Why Some Student Loan Borrowers Won't Have to Pay in July

Some federal student loan borrowers might not have to make a payment in July.

Many borrowers enrolled in President Joe Biden's income-driven SAVE plan are being put into a temporary forbearance as the Education Department enacts more generous repayment benefits that go into effect next month.

As many as 3.4 million borrowers enrolled in SAVE will have their monthly payments reduced under the new benefits. For borrowers with undergraduate loans, their monthly loan bill will be recalculated based on 5% of their discretionary income as of July (down from the current 10%). Borrowers with graduate loans may see their bills reduced, too.

“We look forward to providing millions of borrowers with lower monthly payments,” an Education Department spokesperson said in a statement to Money.

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The department is in the process of sending the necessary income information of borrowers to student loan servicers so that they can implement the lower monthly payment amounts for those who qualify. As a result, “some borrowers may be placed in a brief processing forbearance,” the department says.

During this temporary forbearance, no payment is required, and interest rates are set to 0%. Borrowers will also receive payment credit toward forgiveness through SAVE and Public Service Loan Forgiveness.

About 8 million federal student loan borrowers have enrolled in SAVE since its debut last summer. Of those, 4.6 million borrowers have already had their monthly payments set to $0. These borrowers won’t be affected by the recalculation because their payments are already as low as possible.

The remaining borrowers who require a temporary forbearance will be alerted by their servicer with the subject line: "Your student loans have been placed into a forbearance," according to a draft of the message reviewed by Money. The message outlines the details of the forbearance, noting that if a payment has already been made for July, it will be put toward future payments.

Other SAVE changes borrowers should know for July

In addition to many loan payments getting slashed in July, more changes to the SAVE plan are on the way.

Starting in July, borrowers who have both undergrad and graduate loans will pay a weighted average between 5% and 10% of their income based on the original principal loan balances.

Borrowers who enter deferment or forbearance will start receiving payment credit toward forgiveness for each applicable month, as well. For previously uncounted periods of deferment or forbearance, borrowers will be able to make “buyback” payments for those months to keep them on track for forgiveness.

Payment history is important to reap all the benefits of the SAVE plan. For example, borrowers can have their remaining loan balances forgiven after making 10 years of payments depending on their original balance — up to a maximum repayment period of 20 years for undergrad loans and 25 years for graduate ones.

Originally, this accelerated forgiveness timeline was set to go into effect in July, but the Biden administration fast-tracked the benefit and started forgiving loans in February.

"Why wait when you can get people help early?" White House Press Secretary Karine Jean-Pierre previously told Money.

Though his broad-based student loan forgiveness plan was struck down by the Supreme Court, the Biden administration has forgiven the loans of over 400,000 borrowers through the SAVE plan, totaling more than $5.4 billion, according to data from the Education Department.

In July, the department is also sunsetting some other income-driven repayment plans to streamline borrowers’ repayment options. Afterwards, most borrowers will not be able to access the Pay-As-You-Earn (PAYE) or Income-Contingent Repayment (ICR) plans. But, as student loan expert Betsy Mayotte noted, this isn't necessarily good news all around.

“SAVE isn’t for everyone,” Mayotte told Money earlier this year. While SAVE could set payments to $0 or forgive balances in as few as 10 years for borrowers with low-incomes and small loan amounts, certain high-income borrowers might actually see their payments increase under the plan.

That’s because, unlike PAYE and ICR, the SAVE plan does not have a monthly payment cap and may have a longer timeline to forgiveness for folks with a mix of graduate and undergraduate loans.

Using the Education Department’s loan simulator tool, borrowers can decide whether PAYE or ICR makes sense for their situation before they disappear next month.

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