The Biden administration has touted the new Saving on a Valuable Education repayment plan as the "most affordable repayment plan ever," boasting that it can cut federal student loan borrowers' payments in half and save them thousands of dollars a year.
The Department of Education recently opened applications for the SAVE plan ahead of the expiration of the pandemic moratorium on payments and interest in September. When borrowers begin making payments again — or for the first time ever — in October, many could have a lower, or even no monthly payment, on the SAVE plan.
But the SAVE plan may not be the best option for you. Depending on your repayment goals and income, you might be better off sticking to the standard repayment plan or another income-driven plan. The Federal Student Aid website has a loan simulator tool that lets you compare all the available repayment options and helps you choose the best one for your specific situation.
SAVE replaces the plan formerly known as Revised Pay as You Earn. And the other IDR plans — Pay as You Earn and income-contingent repayment — will be eliminated.
Borrowers currently on those plans will be able to stay on them, but you will not be able to enroll or re-enroll if you leave the plans after July 1, 2024. The primary difference in benefits is for graduate borrowers who have to wait 25 years for loan forgiveness on SAVE versus 20 years on PAYE.
Here's a look at the factors to consider before you apply for the SAVE repayment plan.
Pros of the SAVE repayment plan
While some of these benefits may not apply to your situation right now, they could if your income or family size changes in the future. Plus, there are more changes to SAVE rolling out in 2024 that could make it even more attractive for you.
Here are three of SAVE's primary benefits:
1. Affordable monthly payments
Your payments on SAVE are capped at 10% of your discretionary income. That's defined as the difference between your adjusted gross income and 225% of the federal poverty line, which is about $32,800 a year for individuals in 2023. And beginning next summer, that payment will be cut in half, as the cap will drop to 5% of your discretionary income.
For borrowers earning $32,800 a year or less (or $67,500 and under for a family of four), your monthly payment will be $0.
2. Cap on interest
Accumulating interest has been called out as a contributor to the student debt crisis. The SAVE plan aims to address that by cutting additional interest charges after you've met your monthly payment.
That means if your monthly payment is $0, you won't be charged additional interest. If $50 in interest accumulates on your loans in a month, but your payment is only $30, you won't be charged the additional $20.
This could be an especially helpful benefit for borrowers who expect to significantly increase their salaries in the future. Consider a doctor completing their residency, Lauryn Williams, a certified financial planner and consultant with Student Loan Planner, tells CNBC Make It.
"With SAVE, you're getting an interest subsidy," she says. "This physician who's making 50 grand a year has a really low [payment] on SAVE, with no [extra] interest piling up on them."
Once that doctor starts earning a higher salary, they may consider a different repayment plan, Williams says, but they've reaped the benefit of saving on extra interest while they were on the SAVE plan. They could, of course, remain on SAVE, but with annual income certifications, their payment will rise along with their salary.
3. Forgiveness after as little as 10 years
Beginning in 2024, those with principal loan balances of $12,000 or less can have remaining balances forgiven after just 10 years of payments on the SAVE plan. You'll need to make payments for an additional year for every $1,000 you borrowed above $12,000 up to 20 or 25 years, depending on the degree.
An undergraduate borrower with a principal balance of $15,000 would need to make payments on SAVE for 13 years in order to qualify for loan forgiveness.
All IDR plans had some forgiveness component, mainly forgiving remaining balances after 20 or 25 years, regardless of the original balance. SAVE allows borrowers with lower balances to receive forgiveness earlier, but still keeps the 20-year loan term cap in place for undergraduate borrowers.
It's worth mentioning that you may owe income tax on any amount of debt you have forgiven, as several states treat forgiven debt as taxable income. While there is currently a waiver on federal income taxes on forgiven debt, it's scheduled to expire in 2025.
This will be especially important for low-income borrowers who go the full 20 or 25 years with low or no monthly payments and have relatively large amounts of debt forgiven.
Cons of the SAVE repayment plan
The SAVE plan is primarily designed to benefit low- and middle-income earners. While other borrowers may still find reasons to enroll, there are drawbacks to consider.
Here are three drawbacks of the SAVE plan:
1. Borrowers with mid-level balances don't stand to benefit as much
Your monthly payment on the SAVE plan is income-driven, whereas your monthly payment on the standard repayment plan is balance-driven. That's because the standard plan is designed so that if you make every monthly payment in full and on time, your debt will be paid off in 10 years, or 120 monthly payments, regardless of your original balance.
With a starting debt balance of $26,946 (the average among borrowers when they graduate, according to the National Center for Education Statistics), you would pay $272 a month on the standard repayment plan according to FSA's loan simulator. You would have to earn about $65,000 or less to see that same monthly payment or lower on the SAVE plan.
If you earn more, your monthly payment will go up on the SAVE plan. While that may mean you pay off your balance faster, it would also mean missing out on the benefit of having some of your debt forgiven.
Bottom line: The higher your loan balance, the more likely it is you'll be able to benefit from some amount of debt forgiveness if you remain on the SAVE plan for the required 20 or 25 years. But depending on your income and other expenses, that might not be feasible for you.
Every situation is different so it's a good idea to use the loan simulator tool or run your own calculations to see what's best for you.
2. Monthly payment adjusts as income changes
Since the SAVE plan is an income-driven repayment plan, the higher your income, the more you pay each month. While your payment will stay capped at a percentage of your income, you may find it's more than you want to pay.
You also have to recertify your income every year in order to stay on the SAVE plan, which means every year your salary goes up, your payment likely will too.
This may help you pay off your debt faster, but some borrowers prefer the stability of knowing they'll have the same monthly payment for the duration of their repayment.
3. The SAVE plan isn't available for parent Plus borrowers
Parents who took out loans on behalf of their child are ineligible for all IDR plans, including the SAVE plan.
The only option for parent borrowers outside of the standard, graduated and extended repayment plans is to consolidate their parent Plus loan into a direct consolidation loan to become eligible for the income-contingent repayment plan.
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