SAVE: The New Student Loan Repayment Plan – How it Works

Update: On June 24, 2024, federal courts in Missouri and Kansas struck down parts of the SAVE Plan and blocked the Education Department from lowering payments and providing more forgiveness under that plan. Read SAVE Plan Blocked for more details.

The Saving on a Valuable Education Plan is the newest addition to the suite of income-driven repayment (IDR) plans for federal student loans, which were first introduced in the 1990s to help make repayment more affordable for borrowers.

Launched by the Biden administration in August 2023, the SAVE Plan aims to provide more manageable monthly payments and generous loan forgiveness terms, particularly for low-income borrowers.

If you’re single and earning less than $32,800 a year, or your family of four earns under $67,500, you won’t have to pay a dime each month under the SAVE Plan.

Ahead, we’ll walk you through the key features, eligibility requirements, and application process for the SAVE Plan and how it compares to other IDR plans.

By the end of this article, you’ll clearly understand how the SAVE Plan works and whether it might be the right choice for your student loan repayment needs.

The SAVE Plan is a new income-driven repayment plan for federal student loans, launched by the Biden administration in August 2023. It replaces the Revised Pay As You Earn Plan (REPAYE). The White House shared that the benefits of the plan aim to make student loan repayment more affordable and manageable for borrowers, particularly those with low and middle incomes.

The SAVE Plan introduces several improvements over REPAYE and other IDR plans, including:

• Protecting More Discretionary Income: More of your income is protected from being used to calculate student loan payments.

• Spousal Income Exclusion: Married borrowers no longer need to include their spouse’s income when calculating payments, if they file taxes separately.

• Timely Recertification: Assistance for borrowers in recertifying their income and family size on time.

• Faster Loan Forgiveness: Offers a quicker path to loan forgiveness for students who borrow less than $22,000.

• Interest Subsidy: Prevents unpaid interest from being added to borrowers’ accounts, keeping loan balances from growing.

As of early 2024, over 8 million borrowers are enrolled in the SAVE Plan, with more than half qualifying for $0 monthly payments.

Additionally, nearly half a million borrowers have had their loans forgiven by switching to the SAVE Plan, showing the plan’s effectiveness in providing relief to student loan borrowers.

Learn More: Is Save and IDR the Same?

The SAVE Plan works by calculating your monthly student loan payments based on your income and family size, providing an interest subsidy to prevent loan balance growth, and offering accelerated loan forgiveness based on your original loan balance.

Here’s a closer look at each key feature:

Monthly Payment Calculation

Under the SAVE Plan, your monthly payment is based on your discretionary income, which is the difference between your adjusted gross income (AGI) and 225% of the federal poverty guideline for your family size and location.

Starting in July 2024, payments on undergraduate loans will be capped at 5% of your discretionary income, while payments on graduate loans will be 10%.

But what if you have a mix of undergraduate and graduate loans?

In that case, your payment will be a weighted average between 5% and 10% based on your original loan balances.

Interest Subsidy Benefit

One of the most significant benefits of the SAVE Plan is the interest subsidy. If your monthly payment doesn’t cover the interest that accrues on your loans, the Department of Education will cover the remaining unpaid interest. This means your loan balance won’t grow as long as you make your minimum required payment each month.

For example, if the monthly interest on your loans is $50, but your SAVE Plan payment is only $30, the government will waive the remaining $20 of interest. Under earlier IDR plans, that unpaid interest would have been added to your principal balance, causing your debt to grow over time. The interest subsidy is a powerful benefit that can help keep your student debt manageable.

Learn More: Does the SAVE Plan Eliminate Interest?

Loan Forgiveness

The SAVE Plan offers many borrowers loan forgiveness sooner than earlier IDR plans. If your original loan balance was $12,000 or less, you can receive forgiveness after the equivalent of just 10 years of payments.

For every additional $1,000 you originally borrowed above $12,000, a year is added to your forgiveness timeline, up to a maximum of 20 years for undergraduate loans and 25 years for graduate loans.

For example, if you took out $15,000 in loans, you could receive forgiveness after 13 years of payments on the SAVE Plan. The Department of Education will automatically forgive eligible loans for borrowers on the SAVE Plan once they reach the required number of payments based on their original balance.

The SAVE Plan is designed to help borrowers manage their student debt more effectively by offering more affordable monthly payments, preventing loan balances from growing due to unpaid interest, and providing accelerated loan forgiveness.

Timeline for Implementation

The SAVE Plan, designed to help students with their loans, is being rolled out in stages between October 2023 and July 2024.

Here’s a breakdown of the key dates and provisions:

In October 2023, the SAVE Plan raised the income protection limit, stopped unpaid interest from growing, and stopped counting spouses’ income for certain loans if they file taxes separately.

In February 2024, borrowers with loans under $12,000 that they’ve paid on for 10 years received loan forgiveness. This provision was implemented sooner than first planned, moving from July 2024 to January 2024, due to the Department of Education’s actions.

By July 2024, the SAVE Plan will offer more benefits. Monthly payments for undergraduate loans will be reduced from 10% to 5% of discretionary income. The plan will also remove the consolidation penalty and count certain deferment and forbearance periods towards loan forgiveness.

As of early January, over 6.9 million borrowers had signed up for the SAVE Plan. And within a decade, over 85% of future community college students could be debt-free.

But the SAVE Plan has faced criticism from some lawmakers. Rep. Virginia Foxx believes that a different law would better address college costs and oversight.

Sen. Cassidy thinks the Biden administration is moving too quickly on the student loan schedule and should also focus on properly running the 2024-25 FAFSA.

Despite these criticisms, the SAVE Plan continues to change the landscape of student loan repayment. Borrowers need to stay informed about the schedule and rules to plan their financial future wisely and take full advantage of the plan’s benefits.

Learn More: Do You Have to Consolidate Loans for SAVE Plan?

The SAVE Plan offers several advantages over existing IDR plans like REPAYE, PAYE, and IBR.

To help you understand the differences, we’ve created a comparison table:

As you can see, the SAVE Plan offers several key advantages:

1. Higher income exemption: The SAVE Plan protects more of your income by using 225% of the federal poverty guideline to determine discretionary income, compared to 150% for other plans. This means more low-income borrowers will qualify for $0 payments.

2. Lower payment percentages: Starting July 2024, the SAVE Plan will cut payments on undergraduate loans in half to just 5% of discretionary income, while other plans require 10-15%.

3. More generous interest subsidy: If your SAVE payment doesn’t cover monthly interest, the government waives the remaining interest, so your balance doesn’t grow. REPAYE waives only 50% of unpaid interest, while PAYE and IBR offer no interest subsidy.

4. Accelerated forgiveness timeline: The SAVE Plan provides loan forgiveness sooner for many borrowers, especially those with lower original balances. Borrowers with an original balance of $12,000 or less can receive forgiveness after just 10 years of payments, while other plans require 20-25 years no matter the balance.

However, the SAVE Plan does not have a payment cap. Not having a cap means high earners may have higher monthly payments compared to PAYE and IBR, which cap payments at the Standard 10-year plan amount.

In our experience, for high earners with low loan balances, we often compare the SAVE Plan with the Income-Contingent Repayment (ICR) Plan, which caps payments at the lesser of:

1. What you would pay on a repayment plan with a fixed monthly payment over 12 years, adjusted based on your income; OR

2. 20% of your discretionary income, divided by 12.

Sometimes, ICR may result in lower monthly payments for these borrowers.

Related: Is the SAVE Plan Worth It?

Despite these differences, all IDR plans share similarities. They base payments on a percentage of discretionary income, offer loan forgiveness after 20-25 years in most cases, and have the same eligible loans.

To qualify for the SAVE Plan, you must have eligible federal student loans and meet certain requirements.

Eligible Loans

• Direct Subsidized Loans

• Direct Unsubsidized Loans

• Direct PLUS Loans made to graduate or professional students

• Direct Consolidation Loans that did not repay any Parent PLUS Loans

If you have Federal Family Education Loan (FFEL) Program loans, Perkins Loans, or HEAL loans, you can make them eligible for the SAVE Plan by consolidating them into a Direct Consolidation Loan.

Parent PLUS Loans are not directly eligible for the SAVE Plan, even if consolidated.

However, a workaround called the Double Consolidation Loophole can make them eligible. This loophole involves a complex process of consolidating the Parent PLUS Loan with another eligible loan and then reconsolidating the new loan.

Over the past year, our student loan experts have successfully guided dozens of parents through this intricate process, helping them take their monthly payments from thousands of dollars down to just a few hundred.

Related: Are Parent PLUS Loans Eligible for SAVE Plan?

Income and Other Requirements

There is no income limit to qualify for the SAVE Plan. Your payment amount will be calculated based on your discretionary income and family size, so even high-income earners can benefit from this plan.

To enroll in the SAVE Plan, you must be a good-standing borrower on eligible loans. This means that your loans must not be in default, and you must be current on your payments or in a deferment or forbearance.

Learn More: SAVE Plan Student Loans Income Limit

Demonstrating Financial Need

While there is no specific income requirement for the SAVE Plan, you’ll need to provide information about your income and family size when you apply. This information will be used to calculate your discretionary income and determine your monthly payment amount.

You’ll also be required to recertify your income and family size yearly to remain on the SAVE Plan and make sure your payments are accurately adjusted based on your current financial situation.

Applying for the SAVE Plan is a straightforward process that can be completed in two ways:

1. Applying online through your StudentAid.gov account (recommended for most borrowers)

2. Submitting a paper IDR Request Form to your loan servicer (recommended for specific situations)

As student loan experts, we typically recommend using the paper application for our clients who are married, own businesses, or have multiple income sources that fluctuate throughout the year. The paper application allows us to report their income more accurately and ensure they receive the lowest possible monthly payment.

But for most borrowers, applying online on the Federal Student Aid website is the most straightforward and efficient method.

With this in mind, let’s walk through the steps for submitting an online SAVE Plan application:

1. Log in to your account: Go to StudentAid.gov and log in using your username and password (FSA ID).

2. Start the IDR application: Navigate to the Income-Driven Repayment (IDR) plan application once logged in. Indicate whether you’re a new IDR applicant or a returning IDR borrower, depending on your current situation and repayment plan.

3. Provide employment information: Specify whether you are employed or unemployed. If you’re employed, you must provide proof of income. If you’re unemployed, confirm whether you’re receiving unemployment benefits.

4. Enter family size and marital status: The application will ask for your family size and marital status. If you’re married and file a joint federal income tax return, include your spouse’s income. If you file taxes separately, your monthly payment will be based only on your income.

5. Verify income: Provide consent for the Department of Education to securely access your federal tax information. If you don’t file taxes, submit proof of income earned within the last 90 days, such as a pay stub or a letter from your employer stating your gross pay.

6. Review and select your plan: After completing the application, review the repayment plans you qualify for and select the SAVE Plan as your preferred option.

7. Confirm and sign: Verify that all the information in your application is correct and provide your electronic signature to submit the application.

The SAVE Plan interacts with two key loan forgiveness programs: Public Service Loan Forgiveness (PSLF) and IDR forgiveness.

Public Service Loan Forgiveness

The SAVE Plan is a qualifying repayment plan for PSLF, and borrowers who qualify for PSLF can use the SAVE Plan to make their required 120 qualifying payments.

The SAVE Plan’s lower monthly payments will indirectly increase the amount of debt forgiven under PSLF, especially for borrowers with only undergraduate loans.

Learn More: Does the SAVE Plan Qualify for PSLF?

IDR Forgiveness

The SAVE Plan offers a new accelerated forgiveness timeline based on the borrower’s original principal balance. Borrowers with an original balance of $12,000 or less can receive forgiveness after the equivalent of just 10 years of payments. For every additional $1,000 borrowed above $12,000, a year is added to the forgiveness timeline, up to a maximum of 20 years for undergraduate loans and 25 years for graduate loans.

This accelerated timeline is a significant improvement over other IDR plans, which typically require 20-25 years of payments for forgiveness.

As of May 2024, the Education Department reported that $613 million in loans had been forgiven for 54,300 borrowers through the SAVE Plan, bringing the total relief approved under the plan to $5.5 billion for 414,000 borrowers.

The SAVE Plan’s forgiveness terms are part of the larger IDR forgiveness framework, which aims to wipe out remaining loan balances after 20-25 years of payments for borrowers who took out more than $22,000 in federal student loans for college.

One-Time IDR Account Adjustment

In addition to the SAVE Plan’s accelerated forgiveness timeline, borrowers may also benefit from the one-time IDR account adjustment, also known as the “IDR waiver.” This initiative retroactively credits borrowers for past repayment, deferment, and forbearance periods that wouldn’t usually count toward IDR or PSLF forgiveness.

Under the change, the Education Department will review borrowers’ accounts and grant credit for any months spent in repayment (regardless of loan type, repayment plan, or if payments were partial or late), certain periods of deferment and forbearance, and months before loan consolidation that previously didn’t count.

This account adjustment has already had a significant impact, with over 996,000 borrowers having $49 billion in loans forgiven as of May 2024. The combination of the SAVE Plan’s accelerated forgiveness timeline and the IDR account adjustment means that many borrowers can receive IDR forgiveness much sooner than they would have under earlier plans.

Potential Tax Implications of SAVE Plan Forgiveness

While IDR forgiveness under the SAVE Plan is temporarily exempt from federal taxation through the end of 2025, the tax status of forgiveness after 2025 remains uncertain. Without a change in the law, you could face a SAVE Plan tax bomb. Additionally, some states may tax discharged student debt as income.

Learn More: SAVE Plan Tax Bomb

The SAVE Plan offers a significant change for married borrowers compared to the previous REPAYE plan.

Under SAVE, married borrowers who file their federal taxes separately will have their monthly payment determined based only on their individual income, excluding their spouse’s earnings. But married borrowers who file taxes jointly will have their combined household income used to calculate their SAVE Plan payment.

Additionally, married borrowers who file separately will no longer have their spouse included in their family size calculation, which could result in a higher monthly payment in some cases.

Learn More: SAVE Plan: When and How to File Taxes Separately as a Married Couple

Borrowers with Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans made to graduate or professional students, and Direct Consolidation Loans that did not repay any PLUS loans made to parents are automatically eligible for the SAVE Plan.

But borrowers with other types of federal loans, such as FFEL, Perkins, or HEAL loans, must consolidate them into a Direct Consolidation Loan before enrolling in the SAVE Plan.

To maximize the benefits of the IDR account adjustment, borrowers who need to consolidate should aim to submit their consolidation application by April 30, 2024.

Learn More: Do You Have to Consolidate Loans for SAVE Plan?

The SAVE Plan not only reduces student loan payments but also improves debt-to-income (DTI) ratios, making it easier to qualify for a mortgage. For example, average monthly payments can drop from $197 to $69, allowing borrowers to save more for down payments.

According to a Center for Responsible Lending study, this reduction in payments can decrease DTI ratios by 1.5% to 3.6%. Borrowers with $0 payments could see their DTI decrease by 3.8% to 7.1%.

These changes are particularly beneficial for majority Black and Latino communities, who often face higher financial barriers to homeownership.

Learn More: Do Student Loans Affect Buying a House?

Yes, the SAVE Plan offers loan forgiveness based on the borrower’s original loan balance. Borrowers with an original balance of $12,000 or less can receive forgiveness after the equivalent of 10 years of payments. For every additional $1,000 borrowed above $12,000, a year is added to the forgiveness timeline, up to a maximum of 20 years for undergraduate loans and 25 years for graduate loans.

Yes, monthly payments under the SAVE Plan are based on your discretionary income, which is calculated using your adjusted gross income (AGI). Specifically, discretionary income is the difference between your AGI and 225% of the federal poverty guideline for your family size and location.

The SAVE Plan offers a more affordable and manageable path to student loan repayment, with lower monthly payments, interest subsidies, and accelerated loan forgiveness. Borrowers with an original loan balance of $12,000 or less can have their loans forgiven after just 10 years of payments.

Understanding the plan’s features, eligibility requirements, and potential benefits can help you decide whether the SAVE Plan is right for your unique financial situation.

To create a personalized strategy for your student loans and take advantage of the SAVE Plan’s benefits, book a 1:1 call with one of our expert consultants today.