The SAVE interest subsidy may not get much attention, but I’d argue that this rarely discussed benefit makes SAVE the best federal student loan repayment plan.
Though the calculations might first appear complicated, the SAVE interest assistance can save borrowers thousands of dollars per year.
Want to calculate your subsidy? Check out our SAVE subsidy calculator to estimate the value of the monthly SAVE subsidy for your loans.
Sherpa Note: The REPAYE plan is being phased out and replaced by the new SAVE plan.
REPAYE was the first repayment plan to offer borrowers an ongoing interest subsidy, but the SAVE subsidy is a huge improvement.
What is the Saving on A Valuable Education (SAVE) Interest Subsidy?
Only certain borrowers qualify for the SAVE interest assistance. To qualify, a borrower’s monthly payment on SAVE must be less than the monthly interest generated by the student loan. In other words, if your loan is growing faster than you can make payments, the government will help pay your interest.
No special enrollment is required. Borrowers just need to sign up for the SAVE plan.
Those receiving the interest subsidy will see a monthly transaction each month labeled “interest subsidy.” As interest assistance, it does not change the principal balance. However, it does reduce the outstanding interest on the loan.
The size of the subsidy depends entirely upon the borrower’s balance and income.
SAVE Interest Subsidy Calculations
The best way to make sense of the SAVE interest subsidy is to look at a simple example.
Suppose a borrower has a federal student loan balance that generates $500 per month in interest. That same borrower has a monthly payment on SAVE of $100.
In this situation, the borrower’s balance is actually going up by $400 per month.
The SAVE subsidy covers 100% of the excess interest. In this case, the loan generates $500 per month of interest, but $400 of it is in excess of the borrower’s monthly payment.
Thus, the borrower in this example would receive a $400 per month interest subsidy on SAVE. This is significant because it means the borrower’s balance doesn’t grow even though the monthly payments are less than the monthly interest charges.
Calculate your subsidy: The SAVE Subsidy Calculator allows borrowers to see their monthly payment on SAVE and how much interest the subsidy will cover.
Extra Payment on the SAVE Subsidy
Initially, it looked like borrowers could receive the SAVE subisdy and have all of their extra payments counted toward principal instead of interest.
After some confusion, it now looks like extra payments will count toward interest first, making it a misake for subsidy recipients to make extra payments. Instead, these borrowers should consider a different strategy, such as putting money aside in a high-yield savings account.
SAVE Subsidy Tax Concerns
Many servicers are describing the SAVE subsidy as a form of forgiveness. Given the potential tax issues with student loan forgiveness, some borrowers are concerned that the subsidy might mean a bigger tax bill in the future.
The good news is that borrowers shouldn’t worry about a tax bill as a result of the SAVE subsidy.
Even though the Department of Education hasn’t explicitly said there won’t be a tax bill, borrowers are on safe ground assuming there won’t be tax consquences:
- The REPAYE subsidy hasn’t caused tax problems. Before the SAVE subsidy covered 100% of interest, the REPAYE subsidy covered 50%. REPAYE borrowers didn’t have to pay a tax on forgiven debt.
- Reduced interest charges are not the same as forgiven debt. Think of the SAVE subsidy like a zero percent APR credit card. Credit card companies routinely offer a temporary 0% interest rate to encourage people to use their cards. There isn’t a tax for the people who get this perk.
It’s possible that some state government might target student loan borrowers who receive the SAVE subsidy, but thus far, it hasn’t happened. Even if there was a tax on the interest relief, it wouldn’t change the math for most borrowers. Paying a dollar today to save 25 cents in the future rarely makes sense.
Why Does SAVE Assist Borrowers with Interest?
The point of the interest subsidy is to prevent balances from spiraling out of control.
Those getting the maximum subsidy, i.e., the borrowers making $0 monthly payments, will essentially have a 0% interest rate.
The interest assistance helps borrowers stay on track during a period of unemployment or underemployment. Before SAVE, a prolonged job search could make successful repayment seemingly impossible. Under SAVE, borrowers get a little more breathing room.
Interest Subsidies for IBR, PAYE, and ICR Borrowers
Sadly, the repayment plans of IBR, PAYE, and ICR do not qualify for an interest subsidy.
REPAYE/SAVE is the only plan that offers this protection to borrowers who cannot afford to keep up with their federal student loan interest.
When Isn’t REPAYE/SAVE the Best Option? The best choice for most borrowers with larger balances and lower incomes is usually SAVE. However, there is at least one circumstance where other IDR plans might be better:
Graduate Borrowers Planning on IDR Forgiveness – On PAYE and IBR for New Borrowers, student loan forgiveness comes after 20 years. Under REPAYE/SAVE, borrowers have to wait 25 years if they have graduate school debt. Borrowers in this situation will need to compare the benefit of an interest subsidy against the value of forgiveness five years earlier.
Signing Up for SAVE
Enrollment in SAVE works just like all of the other IDR repayment plans. No extra steps are necessary for the interest subsidy.
Borrowers unsure of whether or not to sign up for SAVE should use the SAVE calculator to get an idea of their monthly bills going forward.
Thank you for your time and advice. I have $27k in a federal loan. I just qualified for $0 payment. However, I would still like to pay something. Will this go to the principal or interest?
Second question. I recently consolidated my private school student loans to a federal loan to be able to take advantage of the SAVE program. Does that mean that my years under the FFEL no longer count toward the 25 years of forgiveness?
You can make payments while qualified for $0 payments and it will get applied to the principal. However, this usually isn’t the best strategy.
On your second question, do you mean you consolidated privately-held FFEL loans into a federal direct loan? (I ask because it really isn’t possible to consolidate a traditional private loan into a federal loan)
Borrowers with FFEL loans who consolidate before 4/30/24 should get full credit for their payments made prior to consolidation.
Yes. An ffel loan. I meant a private college. Thank you for the advice.
What would you suggest for the best strategy to pay off my loans if not paying while I have zero interest?
I’m of the opinion that there isn’t necessarily one best strategy in this situation. For example, if you have credit card debt, that should get paid off first. I’d also encouarge you to consider building up an emergency fund before paying down a zero interest loan.
I put my thoughts on this exact issue in more detail in this article.
Hi Michael,
Currently on SAVE plan. Graduate unsubsidized loans. Income low enough to qualify for zero payment. Got my statement of the “zero” amount due for October 11th. But October 11th came and went and Mohela still having interest accrue daily on it. Wasn’t that interest supposed to be removed by now on an ongoing basis? I think this is happening to tons of people and we’re all confused. Any thoughts on this interest accruing past the due date even though a zero payment? It’s not being removed.
You are correct that your balance should not grow as long as you are on SAVE making $0 payments. From an accounting perspective, I’m not sure how they are handling it. I could see them adding the daily interest each day and then adding a subsidy credit at the end of the month to cancel out the interest. I can also see them just not adding interest at all.
I also have Mohela, but if I log into my account, I’m not seeing the daily interest compenent you are describing. Where are you seeing this info?
Finally, we can’t necessarily assume that Mohela isn’t making a mistake. There are many servicer issues happening right now.
The daily interest component I’m seeing is just the balance going up and up daily. It’s nothing labeled “daily interest.” It’s just a higher total every day. It’s a shame no one knows exactly where and how the subsidy will appear, whether online, on the bill, on another statement… I’ve scoured the internet for days and really see absolutely nothing concerning how it’s applied practically.
That is a really good question, Tim.
Do you have a particular preference in how it gets applied, or are you worried that they are forgetting to do it? If it is the latter, it is probably safe to give it a month or so for them to iron things out. I could see them doing subsidy adjustments for all borrowers on the same day each month, or as part of the monthly billing cycle.
I suppose I’m just concerned Mohela has it screwed up lol. As long as it’s flowing correctly I don’t really care about the process. It’ll probably be some giant batch cycle they run monthly. I’ve seen on Reddit where people say, “it’ll be removed a few days after payment is made,” then I’ve seen others say, “at the end of every month.”
All I know is I haven’t seen anything happen nor any news of how it will happen. And I can’t stomach sitting on the phone for two hours with Mohela only to have someone say, “uh, jeez, I don’t know.” If you ever find the answer Michael please let us know. Thank you for all you do!
Hi, great resource for info! I have a question regarding my grad school loans. I owe 130k in principal and 40k in interest-that has accumulated on the IBR plan (total $170K owed)-began repayment in 2011. If I switch to the SAVE plan would the 170K transfer over or just the $130K? Would the 25 year repayment period start over, or would it still count on from 2011 when I began payments?
If you switch from IBR to SAVE, that 40k of interest would capitalize. However, the good news is that your progress toward forgiveness would not start from scratch.
Hi Michael
This article is so helpful. I was little confused about the interest portion of the SAVE plan. I have $1100 interest occurring every month and my monthly payment under SAVE is $750. Does all $750 goes toward interest? If so for how long? If that’s the case then would i ever touch the principal? If i decide to make extra payment of $250 with total of $1000 per month, would $750 goes toward interest and $250 goes toward the principal? Thank you
If your loans charged $1100 per month in interest and your SAVE payment was $750, that $750 payment would go entirely toward interest, and you would get a subsidy of $350 to cover the unpaid interest.
By paying an extra $250 per month, that money would reduce the principal balance.
However, I’d encourage you to think about the optimal strategy for eliminating your debt. Given that the interest charges are larger than the SAVE payment, working toward forgiveness might be the best bet. If you eventually got your loans forgiven, the extra payments would just leave you with less debt to forgive and less money in your bank account.
Thank you so much for the info Michael. For how long would the $750 keep going toward the interest? Would it keep going for 25 years? Does it mean that i would never touch the principal in 25 years?
You are correct. If your payments remained at $750 for the entire 25 years, the principal balance wouldn’t go up or down, but it would be forgiven at that time.
However, just to make sure we are on the same page, you will have to certify your income yearly, so your payments will increase or decrease as your income changes.
One last question i promise
In reply to “ You are correct. If your payments remained at $750 for the entire 25 years, the principal balance wouldn’t go up or down, but it would be forgiven at that time”
It would never go down even if my payment changes right? I would either stay same or go up. Am i right?
Not quite. If you reach the point where your monthly SAVE payment is greater than the monthly interest charges, your total balance would start to decrease.
Hi! I owe 254k in graduate student loan debt. I am currently on the PAYE plan, with 8 years of repayment left. I am interested in signing up for SAVE, as the monthly repayment is about $200 less, but I am dissuaded by the fact that this plan would put me on a 25-year forgiveness plan. I noted your comment that it might be better for some individuals to stay on PAYE and have a faster track to forgiveness vs. tacking on an additional 5 years of payments when switching to SAVE. But, I was wondering, since interest does not accumulate on SAVE, when the loan balance is ultimately forgiven and taxed as income, wouldn’t the outstanding loan amount to be forgiven under SAVE be less than what it would be under PAYE, where the interest is not subsidized, meaning that I would be paying taxes on a lower amount? I hope I am being clear.
I have two more brief questions:
If I switch to the SAVE plan, would the interest accrued thus far capitalize?
And, will my progress toward forgiveness restart?
Thank you sooo much!
Great questions, Christen!
Your first one is really hard to answer. You are essentially balancing 8 years of higher payments against 13 years of smaller payments. Your income for those 5 extra years will have a huge influence on which plan is best. That said, you are also right about the SAVE forgiveness amount potentially being smaller. If your PAYE payment doesn’t cover the interest, your balance will continue to grow, which could mean a bigger tax bill. However, the tax bill is yet another variable. I’m hopeful that there will not be one, but I’m also saving money to prepare for it.
Traditionally, changing plans caused interest capitalization. However, the new policy is that interest only capitalizes if required by statute. For example, if you were on IBR, it would definitely capitalize. I don’t think switching from PAYE will, but you should call your servicer to confirm.
Lastly, switching to SAVE should not restart your progress toward IDR forgiveness.
Hi Christen, My understanding is that if you have enrolled for PAYE you automatically receive the benefits of SAVE without having to change plans. Perhaps Michael can verify this, but everything I’ve read on my servicer’s and the DOE website confirms this.
You are close, but not quite accurate, Timothy.
If you have signed up for REPAYE, you automatically get the benefits of SAVE. PAYE borrowers will have to switch to REPAYE/SAVE to get the subsidy.
Suppose I’m on SAVE, have monthly interest greater than my monthly obligation, but voluntarily overpay such that I’m actually covering more than the charged interest. Do you know if I’ll still receive the subsidy? I’ve looked but haven’t found guidance on this yet.
My understanding is that you will still receive the full subsidy amount. Once I have confirmation on this detail, this article will be updated accordingly.
Thanks!
Any update on on this? Thank you!
I do. You can make extra payments on SAVE without losing your interest subsidy.
However, in most cases, I think the best approach for most borrowers will be to pay the minimum.
I have been making regular payments of $600 for 19 years on my graduate loan debt, and reach zero balance in 2034. However I’m nearing retirement and my income will drop to $33,000. 1) what would my SAVE payment be at that time, 2) do I have to stay on the program 25 years to get the loan forgiven?
If you have graduate debt, SAVE forgiveness does take 25 years. If you only have undergraduate debt, it would be 20 years.
However, you may have already made a lot of progress from your previous payment activity. I’d encourage you to dig into the details of the one-time payment count adjustment.
If I am not employed and sign up for the SAVE plan and make a $0 payment, what happens when I am later employed? Can I switch to the Standard Repayment Plan? What happens to the interest that I did not pay in the meantime? Does it somehow get added back into the loan if I do not stay on SAVE? The studentaid.gov website says that over time the SAVE plan is more expensive than the standard repayment plan. I am also trying to figure out how that is the case.
If you are making $0 payments, you can continue with the $0 payments, even if you find a new job, until your next income certification. At that point, you can either continue making payments based on your income or you can switch to the SAVE plan.
As far as the interest, SAVE has a subsidy that covers all of the unpaid interest, so your balance won’t grow.
If your SAVE payment is larger than the standard payment, it usually means one of two things. Either you are using a large salary, or you have a small loan balance.
If I switch from the SAVE plan to the Standard plan once I’m working, does the interest that was subsidized under SAVE get capitalized when I leave SAVE? Should I wait a year for rectification before switching to the Standard Repayment Plan?
I have good news for you! You don’t have to repay that subsidy!
If your loan charges $120 per month and you make a $30 payment, normally, your balance would grow by $90 per month and eventually get capitalized. With the subsidy, you pay your $30 per month, the subsidy covers the remaining $90, and your balance doesn’t grow. This is one of the biggest benefits of the new SAVE plan.
As for switching plans, you can switch whenever you want, but from a strategy standpoint, it would only make sense if you had a high-paying job that resulted in a SAVE payment that was much larger than the standard repayment amount. If you are getting a SAVE subsidy, it is a much better deal than the standard repayment plan.
Hi. Great info. here. Best I’ve found so far. I am trying to consolidate. Have been at 0 payments under IBR for several years due to underemployment in mental health. Income up a bit w/ contract job so want to get into the best position e.g. fixed % vs. variable. When I go to Studentaid.gov to fill out consolidation form, it shows my 4 FELL loans at 0% and therefore generates an autofill of 6.8% expected interest. My servicers have declined to send interest rate info. to SA.gov for correction. Using the weighted mean average, my % should 2.380 across the board going off all loans (older grad. loans). Will my new servicer calculate this or am I stuck w/ 6.8 which makes my loan payments way too high to manage. Thank you.
I don’t think there is any way around the weighted average calculation when you consolidate. It is designed so that consolidation doesn’t hurt or help your interest rate.
Also, as an FYI there are few programs happening right now, such as the limited waiver on PSLF and the IDR count update, that might make it much better to consolidate right away rather than waiting.