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 getting 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 will 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.
The SAVE Subsidy and the REPAYE Subsidy
Right now, borrowers are in a state of transition. The SAVE plan is partially available, but borrowers currently on REPAYE can get some of the benefits.
One notable benefit is that the SAVE subsidy covers 100% of the excess interest. Previously, REPAYE only covered 50% of the excess interest.
Borrowers who have interest charges greater than their monthly payment should sign up for SAVE if they are not already signed up for REPAYE. The REPAYE plan will automatically convert to SAVE.
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, the borrowers making $0 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.