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How the SAVE Plan Changes the Student Loan Refinance Analysis

The newest federal repayment plan makes refinancing a bit more risky for borrowers.

Written By: Michael P. Lux, Esq.

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In the past, refinacing has been an effective strategy to eliminate federal student loans.

Once it becomes clear that the borrower will repay the debt in full plus interest, the goal becomes to spend as little as possible on interest, which is where a private loan refinance can help.

However, the danger of a private refinance of federal loans is that borrowers permanently give up all of the perks associated with federal loans. The new SAVE plan introduces new perks that may change the refinance analysis for some borrowers.

SAVE also makes waiting for forgiveness a more appealing option in many cases.

What is SAVE?

SAVE is the newest and most affordable federal student loan repayment plan.

When SAVE is fully implemented on July 1, 2024, borrowers will pay between 5 and 10% of their monthly discretionary income. SAVE also uses a more generous discretionary income calculation.

For the vast majority of borrowers, SAVE will have the most affordable monthly IDR payment.

How much will I pay on SAVE? You can estimate your monthly SAVE payment using this SAVE calculator.

It will show payments for the restart and payments once SAVE is fully implemented.

SAVE Makes Refinancing Less Appealing

The decision to refinance often comes down to the federal perks weighed against lower interest rates offered by private lenders.

SAVE is a considerable improvement on the existing federal government perks.

Before considering a private refinance, borrowers should make sure they understand all of the new benefits of the SAVE repayment plan.

When Sticking with SAVE is an Easy Decision

A critical new perk of the SAVE plan is the monthly interest subsidy available to some borrowers.

This subsidy was designed so that borrowers don’t have balances that spiral out of control.

If the monthly interest charges on your loan are larger than the monthly payment, you have unpaid interest each month. In the past, this would cause loan balances to grow. Under SAVE, the subsidy covers 100% of the unpaid interest each month.

If SAVE covers half of your interest, your interest rate is effectively cut in half.

Any borrower that benefits from the SAVE subsidy should probably avoid refinancing. Borrowers in this category usually struggle to keep up with the interest on their loans. Eliminating the principal balance often will require the help of a federal loan forgiveness program. Thus, a private refinance is likely a regrettable mistake.

Refinancing Can Still Make Sense

For borrowers with smaller balances or larger incomes, SAVE may not move the needle.

If your SAVE payment is as much or more than the standard 10-year payment, many of the best federal perks won’t get utilized. Borrowers in this category won’t receive an interest subsidy. Additionally, their loan will likely be paid in full before reaching IDR forgiveness.

If you fall into this category, refinancing is still worth considering.

However, it doesn’t necessarily mean refinancing is the best option. If job stability is a concern or you are thinking about moving into a less lucrative field, keeping federal protections is the prudent choice.

Refinance Tips

If you are going to refinance, it should only be done if you can save a meaningful amount on interest. Giving up federal perks, even if you are unlikely to use them, doesn’t make sense just to save .25% on interest.

However, if you have high-interest federal loans and can qualify for a significantly reduced interest rate, it might be worth the risk.

At present, the following lenders offer the lowest interest rates in the 5-year fixed-rate loan category:

RankLenderLowest RateSherpa Review
1Earnest4.99%Earnest Review
2Splash Financial5.09%*Splash Financial Review
3ELFI5.48%ELFI Review

A Final Thought on Refinancing

One of the downsides to refinancing is that the change is permanent.

Once you convert your federal loans into a private loan, there is no going back.

If the question on refinancing is a toss-up in your mind, waiting is probably the prudent choice. If there isn’t any doubt that refinancing will save you some money, the sooner you get started refinancing, the more you will save on interest.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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