The US Department of Education has started notifying over 7.5 million federal student loan borrowers enrolled in the now-defunctSAVE repayment planthat they must select a new, lawful repayment option or face automatic enrolment in a standard plan. The guidance follows a court-approved settlement that formally ended the Biden-era Saving on a Valuable Education (SAVE) programme after repeated legal challenges found it unlawful,the Department of Educationconfirmed.

Under Secretary of Education Nicholas Kent addressed the situation at the American Enterprise Institute last week. 'What we have been trying to do is explain to borrowers that loan forgiveness is not happening,' he said. 'Not paying your loans is no longer an option, especially under this administration.'

His remarks were aimed at two groups. The SAVE borrowers have sat in forbearance for nearly two years while courts battled over the plan's legality and must now pick a replacement. Separately, about 8.8 million borrowers are in default on their federal loans, with some having gone more than six years without making a single payment,Investopediareported.

Federal loan servicers will begin issuing formal notices from 1 July, giving borrowers at least 90 days to choose a legal repayment plan. Those who do not act will be automatically placed on the Standard Repayment Plan or the new Tiered Standard Plan.

Alongside the crackdown, the administration is rolling out the Repayment Assistance Plan, created under the One Big, Beautiful Bill Act and available from 1 July. RAP ties monthly payments to income, charging between 1 and 10 per cent of a borrower's adjusted gross income, depending on earnings and number of dependants.

Those earning $10,000 (£7,400) or less annually face a minimum payment of $10 (£7.40) a month. The plan includes a government interest subsidy and a $50 (£37) monthly principal reduction guarantee to stop balances from growing.

Remaining debt is forgiven after 30 years, a decade longer than earlier income-driven plans allowed. Policy analysts have flagged that many lower-income borrowers could actually face higher monthly bills under RAP than they would have under SAVE.

The Education Department has also begun handing operational control of defaulted loan collections to the Treasury Department under an interagency agreement struck on 19 March.

Defaulted borrowers collectively hold roughly $180 billion (£133 billion) in outstanding debt, about 11 per cent of the federal government's total $1.7 trillion (£1.26 trillion) student loan portfolio,Politicowrote.

Treasury Secretary Scott Bessent said the partnership would bring 'long overdue financial discipline' to a portfolio that had been 'badly mismanaged for years.'

Source: International Business Times UK