Millions of federal student loan borrowers are being sent "Final Notice" warnings as the government winds down the SAVE repayment plan, essentially giving affected borrowers another 30 days to select a different repayment option before their loans are automatically moved to a fixed-payment plan.
The notices are the latest stage in the Department of Education's transition of borrowers out of the Saving on a Valuable Education, or SAVE, plan, which ended following a federal court order in March.
Servicers began issuing notices on July 1 giving affected borrowers 90 days to select a new repayment plan, but borrowers who fail to act during that window are getting a final notice providing another 30 days, according to Federal Student Aid.
“That final notice is basically the government saying, ‘Choose your repayment plan, or we'll choose one for you.’ And borrowers probably won't like the choice,” Michael Ryan, a finance expert and the founder of MichaelRyanMoney.com, told Newsweek.
Why It Matters
If borrowers still don't act, their servicer will automatically enroll their loans in a fixed-payment plan, which could produce substantially higher monthly bills than some borrowers paid under SAVE.
More than 7 million borrowers were enrolled in SAVE, which based monthly payments on income and family size. The Education Department said in March that guidance about the transition would go to 7.5 million enrolled borrowers.
Federal Student Aid has warned that monthly payments under the Standard or Tiered Standard plans may be higher than under income-driven repayment.
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What Does the Student Loan ‘Final Notice’ Mean?
Experts say the final notice is essentially a second warning.
After SAVE ended, servicers began notifying borrowers in waves starting on July 1 that they had 90 days to choose another repayment plan for which they were eligible.
Some borrowers reached that deadline only to discover they were being given another opportunity to act.
“For nearly two years, borrowers who were repaying their student loans under the SAVE plan found their accounts in forbearance, as the legality of the plan was debated in multiple courts,” Alex Beene, a financial literacy instructor for the University of Tennessee at Martin, told Newsweek.
“However, with the dust finally settled and the program phased out, borrowers have got to move quickly on picking a new repayment option if they have yet to do so.”
According to Mohela, SAVE borrowers who don't select a new plan will ultimately be placed in either the Standard Repayment Plan or Tiered Standard Plan, depending on their loan disbursement dates.
“While the new repayment options may be more expensive, what is far more financially devastating is ignoring their loans and risk seeing significant damage to their credit scores,” Beene said.
“It's understandable that many borrowers are agitated that this issue is coming at a time when many are struggling with affordability, but a future of worse credit options and potentially garnished wages can do much more damage than short-term pain in the form of higher monthly payments.”
What Should You Do If You Receive a Final Notice?
Ryan said you shouldn’t ignore this notice. Instead, you should check which repayment plans you qualify for before the final deadline rather than simply allowing your servicer to select a fixed-payment plan.
“Don't assume the automatic plan is your best or cheapest option,” Ryan said. “And if you're working toward loan forgiveness, check whether the new plan qualifies.”
Borrowers can use Federal Student Aid’s online Repayment Calculator, which shows the plans they may be eligible for and estimates both monthly payments and total amounts paid.
“Ignoring it doesn't mean immediate default," Ryan said. “It means likely being moved into a fixed payment plan with a much higher monthly bill. For someone barely making ends meet, that increase could be the difference between staying current and falling behind.”
What Student Loan Repayment Options Are Available?
Borrowers' options depend on their particular loans and circumstances.
Federal Student Aid says eligible borrowers can currently apply for or recertify under Income-Based Repayment, Income-Contingent Repayment and Pay As You Earn.
The Repayment Assistance Plan, or RAP, also became available on July 1 as part of the broader overhaul of the federal student loan system.
Borrowers also have fixed-payment options. The Standard plan generally uses payments designed to repay eligible loans within 10 years, although Direct Consolidation Loans can have terms ranging from 10 to 30 years. Tiered Standard meanwhile applies to Direct Loans and has terms ranging from 10 to 25 years depending on the amount borrowed.
“If borrowers fail to act, the Department of Education is warning that they may be automatically placed into a more expensive repayment plan,” Kevin Thompson, the CEO of 9i Capital Group and the host of the 9innings podcast, told Newsweek.
“This means more borrowers could face higher monthly payments, increasing the likelihood of defaults and creating even greater financial distress.”
What If You Can't Afford the New Payment?
Borrowers who cannot afford the payment calculated under a new plan have some options before going straight to missed payments.
Repayment plans based on income can lower their payments, especially if you have a lower income or larger family size.
The National Consumer Law Center has advised borrowers to contact their loan servicer immediately to explore other repayment options or request temporary forbearance or deferment.
“We understand this has been one of the most confusing situations borrowers have had to navigate,” Thompson said. “If you have the opportunity, consult with a professional to determine the best course of action.”
What Happens Next
Failing to select a plan by the final deadline does not itself mean that a borrower's loans will immediately default.
But they will be automatically enrolled in a fixed-payment repayment plan. At that point, the borrower will have a monthly payment obligation under that plan.
Newsweek’s reporters and editors used Martyn, our AI assistant, to produce this story. Learn more about Martyn here.
Contact Newsweek editors on this story: Jason Lemon and Paul Donnelley.