Hey guys, Mike Frontera here with some big student loan news. By the way, if you like these videos, do me a favor. Click that like button and don't forget to subscribe to continue to see videos like these on everything retirement planning.
So it's been about 3 1/2 years since the COVID-19 pause on student loan interest, and this month the meter finally begins running. Again, with the first payments due in October, and with the Supreme Court striking down the $10,000 plus forgiveness plan, it's time to finally fully pay the piper. Well, not so fast.
A new Income Driven Repayment program called SAVE was recently enacted by the Department of Education, and since the DOE has the authority pretty much to create these plans, it doesn't seem likely to encounter much legal backlash. And the amount of forgiveness under save can often be bigger than that one time cancellation that was previously struck down.
So how does SAVE work? And how do you know if it's right for you? So SAVE, or Saving on a valuable education is designed to replace some of the other income driven plans already in place. So let's check out the highlights. So with SAVE, you'll only be required to pay 10% of your discretionary income each year. Discretionary income is defined as your adjusted gross income over 225% of the federal poverty level. And for an individual this year, that comes out to 32,805.
Now, as of next July, that discretionary number goes from 10% down to 5%. That means if your AGI was $50,000, your required payment would be just 72 bucks a month. And no negative amortization, meaning that even if your payments are less than the interest on your loans, any additional interest is automatically waived. So this is a big deal if you expect your income to greatly increase down the road. You're not just going to be building a bigger and bigger balance that you're going to have to repay later.
Also, effective next July, if your original balance was $12,000 or less, you can receive full forgiveness. On any balance that is leftover after 10 years. Now, for every $1000 over 12,000 dollars balance, you add one year for full forgiveness, up to a maximum of 20 years or 25 years if any of those loans were for Graduate School. Quick caveats. So you must recertify your income each year to recalculate your required payment. But now the government will even recertify automatically for you, as long as you give them access to your tax returns.
And Speaking of taxes, you should expect to be taxed on any forgiven loan balance at the end. Now of course, if you get forgiveness under the public service program, that forgiven balance could also be tax free. So is SAVE the best plan for you? Well, for many borrowers it will be. For others, particularly those with higher income and lower balances, maybe not. So it's always best to check it out for yourself. And in fact, the DOE makes this pretty easy to compare plans. They have a loan simulator on student. Aid. gov. It's one of the many great tools on the website, which includes information about these different repayment plans, how they work, how to switch plans, and so much more. Now, whether or not you agree that taxpayers should foot the bill for college loan forgiveness, it's here. So if you have student loans or you know someone who does, it can be a major source of relief.