figure is expected to rise in the near future.

Main Points to Know

• Over 7 million individuals currently benefiting from the Saving for a Valuable Education (SAVE) program will soon need to switch to a different repayment plan and begin making payments again after a lengthy pause.
• With monthly payments set to increase and several recent policy changes, many SAVE participants may find it difficult to keep up with their obligations.
• This situation could further increase the already high number of borrowers who are behind on payments or have defaulted.

Currently, millions of federal student loan holders are either behind on their payments or have defaulted, and this number is likely to climb as more people are required to restart payments.

On December 9, the Department of Education announced it would discontinue the SAVE repayment plan. As a result, the 7.43 million borrowers still enrolled must move to a different repayment option, though a specific deadline has not yet been provided.

Uncertainty Surrounds the Transition

The SAVE plan, introduced during the Biden administration, has kept borrowers in forbearance for over 18 months due to ongoing legal disputes.

While the Department of Education has not set a firm date for when borrowers must switch plans, Sarah Austin, a policy analyst at the National Association of Student Financial Aid Administrators, notes that processing millions of transfers will take considerable time.

“A major concern is the significant backlog in income-driven repayment applications,” Austin explained. “With the Department’s workforce having been reduced, this could further slow the process of moving borrowers to new plans.”

Why This Issue Is Important

Defaulting on student loans can lead to wage garnishment by the Department of Education, reducing borrowers’ disposable income. This could have far-reaching economic effects, potentially hindering economic growth and decreasing federal revenue.

Many borrowers will face higher monthly payments under new plans compared to what they paid with SAVE—sometimes by several hundred dollars each month.

“For many, the new payment amounts will exceed what they had budgeted for,” Austin said. “This is a real concern for those already struggling to manage their finances.”

Many Borrowers Have Never Made a Payment

Austin points out that resuming payments will be a major adjustment for several reasons.

The SAVE program has been in limbo for over a year and a half due to legal challenges, leaving borrowers in forbearance. Many had $0 monthly payments, and prior to that, all federal student loan payments were paused during the COVID-19 pandemic. For some, this will be the first time in six years they are required to make any payment at all.

This also means that some recent graduates have never experienced a typical repayment environment.

“It’s worrisome to consider how these individuals, who have never had to budget for student loan payments, will adapt to this new financial responsibility,” Austin said. “This could contribute to higher rates of delinquency and default.”

Consequences for Those in Default

As SAVE borrowers begin making payments again, the number of people falling behind is expected to grow.

Before the pandemic, 2.76 million borrowers were delinquent—meaning they had missed at least one payment—and about 8.08 million were in default, which occurs after more than 270 days without payment and carries more severe penalties than delinquency. After the payment pause that started in March 2020 and ended in October 2023, even more borrowers have struggled to keep up.

Currently, about 3.32 million borrowers are behind on their loans, and approximately 8.82 million are in default, according to the Department of Education.

Once payments resume for SAVE participants, those who default may have their wages garnished by the Department of Education. This loss of income can make it even harder for borrowers to get back on track.

Austin advises those affected by the end of the SAVE plan to start researching alternative repayment options and prepare for new monthly payments. She also cautions that some current repayment plans will be phased out by 2028.

For more information, read the original article on Investopedia.