Due to the ongoing SAVE litigation, many borrowers find themselves in an unexpected situation: they don’t have student loan payments due.
Because this situation could potentially last for years, depending on how long the legal process takes, many borrowers are unsure how to navigate it.
In most cases, the advice is simple: don’t make extra payments. The analysis differs for borrowers working toward full repayment versus those pursuing forgiveness, but the conclusion remains the same—making unnecessary payments is a mistake.
Extra Payments Don’t Help Chasing Forgiveness
When it comes to making extra payments during forbearance, the most important thing for borrowers pursuing forgiveness is this: extra payments don’t help. Payments only count toward forgiveness if you receive a bill first. Paying more than what is due or making multiple payments doesn’t provide any benefit. You’re simply reducing a balance that will eventually be forgiven anyway.
This holds true regardless of the type of forgiveness you’re pursuing.
PSLF Borrowers Should Use the Buyback Program
If you’re working toward Public Service Loan Forgiveness (PSLF), the forbearance period won’t count toward forgiveness. Everything is paused. The good news for PSLF borrowers is that the buyback program exists.
Though the PSLF buyback is a newer, unproven process, and its costs are hard to project because we don’t know what will happen with SAVE, the best move for most PSLF borrowers is to put the money you’d use for extra payments into a savings account.
Once you reach ten years of public service work, you can use the funds you’ve saved for the buyback. This approach ensures that the money you spend toward your student loans will actually reduce your balance.
IDR Forgiveness Borrowers Don’t Gain From Extra Payments
Borrowers working toward 20- or 25-year Income-Driven Repayment (IDR) forgiveness don’t have the buyback option that PSLF borrowers do.
These borrowers face a tough decision: either pause their progress toward IDR forgiveness or switch to a different repayment plan.
Switching plans is particularly challenging right now because servicers are months behind in processing applications. Moreover, moving to a more expensive plan may end up costing more in the long run—especially if SAVE ultimately prevails in court.
Because making extra payments won’t bring borrowers any closer to forgiveness, the best approach is likely to set the money aside in a high-yield savings account. These funds can be earmarked for the potential tax bill that may arise if forgiveness occurs after 2025.
While there’s hope that time spent under the SAVE litigation forbearance will eventually count toward IDR forgiveness, borrowers can’t rely on it. For now, using the forbearance as an opportunity to build up an emergency fund or pay off other high-interest debt is a smart option.
Want to Switch Plans? If you are eager to get off of SAVE an into a repayment plan that can count toward forgiveness, the online application is not currently available.
Borrowers that wish to swtich back to their old IDR plan will have to use a paper application and submit it via their servicer’s secure portal.
Full Repayment Borrowers Have Better Options
For many borrowers, forgiveness isn’t likely. With growing incomes and shrinking balances, their debt will be repaid long before it could be forgiven.
For borrowers in this situation, enrolling in SAVE and taking advantage of the interest-free forbearance is an incredible opportunity. Pausing interest charges means that 100% of your monthly payments will go toward your principal balance.
However, making extra payments now isn’t the best strategy.
The better option is to put the money into a high-yield savings account during the pause. The more you can save, the better. When the pause nears its end, you can make a large lump-sum payment.
This approach has two advantages. First, it puts interest to work for you instead of against you. Normally, repaying debt is a battle against interest charges, but now, you can earn interest on future payments while your balance remains steady. If you manage to set aside $10,000 in a savings account earning 4% interest, after a year, you’ll be $400 ahead.
Second, this strategy provides flexibility. If your car breaks down or you face an unexpected expense, you can dip into your student loan savings. If you’ve already given that money to MOHELA, it’s usually gone forever.
The One Situation Where Extra Payments Make Sense
If you’ve struggled with managing money in the past and worry that seeing a large balance in your savings account might tempt you to spend it, your strategy might shift.
For example, if you’re close to fully repaying your student loans, one reasonable approach might be to take advantage of 0% interest charges and aggressively pay down the balance until it’s gone. If watching the balance drop each month motivates you, and you’re concerned about being tempted by savings, do what works best for you.
Final Thoughts on the SAVE Litigation Forbearance
We’re in a unique situation right now.
Switching repayment plans is more difficult than usual. The SAVE litigation forbearance comes with both benefits and drawbacks. Most confusing of all, the situation could change in a few months—or stay the same for several years.
It’s not easy to plan.
If you have questions about your situation, feel free to ask in the comments. If you want to find a way to make the most of the SAVE forbearance, let’s set up a call to discuss it.
While this is undoubtedly a confusing time for borrowers, it also presents opportunities.
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