It would take hours to document and explain all of the student loan changes over the past few years.
One of the big changes that many borrowers may have missed: the Department of Education will now cover some or all of the monthly interest for millions of borrowers.
If you are familiar with the SAVE subsidy, this isn’t breaking news. If you haven’t heard about the SAVE subsidy — pay close attention. This particular assistance is something that will make a huge difference in borrower finances.
Why the Government Pays Interest for Some Borrowers
Before jumping into the program details, it is helpful to first explain the problem that the Department of Education is trying to solve: growing balances due to interest.
Historically, when borrowers signed up for an income-driven repayment plan, they often saw their balances grow each month. When that interest capitalized, borrowers started paying interest on the interest, and balances spiraled out of control.
In some cases, the growing balance didn’t matter. For example, a borrower pursuing PSLF usually doesn’t care how much gets forgiven. The critical detail is that the remaining balance gets erased. However, for other borrowers, a tax on forgiveness, or a shift to repay the debt in full meant the extra interest really hurt.
When the new SAVE plan was being developed, rule-makers sought to address this particular issue.
Student Loan Interest Relief Basics
The easiest way to understand the SAVE subsidy is that it is designed to keep your balance from growing.
For example, if you have $40,000 in federal student loans at 6% interest, your loans charge $200 per month for interest alone. If you qualify for an IDR payment of $75, your student loan balance will grow by $125 per month!
Using this same example on the SAVE plan, the SAVE subsidy would cover that extra $125 each month. Borrowers wouldn’t have to worry about a growing balance. Additionally, borrowers can pay extra to knock down their principal balance — though this strategy usually isn’t recommended.
Calculate Your Interest Subsidy: Use this calculator to estimate monthly payments on SAVE and your monthly interest subsidy.
Qualifying for SAVE and Student Loan Interest Help
There are a few limitations to SAVE. First, the SAVE repayment plan is only available for federal student loans. Interest relief isn’t available for private loans.
Additionally, borrowers need federal direct loans to qualify for SAVE. However, some loans can be consolidated to gain SAVE eligibility. For example, a borrower with a Graduate FFEL Loan could consolidate their loan into a federal direct loan and enroll in SAVE.
Finally, the SAVE relief depends on your balance and yearly income. If you have a substantial annual income and a small federal loan balance, SAVE may not offer much help.
To date, nearly five million borrowers have signed up for SAVE. Of that group, almost three million borrowers qualified for $0 per month payments. These borrowers won’t have to make a payment for at least a year, will have their interest covered, and will make progress toward student loan forgiveness.
Maximizing the Interest Subsidy Benefit
If you qualify for a SAVE subsidy or you are reasonably close to qualifying, these tips may help you maximize the benefit.
- Find ways to reduce your AGI – SAVE payments are usually calculated based on the AGI of your most recent tax return. Getting crafty with your tax planning can mean lower student loan payments. For example, putting money in the right retirement account can lower your student loan bills.
- Consider Filing Taxes Separately – If you are married and file taxes jointly, your spouse’s income is used to determine monthly IDR payments. Filing separately can exclude spousal income from these calculations.
- Use SAVE to Focus on Other Goals – If SAVE covers part of your student loan interest, it could be an excellent time to build up your emergency fund. Likewise, you might also want to pay off credit card debt or save for retirement. Minimum payments often make the most sense for borrowers on SAVE.