Unfortunately, the Department of Education says the SAVE pause during the litigation will not count toward IDR or PSLF forgiveness. This puts borrowers in a difficult situation, as explained below.

This page will be updated as the SAVE cases progress through the court system and more information becomes available.

Key Events in the SAVE Litigation Timeline

Two cases have been filed seeking to block the SAVE repayment plan. One case was filed in Missouri and the other in Kansas.

• 6/24/24: District court judges in Missouri and Kansas each issue preliminary injunctions regarding the SAVE plan. One court prevents forgiveness under SAVE while the other court blocks the 5% calculation for borrowers with undergraduate debt.
• 6/30/24: The 10th Circuit Court of Appeals issues an order allowing the Department of Education to move forward with the 5% calculation for undergraduate debt. This overruled the Kansas judge who initially granted the preliminary injunction.
• 8/9/24: The Eighth Circuit blocks all forgiveness, interest subsidies, and the discretionary income calculation under SAVE.
• 8/13/24: The government files an emergency request to the Supreme Court asking for the SAVE plan to be reinstated.
• 8/28/24: The Supreme Court declines to intervene with the preliminary injunction. It will stay in effect until the case is resolved.

Sherpa Tip: This timeline only includes the SAVE litigation cases. Forgiveness 2.0 and any related litigation will be on a saparate page.

Current Status: A Long Wait Before We Get a Resolution

Now that the Supreme Court has declined to rule on the Eighth Circuit’s preliminary injunciton ruling it means that SAVE will be temporarily blocked until the case is finally resolved.

This means that borrowers are likely in for a wait of several months or even potentially years before there is a final ruling in the case.

For now, borrowers enrolled in SAVE will not be charged interest and they won’t have to make any payments.

Possible Outcomes and Their Odds (Odds Updated 8/28)

The section that follows is an educated guess. Litigation is unpredictable, and when you factor in the political components of these cases, it makes guessing a final result even harder.

That said, lots of you have emailed me asking about my opinions on various aspects as well as what the worst outcomes look like. I’m doing my best to give you my thoughts on this situation and to give you a range of what might happen.

I will update the odds as new information becomes available.

The Best Case Scenario: The Courts determine that the SAVE plan is within the authority of the Department of Education and the SAVE takes effect as planned. Congress granted the President the authority to create an income-driven plan and chose not to define exactly how it would work. Now that the Chevron case has been overturned, it appears as though the courts will take a bigger role in determining the specifics of the authority granted by Congress. As a result, the best case scenario, while very possible, isn’t the most likely outcome. Odds: 20%

The Most Likely Scenario: Parts of SAVE are eliminated and parts of SAVE survive. The parts of SAVE that are in the most jeopardy are the 5% calculation for undergraduate borrowers and the early forgiveness provision for borrowers with smaller balances. These parts are in the greatest jeopardy because experienced district court judges, appointed by Obama, felt that issuing a preliminary injunction to block these features was necessary. Generally speaking, judges only grant a preliminary injunction if they feel the party requesting the injunction is reasonably likely to succeed. Odds: 50%

The Bad Outcome: The entire SAVE regulations are blocked. In the event that the courts decide the President and Department of Education acted beyond their Congressional approval, they could block the SAVE plan completely. This would erase the favorable discretionary income calculation and the generous SAVE subsidy among other features. Borrowers currently on SAVE would likely revert back to REPAYE. Odds: 30%

The Worst Case Scenario: The court determines that only the plans explicitly created by Congress are valid. This would mean that both SAVE and REPAYE are eliminated. Many borrowers would be stuck with the IBR repayment plan in that situation. Fortunately, this outcome is highly unlikely. The courts are much more likely to prevent a new plan from being created than they are to wind back a plan that is already in use. Additionally, millions of borrowers have signed contracts with the government where REPAYE and all the other non-SAVE repayment plans are a term of the contract. Odds: <1%

Evaluating Your Next Move: Key Factors for Borrowers

While the interest-free forbearance is a positive, the uncertainty around its duration and the implications for IDR or PSLF forgiveness complicates matters. In most cases, borrowers should avoid making unnecessary extra payments.

Here are some key factors to consider when evaluating your next move:

Time Until IDR Forgiveness: If you are nearing IDR forgiveness, moving out of SAVE might be a smart move. Under the current rules, loans forgiven under IDR will be taxed starting in 2026. If you think you might be right on that border, swift action could be necessary. The tricky part about making this move is that processing times are currently very slow for IDR applications.

PSLF Job Stability: For borrowers working toward PSLF, moving out of SAVE probably doesn’t have the same urgency. The buyback program protects borrowers in this situation. There are some hoops to jump through, and borrowers will want to set aside some money to prepare for the cost of the buyback, but changing repayment plans is probably more o of a hinderance than a help at this time.

Repayment Strategy: Borrowers who are unlikely to reach forgiveness under PSLF or IDR should stay on SAVE. The pause gives them the opportunity to put some extra money aside and knock out their debt more efficiently.

Repayment Plan Switching Headaches: If you’ve tried to do anything with your loans over the past year, you know federal servicers are overwhelmed. Processing times are often delayed, and switching out of SAVE and then switching back in at the conclusion of the litigation could be challenging.

What Happens if I Change Plans? Even though electronic applications are not available on studentaid.gov, borrowers can still submit a paper application.

When the application is initially submitted, borrowers will be placed on a processing forbearance and that time will count toward IDR and PSLF forgiveness, but interest will also accrue.

Once 60 days have elapsed on the processing forbearance, borrowers will be placed in a general forbearance where interest will no longer accure, but the time will not count toward PSLF or IDR forgiveness.

Interest Capitalization: In the past, changing repayment plans led to interest capitalization. New rules now only capitalize interest when statutorily required. Notably, if a borrower switches from IBR to SAVE (or any other repayment plan) interest capitalizes. This shouldn’t be much of an issue because borrowers on SAVE won’t have any interest to capitalize due to the subsidy. However, if you qualify for low monthly payments on IBR and the interest charges are greater than your monthly bill, you may have a larger balance if you return to SAVE at the end of the litigation pause.

Final Tip: Stay Informed

Stay informed as this is a fast-moving situation. Follow updates closely, and be prepared to adjust your repayment strategy as needed.

At this time, there are not upcoming deadlines or urgent actions that may need to be taken. However, that all could change quickly. Monitoring these cases is important. It’s early August, and there could be many changes coming before the month is over.

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 SAVE Lawsuits: Current Status, Next Steps, and Tips for Borrowers Navigating the Chaos appeared first on The Student Loan Sherpa.

This combination of legal and regulatory uncertainty is particularly frustrating for borrowers who are trying to plan their finances and choose the best repayment strategy. Understanding the current state of these plans and the potential impacts of the ongoing legal battles is essential for borrowers trying to figure out what to do next.

Sherpa Thought: This article focuses on the consequences of the SAVE litigation. If you want to know more about the SAVE lawsuit, be sure to check out this article.

Current State of IDR Enrollments

As of now, borrowers can enroll in any IDR plan except REPAYE, which has been replaced by the SAVE Plan. However, the enrollment process has become more complex due to ongoing litigation:

• Application Process: Borrowers must submit a paper application or upload a completed PDF application through their loan servicer’s website. Online applications are not currently available due to the legal challenges.
• Administrative Forbearance: Once a new IDR application is submitted, borrowers are placed on administrative forbearance for up to 60 days. During this period, interest accrues on the loans, but the time counts toward both IDR forgiveness and Public Service Loan Forgiveness (PSLF).
• General Forbearance: After the 60-day administrative forbearance, borrowers are moved to general forbearance if the application process is still ongoing. During general forbearance, interest does not accrue, but the time spent in this status does not count toward forgiveness.

PAYE, ICR, and REPAYE: The Impact of SAVE and Litigation

PAYE, ICR, and REPAYE were all created under the same congressional authority as the SAVE Plan. This shared origin has raised concerns about the long-term outlook of these plans, especially after a broad and arguably unclear preliminary injunction cast doubt on forgiveness under any of these plans.

However, it’s important to note that ICR, PAYE, and REPAYE should not be impacted by any final ruling in the SAVE case. The plaintiffs in the SAVE litigation are not seeking to overturn the regulations governing these older plans. Additionally, the Administrative Procedure Act (APA) makes it difficult to challenge regulations that have been in place for over six years, which provides an additional layer of protection for ICR, PAYE, and REPAYE. This makes new lawsuits and future challenges to PAYE, ICR, and REPAYE unlikely.

Even though the rules for these plans are unlikely to be overturned or challenged directly, they can still be eliminated by the SAVE regulations. As the later sections explain, SAVE as currently written significantly impacts these other IDR plans and could phase them out over time.

Thus, the outlook for all IDR plans is direcly impacted by the SAVE ligitation. If SAVE wins in court, availability of some plans becomes limited. If SAVE loses, we revert back to older rules. Because each plan is different, the potential changes and impacts from SAVE are also slightly different.

PAYE: What Happens if SAVE Survives vs. SAVE Gets Struck Down

PAYE (Pay As You Earn) is currently closed to new enrollments under the SAVE regulations. Borrowers who were already enrolled in PAYE can remain on the plan, but no new borrowers can sign up.

If the SAVE Plan survives the ongoing litigation, PAYE will remain closed to new borrowers. However, if the new SAVE regulations are struck down, PAYE could be reopened for new enrollments, allowing borrowers to choose this plan if it better suits their financial situation.

ICR: Different Rules for Parent PLUS Borrowers

ICR (Income-Contingent Repayment) remains available for borrowers with Parent PLUS loans, but it is otherwise closed to new enrollments, similar to PAYE.

If the SAVE regulations continue, ICR will remain an option solely for Parent PLUS borrowers. However, if the SAVE Plan is overturned, ICR could once again become available to all borrowers, offering another option for those who might benefit from its unique terms.

IBR: Statutory Certainty

IBR (Income-Based Repayment) is currently available to eligible borrowers and is considered a secure option due to its statutory foundation.

The SAVE litigation revolves around whether the Department of Education exceeded its authority granted by Congress when creating the SAVE Plan. IBR, however, is fundamentally different because its terms and conditions were established directly by Congress. This means that any changes to IBR would require new legislation, providing a stable and secure option for borrowers.

Under the SAVE regulations, borrowers who have been on SAVE for a total of 60 months are not eligible to sign up for IBR. If SAVE is struck down, this 60-month restriction would likely be eliminated, ensuring that IBR remains accessible to all eligible borrowers.

REPAYE: Modified and Replaced by SAVE

REPAYE (Revised Pay As You Earn) has been modified and renamed to become the SAVE Plan. Borrowers who were previously enrolled in REPAYE were automatically transitioned to SAVE. As a result, REPAYE is no longer available for new enrollments.

If the SAVE Plan survives, REPAYE will be permanently replaced by SAVE. However, if the SAVE Plan is struck down, REPAYE could be reinstated, allowing borrowers who preferred REPAYE’s terms to once again enroll in the plan.

It is also likely that if SAVE is struck down, borrowers who signed up for SAVE will be moved back to REPAYE.

Expect More Changes Ahead

The future of PAYE, IBR, REPAYE, and ICR hinges on the outcome of the SAVE litigation, but the legal protections and statutory foundations of these plans offer some security.

Borrowers should remain informed about ongoing legal developments and understand how different scenarios might impact their repayment options. Whether SAVE survives or gets struck down, understanding the current state of these plans and their potential future is crucial for making informed decisions about your financial future.

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 The Future of PAYE, IBR, REPAYE, and ICR: Navigating Uncertainty and Understanding Your Options appeared first on The Student Loan Sherpa.

Borrowers often believe they must choose between paying off loans and saving for retirement. After all, every dollar you put towards retirement is a dollar you can’t use to pay down student loans.

What if it was possible to build a retirement and make student loan debt disappear at the same time?

It might sound surprising, but there are at least four different strategies that can be used to work towards both milestones.

Use Student Loan Forgiveness to Build a Bigger Retirement

The federal student loan forgiveness programs can be excellent opportunities to eliminate student loan debt. For borrowers with large student loans and a smaller income, these programs can be life-changing.

Borrowers on income-driven repayment plans can have their remaining balances forgiven after 20 to 25 years worth of payments. Those employed by the government or an eligible non-profit can have their loans forgiven after just ten years of payments.

Unfortunately, there is some risk in chasing after student loan forgiveness. While borrowers should understand the rules of loan forgiveness, there are no guarantees. Even though the concern over the high rejection rates in the media may be exaggerated, there is no denying that forgiveness comes with a bit of uncertainty.

Borrowers worried about qualifying don’t have to skip the program entirely. Instead, they can chase after student loan forgiveness but protect themselves if it doesn’t happen.

One option is to open a savings account as a Plan B fund. Borrowers make the minimum student loan payments as they pursue forgiveness and any additional funds that they have available go into the Plan B account. Going this route allows borrowers to attack their debt aggressively, but also try to maximize forgiveness opportunities.

If it becomes clear that forgiveness won’t happen, the Plan B fund can be used to put a huge dent in the debt balance. If forgiveness does work out, the Plan B fund can be used as a huge head start toward retirement.

Refinance and Build a 401(k) or IRA

Those who aren’t eligible for forgiveness can still lower payments and save for retirement.

Companies like SoFi, Splash, and CollegeAve all refinance student loans for borrowers with a decent credit score and income. These companies pay off the older high-interest loans in full, and a new loan with a lower interest rate is created.

Further Reading: Learn how student loan refinance companies make money.

By refinancing, borrowers can free up some additional cash each month. This additional money can be put towards retirement in a 401(k) or an IRA.

For example, suppose a borrower pays $500 per month on their student loans. They may be able to refinance and get the monthly payment lowered to $350. This means an extra $150 monthly. Instead of keeping this money, they can invest it in an IRA.

Depending upon the terms of the student loans, a borrower can refinance student loans to get them paid off more quickly AND use the additional funds available each month to save for retirement. The key to the process is finding the lowest refinance rates available.

Get Your Employer Involved

One of the best ways to build a retirement is to take advantage of employer matching programs. If your employer offers a dollar-for-dollar match, it means each retirement contribution essentially doubles from day one.

Unfortunately, some student loan borrowers do not take advantage of this program because they feel they need every dollar from their paycheck to pay down student loans and pay for the essentials. (Editor’s Note: Passing on an employer matching program is usually a bad idea as it is essentially passing on free money.)

New legislation now allows employers to tie 401(k) matching contributions to employee student loan payments. In other words, payments toward student debt can become retirement contributions depending on your employer.

Because this is relatively new territory, many employers don’t know about this option, and many others will be hesitant to do so. However, some employers may embrace the opportunity. The matching cost to the employer is the same whether the match is based upon a student loan payment or a retirement contribution.

Discuss with your boss or HR how employers can now match contributions based on student loan payments. Many companies are looking for ways to attract young, talented people, and this could be very appealing.

Turn Retirement Tax Breaks into Lower Student Loan Payments

This is my favorite student loan hack.

Borrowers on IDR plans like IBR, PAYE, and SAVE can lower their AGI —and their payments — by contributing to a retirement account.

As most borrowers know, when IDR payments are calculated, the government usually uses your most recent tax return. The important number pulled from the tax return is the AGI or Adjusted Gross Income. A higher AGI means higher student loan payments, and a lower AGI likewise means lower monthly payments.

Contributions to a 401(k) or a traditional IRA lower the AGI. Accountants call tax breaks that lower the AGI above-the-line deductions. For each dollar that is put in a 401(k) or IRA, the AGI is reduced by one dollar.

If a student loan borrower puts $300 per month in an IRA, their AGI will be $3,600 lower the following tax year. The lower AGI means a lower tax bill AND lower student loan payments. Borrowers can use the federal government’s student loan repayment estimator to see how changes to their AGI would change their monthly student loan bill.

Putting money in a 401(k) or IRA provides student loan borrowers with three primary advantages:

1. A lower tax bill in April,
2. A lower monthly payment on an IDR plan, and
3. A larger balance in their retirement accounts.

It is worth noting that a lower monthly IDR payment can mean spending more in interest over the life of the loan, so borrowers should factor total loan cost into their planning. However, for borrowers who will eventually qualify for federal student loan forgiveness, this option can result in a larger portion of the loan balance being forgiven.

Final Thought: Plan Ahead and Know the Rules

These advanced strategies can be confusing, but they are worth understanding for better financial planning.

All student loan borrowers should familiarize themselves with the terms of their student loans and understand how the debt impacts their finances.

By understanding and planning, borrowers can use these strategies to quickly and efficiently eliminate their debt. They will also be empowered to meet other important financial goals, such as retirement.

The post 4 Ways to Save for Retirement AND Eliminate Student Loan Debt appeared first on The Student Loan Sherpa.

Unfortunately, SAVE isn’t always the best choice.

SAVE doesn’t have a cap on monthly payments, and IBR and PAYE offer monthly payment caps.

What happens to borrowers earning so much money in the future that SAVE becomes more expensive than IBR and PAYE?

The PAYE and IBR Payment Caps and the Danger with SAVE

The “danger” with SAVE is that monthly payments are always based on what a borrower earns. In other words, the more money you make, the more money you pay on SAVE.

PAYE and IBR offer a payment cap. If you earn so much money that your monthly payment is greater than what your payment would be on the 10-year standard repayment plan, your monthly bill is based on the 10-year plan. This offers protection for those in lucrative fields who fear that a SAVE payment could become unreasonably large.

The big fear for many borrowers is that they make many years of SAVE payments but then have to leave income-driven repayment because the bill becomes too large

Eligibility Issues

A secondary problem with SAVE is that enrollment after July 1, 2024, will limit IDR options in the future.

Borrowers on SAVE after this date lose access to PAYE immediately. They also lose access to IBR after five years of SAVE payments.

This means you can’t sign up for SAVE while it is cheaper and then jump into IBR or PAYE when they become the more affordable option. Instead, borrowers must commit long before they know what their earnings will be in the future.

The Partial Financial Hardship Part of the Equation

Anyone can sign up for SAVE, but to enroll in PAYE or IBR, you have to have a partial financial hardship.

What is a partial financial, and how does it impact the payment caps on these plans?

To show a partial financial hardship to qualify for IBR or PAYE, a borrower’s income cannot be so large such that their monthly IDR payment is larger than what the payment would be on the 10-year standard repayment plan. In other words, if PAYE and IBR don’t save money, you can’t enroll.

However, once you are enrolled in IBR and PAYE, you won’t get kicked out for earning too much money. Instead, your monthly payment hits the 10-year standard repayment cap and stays at that number until your income drops, you repay the loan in full, or you earn forgiveness.

If you are early in your repayment journey and you don’t have a partial financial hardship, barring a major financial setback, forgiveness is an unlikely outcome.

Don’t Lose Sight of the Real Goal

Before going further in our analysis, it is probably a good idea to remind ourselves of the real goal we are chasing: spending as little as possible on debt elimination.

When we become too focused on student loan forgiveness and IDR options, sometimes it is easy to lose sight of this goal.

You don’t get any special prize because you qualify for IDR forgiveness instead of paying off your entire balance. What you do receive is a large tax bill on the forgiveness if it happens in 2026 or later, though there is some hope this gets repealed.

In some cases, repaying the debt as quickly as possible and minimizing interest spending is the best way to eliminate debt. Playing games with IDR plans and prolonging the time could just mean that you spend more in interest over the life of the loan.

At the point your SAVE payment is greater than the standard 10-year payment, there is a real chance that payment in full as quickly as possible is the best approach. The sooner this happens in your repayment journey, the less likely you are to benefit from any sort of IDR forgiveness.

In other words, the lack of a SAVE cap only matters in a narrow set of circumstances. If you never reach the point where your SAVE payment is greater than the 10-year standard payment, the absence of a cap doesn’t matter. If you blow past the cap early in your repayment journey, it won’t matter either. The PAYE and IBR cap only offers value if you reach that point late in your forgiveness journey.

Changes on the Horizon

The big wildcard is that we don’t have any idea what federal student loan repayment will look like in the future.

Consider how much has changed in the last five years. We had a global pandemic, payments paused for years, a new repayment plan created, and numerous temporary programs to help borrowers qualify for forgiveness.

This site has been around for just over a decade. In that time we’ve seen the following repayment plans become available: PAYE, REPAYE, IBR for New Borrowers, and SAVE. Each successive new IDR plan offered some improvements over previous options.

If that history tells us anything, it is that we are likely to see more student loan changes in the future.

The impact on our present analysis boils down to one simple thought: paying extra today because it might save you money in the future may not make sense.

PAYE and IBR forgiveness timeline vs. SAVE

Our discussion of payment caps should also cover one other critical point: forgiveness timelines.

Borrowers on PAYE and IBR for New Borrowers can qualify for IDR forgiveness after 20 years. Borrowers on SAVE have to make 25 years of payments if they have any graduate debt (those with only undergraduate loans will only have to make payments for 20 years).

Thus, the two biggest arguments for PAYE and IBR are caps on payments and earlier forgiveness.

This site has already done a deep analysis of the risks and benefits of early PAYE or IBR forgiveness compared to SAVE.

Like the payment cap analysis, there isn’t an easy or obvious answer, just a number of considerations and angles to approach things.

The “Worst-Case” Scenario when Signing Up for SAVE

Some borrowers fear that they will reach a point with SAVE where their income becomes so high that the lack of a payment cap becomes relevant.

To be fair, that is a realistic concern, especially in some higher-earning fields. That said, it is kind of like worrying about all the taxes if you win the lottery. File it away as a good problem to have.

In this circumstance, a borrower could switch back to the 10-year repayment plan. The downside is that the payment would not count toward IDR forgiveness – notably, it would still count toward PSLF.

With the ability to hide income away in retirement accounts, and the ability to exclude spousal income by filing separately, many borrowers can find a way to keep SAVE payments below the standard 10-year plan. Those that cannot either have a very large income or a smaller loan balance. In either of these scenarios, repayment in full will merit serious consideration.

The Risk to Choosing PAYE or IBR for Payment Cap Protection

The alternative approach yields a much different worst-case scenario.

If you stick with PAYE or IBR and willingly pay extra in the hopes that one day your earnings justify the decision, things could go quite poorly.

For starters, this route is especially risky if you qualify for any subsidy on the SAVE plan. In this circumstance, not only are you paying more each month, but your balance may also be growing. The impact here is that if you reach a point where payment in full makes the most sense, you’ve left yourself with a bigger balance to eliminate.

The biggest danger is that your income never justifies opting for payment cap protection. In that scenario, you make years of unnecessarily larger payments, forgo interest assistance, and never utilize the cap that requires so much sacrifice.

Choosing Between PAYE and IBR or SAVE

There isn’t a guaranteed better option. However, factors can tip the scales one way or another.

If you only have undergraduate debt, SAVE forgiveness happens as early as PAYE and IBR, so that might tip the scales toward SAVE.

As your future high-earning years become less speculative, opting for payment cap protections makes more sense. For example, someone who just finished law school shouldn’t assume they will be making a partner salary in 15 years. There are too many variables in the way. However, a physician who just finished their residency might be comfortable projecting a larger income.

If your peak income is really high and your income could also be really low, SAVE makes more sense. For example, suppose you are a struggling musician or actor. If things go poorly, the SAVE subsidy and lower payments are extremely valuable. If things go really well, your income is so large that payment in full is likely the best strategy.

Opting for IBR or PAYE makes more sense if you are further down the repayment journey and have a high-income floor. The cap isn’t valuable if you use it for 10 years because you will have paid off your loan in full before getting any forgiveness. However, the cap is useful if it saves you some money for three years and you are getting forgiveness earlier.

How to Run the Numbers

Two important items are necessary to do these projections. First, you need to know your loan balance. Second, you need a crystal ball so that you can figure out how much money you will earn over the next 20-25 years.

Without a working crystal ball, you will need to run the numbers a few different ways.

First, consider what your payments will look like if things go well for you in the coming years. Assume you get that promotion and that your housing costs stay stable. Assume nobody gets sick and there are no unexpected expenses.

Then look at the downside. You don’t have to think about what it will look like if you get fired and your house burns down. Just think about what might happen if you don’t get the promotion or if you leave for a less lucrative position.

Think about different career scenarios that might realistically play out for you in the coming years.

For each scenario, consider what it means for your student loan payments. Is the SAVE subsidy and lower payments the better option? Does potentially earlier forgiveness and payment caps make PAYE or IBR for New Borrowers the better route? Is it best to just knock out the debt in full to save money on interest?

Going through each scenario and running the numbers may not give you one answer that is clearly the best route. However, you may see a pattern emerge. You may decide that one option usually is the best, and in the rare circumstance that it isn’t, you can live with that outcome.

If you have questions about your options or you want to know how this choice can impact your retirement planning or your ability to buy a house, let’s schedule a consultation to see how all of these plans and programs apply to your specific situation.

The post SAVE vs PAYE and IBR: Payment Caps, Partial Financial Hardships and More appeared first on The Student Loan Sherpa.

Rather than list the many borrowers who can benefit from the SAVE IDR plan, it is probably easier to list the few borrowers on IDR plans who wouldn’t benefit from signing up for SAVE.

That list includes the following:

• Certain high-earning borrowers with graduate debt who finished school in the last decade.

End of list. If you have been out of school for a while or if you don’t have graduate debt, SAVE is almost certainly the best IDR plan available.

REPAYE (Revised Pay As You Earn) vs. SAVE (Saving on a Valuable Education)

The REPAYE plan is getting eliminated and replaced with SAVE.

Think of SAVE as a new and improved REPAYE. Borrowers will see some changes happen right away, and other changes will happen in July 2024.

The transition from REPAYE to SAVE is a two-phase process.

Phase I started with the repayment restart. Borrowers still pay 10% of their discretionary income each month, but the discretionary income formula changes. Instead of using 150% of the federal poverty level in the calculation, the number jumps to 225%. For borrowers, this means a smaller monthly bill.

The next immediate change is that married borrowers who file their taxes separately can exclude spousal income from REPAYE calculations. This improvement makes REPAYE a better option for married borrowers.

Finally, SAVE now covers 100% of the excess interest the loan generates each month. The current REPAYE subsidy only covers 50%. For example, a $10,000 loan at 6% interest generates $600 per year in interest or $50 per month. In this example, if your REPAYE payment is $20, it means $30 per month in excess interest. In the past, REPAYE immediately forgives 50% of that interest, meaning our borrower has $15 immediately forgiven. Now, REPAYE/SAVE will cover all $30 of the monthly unpaid interest.

Phase II happens on July 1, 2024. REPAYE formally becomes the SAVE plan, and the remaining provisions of SAVE take effect. These provisions include earlier forgiveness for borrowers with smaller balances and lower payments for borrowers with undergraduate debt.

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

REPAYE/SAVE Enrollment and Eligibility

The vast majority of IDR borrowers will want to sign up for the SAVE plan.

Those already in REPAYE should have had their payments automatically recalculated under the new terms. Borrowers can enroll in SAVE or update their IDR enrollment on the Department of Education IDR enrollment page.

All Federal Direct Loans are eligible, including Federal Stafford (Subsidized and Unsubsidized), Graduate Plus, and Direct Consolidation. The one exception is that Direct Consolidation loans that include Parent PLUS loans are not eligible.

Borrowers with FFEL Loans and Perkins loans are not eligible. However, these borrowers can consolidate the debt into a federal direct loan to gain eligibility. Additionally, federal direct consolidation at this time should not reset progress toward student loan forgiveness.

Defaulted federal loans are also not eligible. However, the Fresh Start program will allow borrowers to resolve the default and enroll in REPAYE/SAVE.

PAYE (Pay As You Earn) Gets Sunsetted

PAYE was a noteworthy repayment plan because it offered the lowest monthly bill when it was first created.

With the creation of the SAVE plan, most borrowers won’t benefit from PAYE. SAVE will always offer lower monthly payments than PAYE. Additionally, more borrowers will qualify for $0 per month payments under SAVE.

The Department of Education policy is that no new borrowers can sign up for PAYE. However, those currently on PAYE can stick with this plan.

One reason that a borrower might stick with PAYE is if they have graduate loans and they are nearing the 20-year IDR forgiveness. On SAVE, a borrower with graduate debt must make payments for 25 years before earning IDR forgiveness. Borrowers chasing this form of forgiveness must balance the higher payments on PAYE against the earlier forgiveness for those with graduate debt.

Another potential reason to stick with PAYE would be the payment caps on PAYE. For most borrowers this doesn’t make a difference, but if you have some high earning years on the tail end of your repayment journey, the cap could be a benefit.

IBR (Income-Based Repayment) Becomes a Rarely-Used Option

Borrowers on IBR pay 10% or 15% of their monthly discretionary income. The percentage depends on when they took out their first student loan. Those who borrowed after 2014 only pay 10%. Those with older loans pay 15%.

The IDR analysis will look almost identical to the PAYE analysis. REPAYE/SAVE is the cheaper and more affordable repayment plan for most borrowers.

The one exception is borrowers with graduate debt who are pursuing IDR forgiveness after 20 years. SAVE will make these borrowers wait 25 years.

The big difference between PAYE and IBR moving forward is that IBR will still be available for most borrowers, whereas PAYE disappears immediately for those not currently enrolled.

However, borrowers lose IBR eligibility after making 60 payments on SAVE after July 1, 2024. The purpose of this rule is to prevent graduate borrowers from making low payments on SAVE for 19 years and 11 months and then switching to IBR and trying to get forgiveness after 20 years.

The big decision for borrowers with graduate loans considering IDR forgiveness will be deciding between the lower payments of SAVE vs. the earlier forgiveness of IDR.

What about PSLF Borrowers? Borrowers pursuing Public Service Loan Forgiveness won’t have to worry about this issue. PSLF eligibility comes after 120 eligible payments (10 years worth). These borrowers can make payments on any eligible repayment plan, including SAVE.

ICR (Income-Contingent Repayment) Doesn’t Change Much

ICR was the first income-driven repayment plan, but it is also the worst one.

Moving forward, new students will not be able to enroll in ICR. However, borrowers with consolidated Parent PLUS loans can still sign up for ICR.

In the past, and under the new rules, consolidating Parent PLUS loans will be the only way to qualify Parent PLUS debt for PSLF or income-driven repayment.

Sadly, Parent PLUS loans cannot be eligible for REPAYE or SAVE. Thus, it remains critical not to consolidate Parent PLUS loans borrowed for your child with federal student loans borrowed for your education.

What if I Make Too Much for SAVE?

There isn’t an income cap for SAVE enrollment.

Borrowers with substantial incomes may have large payments, but there isn’t a salary cutoff for SAVE enrollment or calculations.

However, some borrowers may have incomes so large that other balance-based plans, such as the 10-year standard repayment plan, become more affordable.

Picking the Best Plan

Despite the changes, things are pretty simple for most borrowers now that payments have restarted.

Most people will want to sign up for the SAVE plan. It will has the lowest monthly payments, an interest subsidy, and full benefits arrive automatically next year.

FFEL and Perkins borrowers should probably consolidate before the IDR Count Update deadline and sign up for SAVE.

Parent PLUS borrowers won’t be able to benefit from the new repayment plan. Their strategy hasn’t really changed.

Borrowers with graduate debt are the only ones who face a decision. They will need to compare the monthly savings of REPAYE/SAVE against 20-year IDR forgiveness. Notably, not all borrowers with graduate loans face this issue. If your loans are too old to qualify for PAYE or IBR for New Borrowers, REPAYE/SAVE will be the best option.

Frequently Asked Questions

Many of you have sent me emails with questions about how SAVE will impact your repayment strategy.

Here are some of the most common questions I’ve received:

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 updated 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 ensure you don’t overlook any critical developments.

The post How SAVE Changed Income-Driven Repayment: Goodbye to REPAYE, PAYE, IBR, and ICR appeared first on The Student Loan Sherpa.

Many couples fear that their student loan payments will double if they get married. This is not the case.

Your payments will almost certainly change if you get married, but the change depends upon several details.

A Note from the Sherpa: This article was initially written in the early days of this site. It has since been updated numerous times to include up-to-date information, including the new SAVE plan.

The Rules for Couples on Income-Driven Repayment Plans

I usually don’t like to dwell on the research that goes into each article, but given that there is so much contradictory information on this topic, it is probably prudent.

Like any student loan issue, it starts with a call to the student loan servicer. When I asked about how marriage would affect my student loan payment, I proposed the following hypothetical. Suppose my spouse and I each make $40,000 per year, both have student loans, and both are on IBR. Will our payments be the same as two single people making $40,000 per year, or will they be double? I was told confidently (and incorrectly) that our payments would be doubled.

Because I was reasonably confident that the provided information was incorrect, I politely went through several other hypotheticals with my lender. Eventually, the customer service representative changed her answer. She explained that if we both were on IBR before marriage and got married, our total payments should remain the same. She based this response on the Income-Driven Repayment application form. This particularly clever customer service representative noticed that you could submit information about your spouse’s federal student debt. They wouldn’t ask for this information if it didn’t count. Thus, she concluded that her initial answer was wrong and that payments would not double if two IBR borrowers got married.

Not fully satisfied with this answer, I turned to Google for further help based on the information from my lender. A bit of legal research followed. Eventually, I found the definitive answer in the Code of Federal Regulations, specifically, 34 CFR 685.221(b)(2)(ii), which states that when calculating IBR payments:

The Secretary adjusts the calculated monthly payment if—Both the borrower and borrower’s spouse have eligible loans and filed a joint Federal tax return, in which case the Secretary determines—

(A) Each borrower’s percentage of the couple’s total eligible loan debt;
(B) The adjusted monthly payment for each borrower by multiplying the calculated payment by the percentage determined in paragraph (b)(2)(ii)(A) of this section; and
(C) If the borrower’s loans are held by multiple holders, the borrower’s adjusted monthly Direct Loan payment by multiplying the payment determined in paragraph (b)(2)(ii)(B) of this section by the percentage of the total outstanding principal amount of the borrower’s eligible loans that are Direct Loans;

Similar language for PAYE can be found at 34 CFR § 685.209(a)(2)(ii)(B).

This legal jargon basically says that the total IDR payment is calculated for the couple. Individual payments are then based on the portion of the debt in the name of that particular spouse. So if your spouse has twice the student debt you do, if you both are on the same IDR plan, her payment will be double yours.

Calculating Monthly Payments

One of the best tools for calculating monthly payments is the Department of Education’s Loan Simulator. Couples can add both their incomes and student loans to get an accurate projection of monthly payments.

For those who want to understand how the calculations are made, the Department of Education is first looking at the combined adjusted gross income (AGI) of the couple from their most recent tax return. From that number, the Department will calculate the discretionary income of the couple. Depending upon the Income-Driven Repayment plan selected, the couple will be responsible for paying 10, 15, or 20% of their discretionary income towards their federal student debt. (Up to this point, the process for single individuals and couples is the same.)

When couples both have federal student loans, the payment is split proportionally to how much each partner has borrowed. The spouse who borrowed more will be the one with the higher payments.

How Married Couples Pay More on IBR, PAYE, and SAVE

Now, things get complicated.

Even though the double payment concern doesn’t exist, it is still possible that payments will go up.

The increase can be traced back to the discretionary income math. Loan payments are based upon discretionary income, defined as earnings above 150% of the federal poverty level. (Note: SAVE uses a more generous 225% of the poverty guidelines.)

A quick example of payment calculations will help illustrate the issue. Suppose I earn $44,000 annually, and the federal poverty guidelines say that 150% of the poverty level is $20,000. My discretionary income is  $24,000 per year or $2,000 per month. If I were on PAYE, 10% of my monthly discretionary income would be $200. Thus, I pay $200 per month on PAYE.

For couples who both have student loans, filing jointly or separately impacts the amount of money that you keep each year before you have to make payments. If you file separately, you get to keep that first $20,000, and your payments are based upon the rest. Your spouse also keeps the first $20,000, making payments based on the additional income. By filing separately, you EACH get to keep that first bit of income.

If you file jointly as a couple, you only get to keep that first bit of income once. If your combined income is $90,000, you subtract that $20,000 from the poverty guidelines once, leaving $70,000 of discretionary income. Because of this distinction, a couple will pay slightly more if they file jointly.

For many couples, the slight increase may not offset the downsides of filing separately. However, the only way to know for sure is to do the math on filing jointly and filing separately. Between tax programs that quickly estimate your tax bill and the Department of Education Loan Simulator, comparing the two options isn’t difficult.

Special Rules for REPAYE and SAVE

At one point, the REPAYE plan had special rules for married couples who filed separately. In most cases, borrowers still had to include their spousal income, even though they filed separately. For this reason, many married borrowers were encouraged to stick with PAYE or IBR.

With the creation of the new SAVE plan, the old REPAYE rules were eliminated. This is excellent news for married borrowers who want to take advantage of the new SAVE plan.

Now, spousal income is treated the same for all IDR plans. If you file separately, you can exclude your spouse’s income from your loans. If you file jointly, payments are based on your combined income.

When Married Couples Who Both Have Student Loans Should File Separately

Adding kids to the equation can change the math.

As one reader noted in the comments, being in a family of four means that the poverty guideline number is much higher than it would be for just two. Filing separately and being able to subtract that number twice can make a big difference.

The larger your family, the bigger the potential savings from filing separately, even if you both have student loans.

The Short and Simple Answers for IBR, PAYE, and SAVE Couples Who Both Have Student Loans

• Filing taxes jointly does not mean your student loan payments will double.
• Filing taxes jointly does mean that your monthly payments will be somewhat higher.
• If you have a larger family, the IBR and PAYE benefit of filing separately goes up.
• Borrowers should compare the potential savings of filing separately against the higher taxed bill caused by filing separately.

Finally, I’d also like to point out that getting a low IBR or PAYE payment is not the goal of federal student loan borrowers. The goal is to eliminate the debt. For borrowers chasing after student loan forgiveness, the lower payments are valuable. If you will eventually pay the debt off in full, lower monthly payments just mean the loan will cost more in the long run.

The post IBR, PAYE and SAVE for Married Couples who Both Have Student Loans appeared first on The Student Loan Sherpa.

However, for one group of borrowers, the analysis isn’t so simple.

Borrowers with graduate debt can qualify for forgiveness after 20 years on the PAYE or IBR for New Borrowers plans. On the SAVE plan, borrowers with graduate debt must make payments for 25 years before earning forgiveness.

The issue essentially boils down to a simple question: Is it better to have lower payments for a longer period or faster forgiveness with higher payments?

Some Ground Rules for Comparing SAVE to PAYE and IBR

To make a useful comparison between these student loan repayment plans, it’s important to understand a few key details.

First, borrowers can switch from their current IDR plan to SAVE without losing any progress made toward IDR forgiveness. For example, if you have already completed 11 years on another IDR plan, your progress will carry over when you switch to SAVE.

Second, the IBR plan mentioned here specifically refers to IBR for New Borrowers. If you borrowed your first student loan before July 1, 2014, you are not eligible for IBR for New Borrowers. For those of us on the “old” IBR plan, the decision of whether or not to switch to SAVE is a much easier one. Old IBR requires 25 years to achieve forgiveness, so switching to SAVE wouldn’t slow down your forgiveness timeline.

Likewise, it is worth noting that the PAYE plan is available only to those who were new borrowers as of October 1, 2007 and received a disbursement of a Direct Loan on or after October 1, 2011. If your student loans are older, you wouldn’t be eligible for PAYE, and this particular issue won’t apply to you.

Finally, this issue applies only to borrowers with graduate debt. If you have any graduate loans, IDR forgiveness through SAVE takes 25 years. If you have only undergraduate loans, SAVE forgiveness takes 20 years – just like PAYE and IBR for New Borrowers.

A Note About Repayment Plan Eligibility: Right now, borrowers can sign up for SAVE, and if they decide it was a mistake, they can switch back to PAYE or IBR.

Starting July 1, 2024, borrowers on the SAVE plan cannot enroll in PAYE. Similarly, once a borrower makes 60 payments on SAVE, they lose IBR eligibility.

Finding the “Right” Answer

This analysis will vary for each borrower. There won’t be a straightforward “right” or “wrong” answer. Instead, the decision will be influenced by various factors that tip the scale in favor of the SAVE plan or the PAYE/IBR plans.

To aid in understanding these nuances, I’ll perform some sample calculations to illustrate potential outcomes. Following that, I’ll explore numerous variables that could impact these figures.

The aim here is to present as many relevant considerations as possible to help borrowers make an informed decision. If you believe there’s another factor that could influence your choice, feel free to mention it in the comments. I can provide feedback on your specific scenario and, if necessary, update the article to include any overlooked aspects.

Sherpa Tip: The faster forgiveness question isn’t the only consideration when deciding between SAVE and PAYE/IBR.

Unlike SAVE, PAYE and IBR have monthly payment caps, which could come into play if you are nearing forgiveness and start earning more money. Deciding between lower payments on SAVE and the caps offered by PAYE and IBR is a similarly complicated question.

Running the Numbers

Estimating your monthly SAVE payments can be a bit tricky because it largely depends on how much graduate school debt you have. If your debt is exclusively from graduate studies, your payment will be 10% of your monthly discretionary income. However, if your debt is primarily from undergraduate studies, that figure drops to around 5%.

Your income level will also play a role in determining your monthly payments and how beneficial the SAVE plan is compared to PAYE and IBR plans. Moreover, any increase in your income over time will affect these calculations.

The key point determination is finding the break-even point. For example, if you have already completed 19 years under PAYE, one more year of PAYE is clearly better than six years of SAVE. Yet, there will likely be a point in which the annual savings from SAVE outweigh the additional five years in repayment.

With this in mind, I’ve analyzed a few different scenarios to illustrate the point.

Annual Income $60,000 per year vs. $120,000 per year

For this example, I’ll focus on Borrower A, who has graduate loans only. This will result in a conservative estimate of Borrower A’s payments under the SAVE plan. I’ll also assume that Borrower A’s salary remains the same throughout the repayment period.

Federal poverty level guidelines influence the repayment calculations. These guidelines are updated annually. So, although keeping a flat salary for 20 years might seem unrealistic, it makes sense for this analysis. Accordingly, this analysis will still be valid for borrowers who receive small annual raises.

If Borrower A’s AGI is $60,000 per year, enrollment in SAVE results in savings of just under $1,100 per year compared to PAYE. The savings on SAVE more than covers the five years of extra payments. Over the course of the repayment period, choosing SAVE could lead to a savings of nearly $4,500.

However, if Borrower A already made four years of payments under PAYE (meaning they had 16 years remaining on the loan), the financial outcome of sticking with PAYE/IBR or switching to SAVE would be nearly the same.

If we bump Borrower A’s annual income from $60,000 to $120,000, the analysis changes considerably. SAVE is still cheaper by nearly $1,100 per year, but the extra five years of payments on SAVE are substantially more expensive. In this instance, choosing SAVE costs over $30,000 more per year.

Lesson: Income level makes a huge difference for borrowers with primarily or exclusively graduate debt. The higher your income, the less advantageous SAVE becomes.

A 50/50 Split of Graduate and Undergraduate Debt

If we assume our borrower has even amounts of undergraduate and graduate debt, their SAVE payment drops from 10% of discretionary income to 7.5% of their discretionary income.

Keeping everything else the same, the numbers change considerably.

Our borrower making $60,000 per year saves over $21,000 by sticking with SAVE. The breakeven point now moves to year 12, meaning eight years of PAYE is about the same cost as 13 years on SAVE. If this borrower had already made ten years of PAYE payments, switching to SAVE would still be better.

For the borrower making $120,000 per year, opting for SAVE results in a total savings of nearly $23,000. The breakeven point is right around year seven. In this scenario, a borrower with less than seven years of PAYE payments in the bank should switch to SAVE.

Lesson: The more undergraduate debt you have, the more valuable SAVE becomes.

Annual Raise of 3%

If a borrower gets an annual raise of 3% each year, the five years of extra payments will be more expensive.

That said, it is crucial to consider that the federal poverty level guidelines used in the discretionary income analysis also go up yearly.

In other words, this example assumes the borrower is getting a raise of 3% per year above the poverty level guideline adjustment.

If this borrower starts at $60,000 per year and has only graduate debt, choosing SAVE will cost over $27,000 more in the long run. However, if this borrower has a 50/50 split of graduate and undergraduate debt, SAVE comes out about $6,500 ahead, with the breakeven point coming after about 3.5 years.

Lesson: If your income is steadily growing relative to the poverty level guideline adjustments, SAVE is probably a bad choice unless a sizable portion of your debt is undergraduate.

SAVE is the Better Choice if the Numbers are Close

The lesson from the simple calculations seems to be that five years of extra payments really add up. This makes sense.

The earlier in repayment you are, and the lower your income, the more beneficial SAVE becomes.

If things are close, a few factors might tip the scale toward picking SAVE.

The SAVE Subsidy

If your monthly payment is lower than the monthly interest charges on SAVE, the SAVE subsidy is a huge perk.

If your loans will ultimately get forgiven, it might seem like a growing balance doesn’t matter.

However, there are a couple of circumstances where keeping the balance in check could be significant.

• If you pay off your loan in full – Many borrowers start on IDR payments to keep their debt affordable but eventually realize that repayment in full is the most cost-effective option for them. If this happens to you, that SAVE subsidy from your lower income days could mean less debt that has to be repaid.
• If forgiveness is taxed – Right now, there isn’t a federal tax on forgiven debt, but it is scheduled to return in 2026. I’m hopeful that it won’t happen, but I have a backup plan just in case. If you end up getting a federal or state tax bill, the SAVE subsidy will keep your balance lower and reduce that eventual tax bill.

The Time Value of Money

Much of this analysis comes down to weighing spending less now against spending more in the future.

Spending $100 today to save $100 in 20 years is a horrible investment. Spending $100 today to save $105 in 20 years is also a horrible investment. Leaving that money in a savings account earning just 2% would be a much better choice.

Inflation and opportunity cost make having more money today more valuable than having that money in the future. The concept at play here is the time value of money.

If you run your numbers and discover that you are pretty close to a breakeven point, opting for SAVE could be the better choice because it puts more money in your pocket right away.

Getting Creative for Recent Grads Eligible for IBR for New Borrowers

There is a strategy nugget worth considering for the recent graduates eligible for the IBR for New Borrowers plan.

The SAVE rules specify that IBR remains available until borrowers have made 60 payments on the SAVE plan.

A borrower could spend four years on SAVE and then switch back to IBR for the earlier forgiveness. This also provides four extra years to consider your options as variables may change.

Sadly, this tactic isn’t available for PAYE borrowers. Once you are on SAVE after July 1, 2024, you permanently lose PAYE eligibility.

Factors that will Change the Analysis

Several circumstances could dramatically alter which approach is best.

Retirement Planning

If the five extra years of SAVE payments happen during retirement, SAVE becomes far more appealing.

Many retirees qualify for $0 per month payments. If you will be living on social security, the five extra years of SAVE may not cost any extra money.

Starting a Family

All the numbers run so far assume a family size of one.

Getting married and having kids could significantly alter these numbers.

The larger family size means smaller monthly payments on both SAVE and PAYE. If you have a large family and make $90,000 per year, the math will look much closer to the $60,000 income example than the $120,000 salary example.

Who Should Pick Early Forgiveness on PAYE or IBR for New Borrowers?

Our analysis shows that high earners, people with growing incomes, and borrowers with mostly graduate debt may be better off with early forgiveness.

A young doctor could be a classic example of someone who should stick with PAYE.

For a recent medical school graduate, the present income is small compared to the reasonably expected future earnings. Additionally, because of the high cost of medical school, the vast majority of a doctor’s student debt will be graduate.

Earning forgiveness five years earlier can eliminate income-driven student loan payments during five lucrative years.

The Best Candidates for Choosing SAVE and Lower Monthy Payments

On the opposite side of the spectrum, we might find teachers and social workers.

These borrowers may have limited graduate debt relative to their undergrad debt. This makes the SAVE payments considerably cheaper than PAYE.

Additionally, many teachers and social workers can also qualify for PSLF. If you are working toward PSLF, SAVE is often the best choice as it usually offers the lowest monthly payments.

Living with Uncertainty

While SAVE is undoubtedly a step forward for student loan borrowers, the slower forgiveness wrinkle for graduate students is a big issue.

With so many variables at play, it will be impossible for any borrower to know the best option for certain.

Consider some of the unknowns that could impact which option is best:

• Taxes on loan forgiveness,
• Future income levels,
• New repayment plans and/or forgiveness options,
• Future financial hardships,
• Future windfalls or pleasant surprises.

Any one of the above could completely change your analysis.

In 2032, President Dwayne “The Rock” Johson could create a new repayment plan that offers even lower payments and earlier forgiveness. This might reward the borrowers who picked SAVE and mean those who went with PAYE paid extra unnecessarily.

Stranger things have happened.

Nobody expected a three-year payment and interest pause for COVID-19.

Politics, national events, and your personal circumstances all represent significant variables.

The best a borrower can do is to consider the different variables at play and make a decision based on the information currently available.

The post Lower Payments on SAVE vs Faster Forgiveness on PAYE or IBR appeared first on The Student Loan Sherpa.

Selecting the best repayment plan requires more than just finding the one with the lowest monthly payment. Each one has unique features that can be positive or negative. The trick is to understand the differences between them.

Today, we will take a deep dive into federal student loan repayment plans. We will cover the repayment schedule, rules, and regulations for each repayment plan. Then, we will explore who could benefit from that particular payment plan.

Repayment Basics

We will first review a few basic concepts helpful in understanding federal student loan repayment.

Federal Student Loan Servicers

The company paid by the government to collect your federal loans is your student loan servicer. The servicer is supposed to guide borrowers through repayment options, including plan selection. However, they don’t always offer the best advice.

Loan servicers can be a valuable source of information, and working with them is essential for making payments. However, it can be a big mistake to rely entirely upon federal student loan servicers. There have been multiple lawsuits brought against loan servicers for failing borrowers.

If you are unsure which lender services your federal student loans, the Department of Education tracks up-to-date records on the servicer(s) assigned to your loans.

Repayment is the Goal

Much of this article will cover the minimum payment requirements on various plans. Selecting the repayment plan with the lowest minimum monthly payment can have significant advantages. But, it’s important to remember that most borrowers will have to pay back their loans in full with interest.

Making the smallest payment possible can result in maximum interest spending. For this reason, borrowers shouldn’t just seek out the “best” federal repayment plan. Instead, they should come up with a strategy for debt elimination. The goal should be to eliminate student loans while spending as little as possible. Merely delaying payments will only increase the cost of the debt.

The Loan Simulator

One of the most valuable resources for federal borrowers is the Loan Simulator. This tool lets you use your actual loan information to estimate your payments on various repayment plans. It isn’t a perfect resource. It has to make certain assumptions about you, your loans, and your repayment. However, it does a decent job of helping people consider how the different repayment plans would work in their circumstances.

Federal Student Loan Consolidation

You may have one or more federal loans that are ineligible for a desired repayment plan or program. You can usually remedy this issue by consolidating your federal loans. Federal student loan consolidation is when the federal government combines all of a borrower’s existing federal loans into one or two individual loans. Determining whether or not you should consolidate can be a tricky question. But it’s an essential question to answer, especially if you’re considering pursuing Public Service Loan Forgiveness.

Finding the Best Federal Repayment Plan

If there isn’t a single repayment option that stands out as the best, how do you pick the right one?

The best way to think about federal repayment plans is to consider them as tools in a toolbox. For example, a borrower might opt for a very low minimum payment plan to focus her efforts on paying down high-interest credit card debt. Once she pays off the high-interest debt, she can switch tools and turn to a more aggressive repayment strategy. For this reason, there isn’t a “best” repayment plan. Instead, borrowers should focus on finding the plan that best fits the needs of their circumstances.

The key is to understand how you can use these tools. Once you understand the various options, you can pick the right tool for the job.

The Standard Repayment Plan

The Standard Repayment Plan is often called the 10-year repayment plan. This plan is the default plan on which the government initially places most borrowers. Accordingly, the first student loan bill to show up in your mailbox is probably based on this plan. It is also the repayment plan that usually has the highest minimum payment.

The math on the standard repayment plan is simple. Payments are calculated so that the loan is paid off in full after ten years, or 120 payments. The monthly payments stay level for the duration of the loan. Note: For borrowers who consolidate their loans, the standard repayment plan can have a 10 to 30 years repayment length.

The Graduated Repayment Plan

The government set up the Graduated Repayment Plan to help borrowers ease into their student loan repayment. Borrowers enrolled in the graduated repayment plan will see their monthly payments increase every two years. The repayment length on the graduated repayment plan is ten years. However, if the borrower has previously consolidated their federal student loans, repayment can last for 10 to 30 years.

While making smaller payments that gradually increase may sound appealing, this plan isn’t the best choice for most borrowers. One of the significant flaws with the graduated repayment plan is that it doesn’t qualify for some of the best federal student loan forgiveness programs. Borrowers looking for lower payments are typically better off opting for an income-driven repayment plan due to their increased flexibility.

The Extended Repayment Plan

The Extended Repayment Plan gives borrowers 25 years to repay their student loans. There are two options with this plan. The first offers fixed payments for the entire 25 years. The second, sometimes called the Extended Graduated Repayment Plan, offers graduated payments. Borrowers who opt for lower payments now and higher payments in the future will end up spending more on interest.

Like the Graduated Repayment Plan, the Extended Repayment Plan doesn’t qualify for some student loan forgiveness programs. Accordingly, this plan is less than ideal for most borrowers. Even for borrowers who don’t expect to pursue loan forgiveness, opting for an income-driven plan is often preferable. This is because it keeps that possibility open in the future.

If the Extended and Graduated Repayment Plans seem like undesirable options, there is a reason. The government created these plans long before it created the newer, more borrower-friendly plans. In some ways, these plans are ineffectual relics. However, it’s certainly conceivable that circumstances could exist in which a borrower might want to choose one of these plans.

Public Service Loan Forgiveness Note: While the Graduated and Extended Repayment plans are not eligible for PSLF, borrowers who are otherwise eligible may have a limited opportunity for forgiveness.

Income-Driven Repayment Plans

The remaining federal repayment plans fall into the category of Income-Driven Repayment (IDR) plans. In many cases, IDR plans are part of an optimal repayment strategy.

What makes these plans special is that monthly payments are based upon how much a borrower makes rather than what they owe. In theory, this means that all federal borrowers should be able to afford their monthly payments.

To enroll in an IDR plan, borrowers must first submit income verification. This usually means a recent tax return or latest paystub. From this information, the loan servicer will calculate a borrower’s discretionary income. We have previously looked at discretionary income calculations in detail. The short version is that once a borrower earns enough income to be above 150% of the federal poverty level, they must pay a portion of that surplus income toward their student loans. The percent of discretionary income required depends upon the specific IDR plan selected.

A big perk of IDR plans is that they are eligible for student loan forgiveness after 20 to 25 years, depending on the plan. Borrowers on SAVE with a small balance can also qualify in as little as 10 years. For borrowers with no hope of ever repaying their federal loans, this route to forgiveness offers a light at the end of the tunnel. The bad news is that the IRS may consider forgiven debt to be income for tax purposes.

Fortunately, there are a couple of notable exceptions to the tax rule. For starters, Public Service Loan Forgiveness is not taxed. Second, there is a temporary exception that lasts until 2026. However, borrowers who earn forgiveness after the temporary rule expires may still get a tax bill.

The table below shows the basics of each Income-Driven Repayment Plan.

Plan	Discretionary Income Required	Years Until Forgiveness
ICR - Income-Contingent Repayment	20%	25
IBR - Income-Based Repayment	15%	25
PAYE - Pay As You Earn	10%	20
IBR for New Borrowers*	10%	20
SAVE - Saving on A Valuable Education	5 - 10%	20 or 25**

* New Borrowers are defined as those who started borrowing after July 1, 2014.
** Borrowers with graduate school debt qualify after 25 years, while those with undergrad debt qualify after 20 years.

While our table does cover the basics of the various IDR plans, there is fine print associated with each program that borrowers should understand. In some cases, this fine print prevents certain borrowers from applying to their desired repayment plan. In other cases, some repayment plans have unique perks that make them an ideal option.

Further Reading: Tips for Deciding Between IBR, PAYE, and SAVE.

Pay As You Earn (PAYE)

The Pay As You Earn (PAYE) plan is one of the most popular federal student loan repayment plans. The government expects borrowers to pay only 10% of their discretionary income. Furthermore, the government grants forgiveness after 20 years. The 10% and 20-year numbers are both the lowest available of all the IDR plans. The PAYE plan is also an eligible repayment plan for Public Service Loan Forgiveness.

The downside to PAYE is that it is available only to borrowers who are new as of Oct. 1, 2007, who received a disbursement of a Direct Loan on or after Oct. 1, 2011.

For a while, PAYE was the best repayment plan available. The arrival of SAVE changed this analysis.

Saving on A Valuable Education (SAVE) – Formerly REPAYE

The new SAVE plan is arguably the best federal student loan repayment option. It was created to replace and improve upon the REPAYE plan.

It changes the discretionary income calculation so that borrowers get to keep more of their income.

Additionally, borrowers with undergraduate debt are only required to pay 5% of their discretionary income on SAVE. Graduate debt still gets charged at 10%.

SAVE also has an excellent subsidy for borrowers who have unpaid interest each month.

Looking Into SAVE: SAVE introduces a few new rules, and some of them will not be available until July 1, 2024.

If you are considering any IDR plan, be sure to investigate the full details on the SAVE plan.

SAVE Calculator: Curious about SAVE payments?

Check out the new SAVE calculator to estimate monthly payments on SAVE.

Income-Based Repayment Plan (IBR)

The Income-Based Repayment (IBR) plan is one of the most popular repayment plans. For a long period, the IBR plan was by far the best option for many borrowers. As time has passed, however, the government has created new programs such as PAYE and SAVE. This means that, while IBR might still be the preferred choice for some, it is no longer the slam dunk it used to be.

Before we get into the IBR specifics, it is essential to note that there are two forms of IBR: IBR for New Borrowers and the standard IBR plan. These two repayment plans work in the same manner, but there are three key differences. IBR for New Borrowers:

1. only charges 10% of discretionary income (standard IBR is 15%),
2. offers forgiveness after 20 years (standard IBR is 25), and
3. is only available to borrowers who started borrowing after July 1, 2014.

The IBR for New Borrowers plan is an excellent option, but many borrowers are not eligible for this repayment plan.

Today, the borrowers who might still want to opt for IBR would be those who desperately want to file their taxes separately from their spouses. IBR plans don’t include spousal income in the monthly payment calculations. Thus, IBR borrowers should be willing to pay 15% of their discretionary income and probably a higher tax bill.

Income-Contingent Repayment Plan (ICR)

The Income-Contingent Repayment (ICR) plan is much less desirable than the newer IDR plans. This is because ICR charges 20% of discretionary income and requires a full 25 years before student loan forgiveness is an option. ICR is an eligible repayment plan for Public Service Loan Forgiveness purposes.

However, ICR is still a good option for some borrowers because it is some borrowers’ only option. The most common example would be parents who borrowed PLUS loans. If these parents consolidate their PLUS loans into a federal direct consolidation loan, they can become eligible for ICR and Public Service Loan Forgiveness. For many Parent PLUS loan borrowers, this is the best option.

FFEL Loans, PLUS Loans, and Perkins Loans

The Federal Family Education Loan (FFEL) program and the Perkins loan program were two very popular forms of student loans for several years. In 2010, Congress terminated the FFEL program and chose not to renew the Perkins Loan program in 2017. These two programs were unique in their funding structure. As a result, the government treats repayment of these loans somewhat differently than the standard federal direct loans. Although the PLUS loan program continues to this day, it also receives specialized treatment in repayment.

Borrowers with FFEL, PLUS, and Perkins loans should know that these loans may not be eligible for all repayment plans. They should also know that federal direct consolidation can often serve as a backdoor to make the debt eligible for the desired repayment plan. However, some of these loans can be toxic and destroy program eligibility. For example, including a PLUS loan made to a graduate student into a federal direct consolidation can make that loan eligible for SAVE. However, including a PLUS loan made to a parent into a federal direct consolidation makes the entire consolidated loan ineligible for SAVE.

We won’t be getting into the specific eligibility issue for these loan types, but borrowers with these loans should be aware of the potential problems. Handling these loans will require a bit more research and extra conversation with your student loan servicer.

Does My Spouse’s Income Count in Repayment Plan Calculations?

Being married can make federal student loan repayment a bit more complicated.

As a general rule, the Department of Education looks at a couple’s ability to pay the debt and calculates discretionary income for the couple rather than the individual. For married couples who both have federal student loans, this means that the math will get a little more tricky, but household spending on federal student loans will remain constant. When calculating payments, the Department of Education first ascertains the exact number it expects a couple to pay each month. The Department then determines the monthly amount owed based upon relative loan size.

For couples who both have federal student loans, the math might look like this:

Mr. and Mrs. Example both sign up for IBR. Based upon their latest tax return, the Department of Education determines that 15% of their combined income results in a $300 per month IBR payment. Mr. Example owes $40,000 on his student loans, while Mrs. Example owes $20,000. Because Mr. Example’s debt is double his wife’s, he will owe double the payment. Mr. Example will be charged $200 per month while Mrs. Example gets charged $100 per month. If Mr. and Mrs. Example had equal debt, they would each be expected to pay $150 per month. Filing taxes separately may not result in much savings; it just means the individual payments may be slightly different depending upon loan balances.

For couples with one spouse who has federal loans and one who does not, things get more tricky. This is because most IDR plans will calculate payments based upon their combined income rather than just the borrower’s income. The good news is that the couple can file their taxes separately to secure a lower payment on some repayment plans. The bad news is that by filing separately, the tax bill in April can be more expensive. For some couples, it makes more sense to file jointly and live with the higher monthly payment because the debt will have to be paid in full. For others, filing separately to get lower payments might make sense if the student loan borrower is chasing after student loan forgiveness.

How do I change Repayment Plans?

The easiest way to sign up for an IDR plan is to complete the application online.

Borrowers can use the Department of Education website to submit an Income-Driven Plan Request. The form takes just a few minutes to fill out, and most borrowers can have the IRS send their most recent tax return information directly to the Department of Education, making the process fast and straightforward. Other borrowers may have to manually submit recent pay stubs if they are not using a tax return.

IDR requests can take well over a month to be processed, so borrowers should not expect instant results on their application.

Is Deferment or a Forbearance an Option?

Borrowers who are struggling to repay their federal loans can opt to sign up for a deferment or forbearance. This usually isn’t the best strategy, however. When a borrower isn’t making payments towards their loans, the balance grows, and a difficult situation becomes even harder to manage.

In short, forbearance or deferment is a short-term solution to a long-term problem. These options may be helpful in some limited circumstances. But, most borrowers are better off by putting a plan in place to eliminate their debt rather than just delaying payments.

Opting for an income-driven repayment plan can mean $0 per month payments. What’s more, it starts the borrower on a path to forgiveness and debt freedom.

Refinancing with a Private Lender

Another option for federal student loan repayment is to refinance with a private lender.

This option carries major risks because the refinance process pays off old federal loans in full and creates new private loans. These new private loans don’t have the same great forgiveness programs or the flexibility afforded by income-driven repayment plans. Making things even riskier is the fact that there is no way to “undo” a student loan refinance. Once the federal loan is paid off, it can never come back.

The benefit is that borrowers can get dramatically reduced interest rates. Several lenders offer refinancing services, and they target borrowers with good jobs and a strong credit rating.

Weighing the risk vs. the reward on the refinancing decision can be tricky. We usually suggest borrowers hold off on refinancing until they are confident that they won’t ever need income-driven repayment or student loan forgiveness. At that point, it is time to check the current refinance rates to see if there are any potential savings available.

Which Federal Repayment Plan is the Best Option?

There are a variety of federal repayment plans, and there are specific circumstances where each repayment plan excels.

Many borrowers may find that one plan is best initially but change plans as their repayment situation evolves.

The most important thing for borrowers is to understand the options available so that they don’t miss out on any savings opportunities.

Still not sure which option is best? This IDR comparison article looks at specific circumstances where one plan is noticeably better than others.

The post Federal Student Loan Repayment Plan Options and Strategy appeared first on The Student Loan Sherpa.

SAVE offers most borrowers lower monthly payments and a faster path to student loan forgiveness. However, it isn’t the best option for everyone.

This article will cover the SAVE enrollment process and help borrowers determine whether or not SAVE is the best option for their individual student loan situation.

Signing Up for SAVE: Enroll in About Ten Minutes

The SAVE plan isn’t technically available until July 1, 2024. However, borrowers can take all the steps necessary to enroll today, start receiving benefits as soon as the payment and interest pause ends, and enjoy full SAVE benefits as soon as it is fully available.

It might seem complicated, but the situation is relatively straightforward.

The REPAYE plan will become the SAVE plan on July 1, 2024. Any borrower enrolled in REPAYE at that time will automatically convert from REPAYE to SAVE.

Additionally, REPAYE as we know it, is changing when the payment and interest pause ends on September 1, 2023. This temporary version of REPAYE will lower payments for borrowers, offer a better interest subsidy, and help out married couples.

To enroll, borrowers just need to sign up for the REPAYE plan. The easiest way to apply is to use the Department of Education’s IDR Enrollment Request. They estimate that the online form takes about ten minutes to complete. The IDR enrollment page can help borrowers already on an IDR plan and borrowers who need to sign up for an IDR plan for the first time.

Estimate Your Payments: Because the SAVE plan uses a new formula and REPAYE will use a temporary formula, estimating monthly payments going forward can be tricky.

This SAVE calculator will help borrowers estimate their REPAYE payments for this fall and SAVE payments starting next summer.

FFEL and Perkins Borrowers: Extra Steps to Apply for SAVE

Borrowers with Perkins loans and FFEL loans will have to do some extra work to sign up for SAVE.

Even though FFEL and Perkins loans are not technically eligible for SAVE enrollment, they can become eligible through federal direct consolidation.

At this particular point in time, consolidation may appear a bit complicated. For example, many student loan resources and guides state that consolidation will restart the forgiveness clock, making it a risky choice. While this was previously true, the IDR Payment Count Update will allow borrowers to consolidate without losing progress toward debt forgiveness.

The critical detail for FFEL and Perkins borrowers is that they need to consolidate their debt before December 31, 2023. Missing this deadline could mean missing out on the full benefits of the IDR Count Update.

As part of the consolidation process, borrowers can select which repayment plan they want for their consolidated loan. Those who wish to sign up for SAVE should enroll in REPAYE. When REPAYE sunsets in July 2024, these borrowers will automatically get put on the SAVE plan.

Switching from IBR, PAYE, and REPAYE: How SAVE Impacts the Forgiveness Clock

I’ve gotten dozens of emails from readers worried that switching to SAVE will delay their progress toward PSLF or IDR Forgiveness.

In the vast majority of cases, there is no impact. For example, PSLF borrowers simply need to make 120 certified payments. PSLF eligibility does not depend on which repayment plan is selected — so long as the borrowers are on an eligible repayment plan.

Likewise, a borrower currently enrolled in the REPAYE plan won’t lose their progress toward IDR forgiveness when REPAYE converts to SAVE.

However, there is one potential downside for borrowers pursuing IDR Forgiveness…

The Risk for Graduate Borrowers on PAYE and IBR for New Borrowers

If you attended graduate school and you are eligible for either the PAYE plan or the IBR for New Borrowers plan, you may have a bit of math to do.

Borrowers with graduate debt on the SAVE plan earn IDR forgiveness after 25 years of payments.

Borrowers with graduate debt on the PAYE or IBR for New Borrowers plans can get forgiveness after 20 years.

These borrowers are allowed to stay on their current repayment plans. However, they are limited in their ability to switch back to these plans once they sign up for SAVE.

Switching to SAVE means lower monthly payments. Sticking with PAYE or IBR for New Borrowers can mean forgiveness arrives five years earlier.

This wrinkle for those with graduate school debt is one of the most significant risks/dangers of signing up for SAVE.

SAVE for Parent PLUS Borrowers

Unfortunately, Parent PLUS loans are not eligible for SAVE.

Worse yet, the consolidation path available for FFEL and Perkins borrowers is not available for Parent PLUS borrowers.

If you have Parent PLUS loans, the only IDR plan available is ICR (Income-Contingent Repayment).

Learning More About SAVE

Before enrolling in SAVE, it is a good idea to learn about the many new provisions in the new repayment plan and the implementation timeline.

In most cases, SAVE will be the best option and help borrowers find considerable savings each month. For these borrowers, the biggest mistake would be waiting to sign up for SAVE and potentially missing out on $0 per month payments or an interest subsidy.

Stay Up to Date: Student loan rules constantly change, and temporary programs create deadlines that can’t be missed. To help manage this issue, I’ve created a monthly newsletter to keep borrowers updated 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 ensure you don’t overlook any critical developments.

The post How to Sign Up for SAVE: Mistakes to Avoid When Switching Repayment Plans appeared first on The Student Loan Sherpa.

Today, we will explore how these zero-dollar payments work, who qualifies for them, their advantages, disadvantages, and more.

Paying $0 Per Month on Your Student Loans

The idea of receiving a bill for zero dollars from your student loan servicer may raise eyebrows, but it’s a real option thanks to income-driven repayment plans. These plans determine the payment amount based on what borrowers can afford to pay, rather than their outstanding loan balance. While there are limitations, a $0 payment can be a beneficial choice for many borrowers.

How do I get a Zero Dollar Payment?

To begin, it’s important to note that a $0 payment is available only for federal student loans; private loans do not qualify. Eligible borrowers need to sign up for an income-driven repayment plan. IBR, PAYE, ICR, and SAVE all will work. These plans require payments ranging from 5 to 15% of a borrower’s discretionary income. If the government’s calculation determines that a borrower has no discretionary income, their monthly payment will be $0.

Payments on income-driven repayment plans are recalculated annually, adjusted for inflation and changes in income.

Sherpa Tip: This article treats all of the federal income-driven repayment plans similarly because qualifying for $0 payments and the pros and cons are all identical.

However, it’s worth noting that there are some important differences between these plans.

For starters, if you qualify for a $0 per month payment, REPAYE/SAVE and its generous interest subsidy is often the best choice.

$0 Student Loan Payments vs. Forbearances and Deferments

Qualifying for a $0 payment differs considerably from a forbearance or deferment.

While forbearances and deferments have time limits and usually do not last a year, there are no such restrictions on zero-dollar payments. Borrowers making $0 payments on income-driven repayment plans can continue to do so year after year.

Furthermore, $0 payments can count towards student loan forgiveness. Borrowers on income-driven plans can have their loans forgiven after 20-25 years, and those working in public service can use their $0 payments to qualify for the 120 payments required for public service loan forgiveness.

Downsides to Understand

Despite the benefit of not making monthly payments, it’s crucial to understand that the student loan interest does not vanish.

The loan balance increases with each passing month due to accruing interest. Borrowers should be aware of capitalized interest, where the additional interest is added to the loan balance, leading to interest being charged on the increased amount.

To avoid unnecessary capitalization of interest, borrowers should make sure not to miss any income certification deadlines.

Submitting $0 Monthly Payments

When borrowers have $0 payments, there is no need to send a check or complete additional paperwork each month.

However, for loans without a required payment, borrowers still must remember to certify their income before the lender-imposed deadline.

Are $0 payments too good to be true?

Given the prevalence of student loan scams and unreliable information from loan servicers, skepticism is natural when it comes to $0 payments on income-driven repayment plans like IBR, PAYE, and REPAYE/SAVE.

Fortunately, one of the advantages of federal student loans is the availability of income-driven repayment plans based on borrowers’ income rather than their loan balance.

If the Department of Education determines that a borrower cannot afford monthly payments, they will owe $0 per month. Even unemployed borrowers can be eligible for income-driven repayment plans, with most qualifying for $0 monthly payments. The Department of Education considers factors like family size and location to determine affordability, calculating payments based on the Adjusted Gross Income (AGI) reported on tax returns.

IDR Enrollment Process

While not every borrower can qualify for a $0 payment, anyone can apply for an income-driven repayment plan.

The process may take a few months to complete, but the initial paperwork can be filled out in approximately 10 minutes. Borrowers can apply through studentloans.gov or submit a paper application to their loan servicer.

Frequently Asked Questions

Final Thoughts

Understanding $0 payments on income-driven repayment plans can help borrowers make informed decisions about managing their student loan debt.

While the concept may seem too good to be true, it is a legitimate option for eligible borrowers with federal student loans. By taking advantage of income-driven repayment plans, borrowers can benefit from affordable payments, loan forgiveness opportunities, and a path toward financial stability.

The post Paying $0 Per Month On Your Federal Student Loans with IDR Plans Like SAVE appeared first on The Student Loan Sherpa.