For borrowers who qualify for $0 per month payments, it means their student loan is essentially interest-free during this time.

I’ve heard from many borrowers who want to maximize this subsidy and pay down their loans as quickly as possible. Guidance here is especially complicated because the Department of Education has altered the guidance that it gives borrowers who receive the subsidy. Arguably, there is a policy change at play here.

Thus, we need to cover three different situations:

1. What is the rule if you make extra payments while on the SAVE plan?
2. Has this rule changed?
3. If you made extra payments based on bad guidance from the Department of Education, what is your remedy?

How do I know if I get a SAVE subsidy? If you don’t want to do any math, this calculator will provide SAVE payments and monthly subsidy amounts.

If you want to do the math on your own, it is pretty simple. For each loan, multiply the balance by the interest rate. This number will give you the yearly interest charges on the loan. Divide that number by 12 to estimate the monthly interest charges for that loan. You get a subsidy by the amount your monthly interest charges exceed your monthly payment.

How Servicers Process Extra Payments for Borrowers who Receive the SAVE Interest Subsidy

If you look at the current version of the Department of Education’s page on SAVE, there isn’t much clarity about how extra payments are processed.

In theory, borrowers could use the subsidy to cover their unpaid interest, and then make an extra payment to lower their principal balance. The SAVE page doesn’t advise against making extra payments.

Unfortunately, the way it works isn’t very favorable to borrowers.

To find clarity on this situation. I spoke with someone from the ombudsman office at a loan servicer. Because the servicers are responsible for processing payments, they have to know how to apply extra payments and whether or not it will reduce the principal balance or the interest.

I was told that the SAVE subsidy is applied on a one month delay. When applying the subsidy, they compare payments against interest charges for the previous month. If the interest charges are greater, the borrower gets a subsidy in that amount.

This means that the borrowers who pay extra reduce their subsidy. It also means paying extra while recieving the SAVE subsidy is a big mistake.

Confusion About Subsidy Application and Strategy

When the SAVE Subsidy was first announced, it looked like borrowers were able to make extra payments and have 100% of the extra payments count toward principal.

The Department of Education recommended that borrowers pay extra to lower their balance, even if they qualify for $0 payments on SAVE:

The above language comes from an archived version of the SAVE announcement.

Notably, this language has been removed from the SAVE page.

Sherpa Thought: Between the servicer clarifications I’ve received and the language removal from studentaid.gov, it seems quite clear to me that extra payments on SAVE will first reduce the interest balance before being credited toward the principal balance.

It is possible that the Department of Education changes this policy, but for now, making extra payments if you recived the SAVE subsidy is a mistake.

Refunds for Previous Extra Payments

If you previously made extra payments in an attempt to have 100% of that extra payment count toward your principal balance, I think you should get a refund on that extra payment.

There isn’t currently a Department of Education policy that makes issuing refunds easily available, but a refund would fix things for borrowers who followed the guidance posted to studentaid.gov.

If you want to take action to get a refund on your previous extra payments, I’d suggest the following:

1. Ask your servicer for a refund. Explain that you followed the advice of the Department of Education. This request will likely be denied.
2. File a complaint with the Consumer Financial Protection Bureau. Once again, explain that you made extra payments to lower your principal balance and instead it reduced your subsidy. Filing a complaint with the CFPB is relatively easy, and if enough people do it, it makes a difference.
3. Contact your elected officials. All members of Congress have staff members dedicated to helping voters navigate federal programs and red tape. Correcting an issue for a borrower who was misled by the Department of Education is exactly the sort of thing they can help with.

If you’d like help with any of the above steps or you want to share your progress, please send me a quick email. Student loan repayment is far too complicated, and when the Department of Education gives bad advice, borrowers deserve to get it corrected.

Making the Most of the Interest Subsidy

If you do receive the interest subsidy, it is still possible to set aside “extra payments” to attack your student debt.

My suggestion is to open a dedicated high-yield savings account for this money. Each month you earn interest on the money you have set aside. Meanwhile, the subsidy covers some or all of the interest charges on your student loans. It is a rare win-win for borrowers.

Sherpa Transparency: This page once linked to and quoted the now-deleted language from the Department of Education.

Readers were told that even though their extra payments would count toward principal, they were advised not to follow the Department of Education guidance and to utilize the high-interest savings account instead.

Perks of Minimum Payments and Maximum Subsidy

Even if your savings account paid 0% interest, there are still some significant advantages to putting the extra payments into a savings account.

Build Up an Emergency Fund

When you have lots of student debt, building up an emergency fund may seem like a luxury, but in reality, it is a necessity.

Having money set aside for your federal loans doesn’t mean you must use it for your federal loans. For the borrowers who lack self-control, this can be a significant issue. For others, it is a great asset.

Putting money in savings rather than making a student loan payment means you can pay for an unexpected car repair or medical emergency. If that money was used to pay down your student debt, it is gone forever.

Ideally, you can earn money on interest and then make a large lump sum payment to knock out the loan. If the unexpected happens, you have some flexibility.

Keep the Door Open to Forgiveness

Typically, borrowers employ one of two strategies to eliminate their student debt. They can either make minimum payments and hope to get as much forgiven as possible, or they can aggressively repay their debt to spend as little as possible on interest.

By utilizing the interest subsidy and a high-yield savings account, borrowers can put money aside for aggressive repayment and make minimum payments toward forgiveness.

If your finances change and aggressive repayment becomes the obvious choice, you have money to attack the loan. If you realize that forgiveness is the ideal approach, you will be glad you didn’t make extra unnecessary payments on the loan.

Final Thoughts on the SAVE Interest Subsidy Confusion

When something like this happens, many people are quick to accuse the Department of Education or loan servicers of intentionally misleading borrowers.

I don’t think that is the case here.

At the time the Department of Education posted the now-deleted tip, the SAVE repayment plan was brand new and the exact process for handling the payments may not have been finalized.

That said, even if the error wasn’t malicious, it should still get corrected. All SAVE borrowers who made extra payments following the Department of Education tip should either receive a refund on their extra payment or have the principal balance credited accordingly.

The post SAVE Repayment Strategy: Extra Payments are a Mistake if you get the Interest Subsidy appeared first on The Student Loan Sherpa.

Because the fully implemented version of SAVE charges borrowers less for undergraduate loans, it is necessary to separate undergraduate debt from graduate debt. If you have a consolidated loan, please do your best to estimate which portion of the debt is graduate and which portion is undergraduate.

This calculator has been updated to include the 2024 federal poverty level guidelines, so it should be as accurate as possible.

Subsidy Calculator

What is the Purpose of the SAVE Subsidy?

Historically, many borrowers qualified for IDR plans with monthly payments lower than the monthly interest charges on their loans.

When this happened, IDR enrollment could mean that the balance grew considerably.

This made it harder for IDR borrowers to repay their debt, and it created the possibility of a larger tax bill if the debt was forgiven.

With the SAVE subsidy, borrowers don’t have to worry about their balances increasing.

How is the SAVE Subsidy Calculated?

This calculator estimates your SAVE payment and compares it to the expected monthly interest charges on your loans.

To understand the basics of the SAVE subsidy, check out this article that explains how it works.

Maximizing the Benefit

If you qualify for the subsidy, the Department of Education once suggested making extra payments to attack the principal balance. This would be a big mistake as extra payments reduce the subisdy amount that a borrower receives.

Additionally, borrowers who find ways to shelter income from IDR payments can further increase their subsidy. My favorite strategy is to set money aside in a retirement account.

The post SAVE Subsidy Calculator appeared first on The Student Loan Sherpa.

Though the calculations might first appear complicated, the SAVE interest assistance can save borrowers thousands of dollars per year.

Want to calculate your subsidy? Check out our SAVE subsidy calculator to estimate the value of the monthly SAVE subsidy for your loans.

Sherpa Note: The REPAYE plan is being phased out and replaced by the new SAVE plan.

REPAYE was the first repayment plan to offer borrowers an ongoing interest subsidy, but the SAVE subsidy is a huge improvement.

What is the Saving on A Valuable Education (SAVE) Interest Subsidy?

Only certain borrowers qualify for the SAVE interest assistance. To qualify, a borrower’s monthly payment on SAVE must be less than the monthly interest generated by the student loan. In other words, if your loan is growing faster than you can make payments, the government will help pay your interest.

No special enrollment is required. Borrowers just need to sign up for the SAVE plan.

Those receiving the interest subsidy will see a monthly transaction each month labeled “interest subsidy.” As interest assistance, it does not change the principal balance. However, it does reduce the outstanding interest on the loan.

The size of the subsidy depends entirely upon the borrower’s balance and income.

SAVE Interest Subsidy Calculations

The best way to make sense of the SAVE interest subsidy is to look at a simple example.

Suppose a borrower has a federal student loan balance that generates $500 per month in interest. That same borrower has a monthly payment on SAVE of $100.

In this situation, the borrower’s balance is actually going up by $400 per month.

The SAVE subsidy covers 100% of the excess interest. In this case, the loan generates $500 per month of interest, but $400 of it is in excess of the borrower’s monthly payment.

Thus, the borrower in this example would receive a $400 per month interest subsidy on SAVE. This is significant because it means the borrower’s balance doesn’t grow even though the monthly payments are less than the monthly interest charges.

Calculate your subsidy: The SAVE Subsidy Calculator allows borrowers to see their monthly payment on SAVE and how much interest the subsidy will cover.

Extra Payment on the SAVE Subsidy

Initially, it looked like borrowers could receive the SAVE subisdy and have all of their extra payments counted toward principal instead of interest.

After some confusion, it now looks like extra payments will count toward interest first, making it a misake for subsidy recipients to make extra payments. Instead, these borrowers should consider a different strategy, such as putting money aside in a high-yield savings account.

SAVE Subsidy Tax Concerns

Many servicers are describing the SAVE subsidy as a form of forgiveness. Given the potential tax issues with student loan forgiveness, some borrowers are concerned that the subsidy might mean a bigger tax bill in the future.

The good news is that borrowers shouldn’t worry about a tax bill as a result of the SAVE subsidy.

Even though the Department of Education hasn’t explicitly said there won’t be a tax bill, borrowers are on safe ground assuming there won’t be tax consquences:

• The REPAYE subsidy hasn’t caused tax problems. Before the SAVE subsidy covered 100% of interest, the REPAYE subsidy covered 50%. REPAYE borrowers didn’t have to pay a tax on forgiven debt.
• Reduced interest charges are not the same as forgiven debt. Think of the SAVE subsidy like a zero percent APR credit card. Credit card companies routinely offer a temporary 0% interest rate to encourage people to use their cards. There isn’t a tax for the people who get this perk.

It’s possible that some state government might target student loan borrowers who receive the SAVE subsidy, but thus far, it hasn’t happened. Even if there was a tax on the interest relief, it wouldn’t change the math for most borrowers. Paying a dollar today to save 25 cents in the future rarely makes sense.

Why Does SAVE Assist Borrowers with Interest?

The point of the interest subsidy is to prevent balances from spiraling out of control.

Those getting the maximum subsidy, i.e., the borrowers making $0 monthly payments, will essentially have a 0% interest rate.

The interest assistance helps borrowers stay on track during a period of unemployment or underemployment. Before SAVE, a prolonged job search could make successful repayment seemingly impossible. Under SAVE, borrowers get a little more breathing room.

Interest Subsidies for IBR, PAYE, and ICR Borrowers

Sadly, the repayment plans of IBR, PAYE, and ICR do not qualify for an interest subsidy.

REPAYE/SAVE is the only plan that offers this protection to borrowers who cannot afford to keep up with their federal student loan interest.

When Isn’t REPAYE/SAVE the Best Option? The best choice for most borrowers with larger balances and lower incomes is usually SAVE. However, there is at least one circumstance where other IDR plans might be better:

Graduate Borrowers Planning on IDR Forgiveness – On PAYE and IBR for New Borrowers, student loan forgiveness comes after 20 years. Under REPAYE/SAVE, borrowers have to wait 25 years if they have graduate school debt. Borrowers in this situation will need to compare the benefit of an interest subsidy against the value of forgiveness five years earlier.

Signing Up for SAVE

Enrollment in SAVE works just like all of the other IDR repayment plans. No extra steps are necessary for the interest subsidy.

Signing up is simple, though there are a couple of items that borrowers will want to watch closely when they enroll.

Borrowers unsure of whether or not to sign up for SAVE should use the SAVE calculator to get an idea of their monthly bills going forward.

The post How Does the SAVE Interest Subsidy Work? appeared first on The Student Loan Sherpa.

A significant and all-too-common mistake occurs when borrowers start repayment on the standard repayment plan.

Smart choices today — like opting for SAVE — could have a significant impact moving forward.

The Costly Path of the 10-Year Plan, Forbearances and Deferments

It’s a scenario I see all the time: students receive their first loan bill, make payments for a few months, but soon realize they can’t keep up financially.

Then they compound the problem by jumping into a forbearance or deferment. While these options provide temporary relief from payments, they allow interest to accumulate, ultimately increasing the loan balance as months pass.

At the end of a year or two, these borrowers haven’t made any progress on their debt, they are no closer to student loan forgiveness, and their balance is often much higher than where they started.

This mistake is completely avoidable.

A Better Alternative: The SAVE Program

The strategic choice for managing student loans is to enroll in the SAVE plan as soon as possible. SAVE (Saving on A Valuable Education) adjusts monthly payments based on the borrower’s most recent tax return.

For a recent grad this often means a $0 monthly payment. Even for those graduate whos find work immediatley at graduation, because SAVE is based on the most recent tax return and because earnings during college are typically low, $0 per month payments are common.

Digging Deeper into SAVE: For a deep dive into SAVE rules and a calculator to estimate SAVE payments, check out the SAVE calculator.

Additionally, SAVE includes a generous subsidy that covers all accruing interest, ensuring that the loan balance does not increase over time.

This plan is particularly beneficial for recent graduates who may not have stable, high-paying jobs immediately after school. By preventing the loan balance from growing, SAVE can provide significant long-term savings and financial stability.

The Cost of Picking the Wrong Repayment Plan

Previously, the main disadvantages of not using income-driven repayment plans like SAVE included delayed progress towards loan forgiveness and unnecessary financial strain from unaffordable payments.

Today, the implications are more severe.

With the introduction of the SAVE subsidy, failing to sign up can result in substantially higher loan balances over time due to missed subsidy benefits. Learn how to take advantage of the SAVE subidy to get your finances in order.

Why Do Graduates Make This Mistake?

The default repayment plan for student loans is the 10-year standard plan, which charges the highest monthly payments.

Many loan servicers, overwhelmed by the volume of inquiries, fail to adequately inform borrowers about their options, contributing to poor financial decisions.

Additionally, a general lack of student loan education leaves many without the knowledge needed to make informed decisions about their repayment options.

Preventing Repayment Plan Mistakes

To combat this widespread issue, there is a strong argument for making SAVE the default repayment plan for all graduating students.

However, until such policy changes are implemented, it is critical that students and recent graduates are made aware of this plan and its benefits. Sharing information among friends, family, and through educational institutions can play a crucial role in preventing this costly mistake.

Recovering from Past Mistakes

For those who have already fallen into the trap of standard repayment and/or forbearances, it’s important to note that while past decisions cannot be undone, there are still options available.

The upcoming one-time account adjustment will adjust payment histories, potentially advancing borrowers closer to Income-Driven Repayment (IDR) forgiveness and Public Service Loan Forgiveness (PSLF).

Additionally, Biden’s second big attempt at student loan forgiveness, tentatively called “Forgiveness 2.0,” aims to forgive debt for borrowers whose current loan balances exceed their initial amounts borrowed.

Final Thought

Properly managing student loans requires proactive measures and informed decision-making.

By understanding and utilizing programs like SAVE from the outset, recent graduates can avoid common pitfalls and place themselves on a path to financial stability.

The post This Frequent Mistake by Recent Graduates Just Got More Expensive appeared first on The Student Loan Sherpa.

These changes go far beyond a new repayment plan and the Supreme Court striking down debt cancellation.

Borrowers must understand these changes for a couple of reasons. First, they could benefit through lower payments or earlier forgiveness. Second, in researching their repayment options, they may come across outdated information in conflict with what they read elsewhere.

Those who understand what has changed will be able to save money and avoid following outdated advice from their friends, loan servicers, or the internet.

The Big Change: The SAVE Repayment Plan

The new SAVE plan is a massive change from the options available to borrowers in 2020.

Under SAVE, borrowers can get lower monthly IDR payments and potentially qualify for forgiveness earlier.

Some of the provisions of SAVE will be immediately available when payments resume. Others will become available on July 1, 2024.

If you are new to SAVE, check out my article on the SAVE timeline and how it impacts other IDR plans. Additionally, you can preview SAVE payments using the SAVE calculator.

IDR Payment Count Update

By early 2024, the Department of Education will update borrower progress toward IDR forgiveness.

This is to correct issues where servicers steered borrowers into a deferment, forbearance, or balance-based plan when an IDR plan would have been a better decision.

As a result, many of these prior periods where the borrower was not on an IDR plan will still count toward the required 20 or 25 years for IDR forgiveness.

There are a couple of important takeaways here. First, you may be much closer to IDR forgiveness than you previously thought.

Second, you may have read that repayment plans like the extended or graduated repayment plan will count toward IDR forgiveness. This is true. However, it is essential to understand that this only applies to previous periods on these otherwise ineligible repayment plans. If you sign up for the extended repayment plan in the future, you won’t make any progress toward IDR forgiveness.

Sherpa Tip: For most borrowers, the benefit of the IDR count update happens automatically.

However, if you have FFEL or Perkins loans, you must consolidate them before the December 31, 2023, deadline to benefit.

Consolidation Becomes Less Risky

Historically, consolidating federal student loans came with an element of risk. When you consolidated, a new loan was created, which meant restarting the “forgiveness clock.”

That isn’t the case today. As noted in the previous section, consolidating before the December 31 deadline means borrowers keep all their IDR or PSLF progress. Best of all, if you have mixed progress, the consolidated loan will have the tally of the highest loan that was included. For example, if you have a $10,000 loan with 50 IDR payments and a $10,000 loan with 70 IDR payments, the new consolidated loan gets credit for all 70 payments.

If you miss the December 31 deadline, consolidation won’t mean a complete restart of payment progress. As part of the new rules that go into effect with the SAVE repayment plan, borrowers that consolidate their loans keep the weighted average of their existing forgiveness progress. Returning to our last example, the consolidated loan would have 60 IDR payments.

The Remaining Consolidation Risk: Consolidation is less risky, but it is not without risk. Borrowers who have Parent PLUS loans for their children and student loans from their own education will still want to exercise caution.

Combining these debts in one consolidation loan will mean limited repayment plan eligibility.

REPAYE for Married Couples

Some rule changes were relatively minor, easy to miss, but really important for borrowers. One such example is the change to income rules for married couples on REPAYE.

In the past, borrowers could file their taxes separately to exclude spousal income from IDR analysis. However, they could only do this for specific repayment plans. Notably, on REPAYE, this option was not available. Spousal income was counted in IDR calculations whether or not you filed taxes separately. Thus, REPAYE was a bad choice for many married borrowers.

Fortunately, the rules have changed. SAVE allows married borrowers to file taxes separately to exclude spousal income, and REPAYE has been modified to allow spouses to file separately.

Being married still causes issues for federal student loan borrowers, but the ridiculous REPAYE rule is no longer in effect.

Borrower Interest Subsidy Changes

Historically, one of the “risks” of income-driven repayment plans was that the borrower balance could grow with each passing year.

If the IDR payment was $100, but the loan generated $250 in interest each month, the borrower’s balance would increase by $150 each month. The confusing interest capitalization rules made things even more complicated.

When REPAYE was first created, it had a provision to address this issue. Borrowers with interest charges higher than their monthly payment received a stipend covering half the excess interest. Going back to our previous example, the borrower’s balance would increase by $75 each month instead of the full $150.

Under SAVE, borrowers will get a stipend for 100% of the excess interest. In our example, the borrower pays $100 each month, and the loan balance doesn’t grow at all. Additionally, borrowers currently on REPAYE will get this benefit while they await the transition to SAVE.

PSLF Employment Requirements

Not all of the changes are for the better.

For a brief period, the Limited Waiver on PSLF was in effect. During this time, the Department of Education reviewed PSLF applicant records and updated payment counts helping some borrowers reach the necessary 120 certified payments.

During the Limited Waiver, borrowers were not required to be currently employed by a PSLF employer to earn forgiveness.

Unfortunately, that special exception has ended.

If you are pursuing PSLF, in addition to the 120 certified payment requirement, you must work for an eligible employer at the time of your application and approval. Don’t leave your PSLF job until after your debt is forgiven. An early move could mean missing out on loan forgiveness.

Student Loan Forgiveness Taxes

You may have heard that there is a tax on federal student loan forgiveness. You may have heard that there isn’t a tax on loan forgiveness.

Both statements are wrong.

The potential tax on forgiveness is a bit more complicated than that.

PSLF doesn’t get taxed by the IRS. IDR forgiveness usually gets taxed by the IRS, but from now until January 1, 2026, it doesn’t get taxed.

State taxes complicate things even further. Some states will tax forgiveness; others won’t.

If you are nearing forgiveness or concerned about a potentially large tax bill, talking to a local tax expert is probably the best bet. A tax professional can help determine whether or not you will get taxed and help you find ways to avoid and/or minimize the tax.

My hope is that the federal tax gets permanently erased before we get to 2026, but that will depend on Congress taking action. If forgiveness is off in the distance for you, consider using my strategy to prepare yourself just in case you get a big tax bill.

The Fresh Start Program

Many borrowers were in default on their federal student loan payments at the time of the payment and interest pause.

To help these borrowers, the negative credit reporting and collection calls stopped.

Now borrowers have the option of the fresh start program to get signed up for an IDR plan and get their loans back on track.

In the past, borrowers could either rehabilitate or consolidate their loans to address a default. Because these options could only be used once, many borrowers ended up in difficult situations.

Fresh Start allows borrowers to restart repayment without the mistakes of the past hanging over their heads.

Annual Income Certification

One of the biggest headaches with IDR has been the annual income certification. Inconsistent processing times from loan servicers occasionally resulted in borrowers missing out on months of IDR payments because the servicer was still calculating the monthly bill.

Borrowers not only had to remember to recertify their income each year, but they had to time it right.

Recent legislation now allows borrowers to authorize automatic income verification based on their most recent tax return. These changes haven’t been fully implement on the IDR applications yet. However, once they are in place, borrowers can allow automatic income verification. This will mean one less thing to remember each year.

When the automated income verification is in place, borrowers will receive a letter from their servicer shortly before their previous income verification expires. The letter will include the new monthly payment for the next year. At that point, borrowers can update their information as necessary. For example, if their family size has grown or their income drops, their payment can be recalculated.

Checking Dates and Facts on Student Loan Information

If you are researching options for your federal student loans, it is critical to understand that there have been significant changes over the past few years.

Pay special attention to the date of any articles or resources you read. In many cases, older resources may have information that is no longer accurate.

On a more positive note, the reason for the confusion is that many new rules have been created to correct past issues. There is still plenty of room for improvement, but repayment options for federal borrowers have never been better.

Stay Up to Date: Student loan rules are constantly changing, and temporary programs create deadlines that can’t be missed. To help manage this issue, I’ve created a monthly newsletter to keep borrowers up to date on the latest changes and upcoming deadlines.

Click here to sign up. You’ll receive at most one email per month, and I’ll do my best to make sure you don’t overlook any critical developments.

The post Important Student Loan Rule Changes to Understand appeared first on The Student Loan Sherpa.