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SAVE Repayment Strategy: Balancing Extra Payments, $0 Payments and the Subsidy

Qualifying for a SAVE subsidy gives borrowers an opportunity to get creative with their debt elimination strategy.

Written By: Michael P. Lux, Esq.

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One of the biggest perks of the new SAVE repayment plan is the generous interest subsidy available to borrowers.

For borrowers who qualify for $0 per month payments, it means their student loan is essentially interest-free during this time.

I’ve heard from many borrowers who want to maximize this subsidy and pay down their loans as quickly as possible. Because my suggestion differs from what the Department of Education recommends, I figured explaining and comparing the strategies could be helpful.

Sherpa Tip: The strategies outlined in this article are somewhat advanced. If you will struggle to stick to your financial goals, this approach may not work for you.

Department of Education Tip for Borrowers with a SAVE Subsidy

On the page announcing the SAVE plan, the Department of Education offers the following guidance:

Tip: If you have additional money in your budget to pay down your student loan balance, you can always set a custom payment amount each month, even if you have a $0 payment.

In theory, this makes a ton of sense. If the government is covering the interest through the subsidy, little payments can reduce the principal balance and get borrowers closer to debt freedom.

Additionally, paying more than the minimum is a common debt-elimination strategy. The sooner the balance is paid in full, the less the borrower spends on interest in the long run.

In many circumstances, borrowers may decide that this is the best approach for their loans.

However, it isn’t the approach I would use.

How Extra Payments Impact the SAVE Subsidy Benefit

The cool thing about the SAVE subsidy is that it ensures your balance won’t increase — even if your loan charges more interest than your minimum monthly payment.

In this unique circumstance, paying extra to lower the principal balance doesn’t necessarily reduce interest spending.

An example could shed some light on this situation:

Suppose you have a $12,000 loan balance with a 5% interest rate, and based on your family size and income, you qualify for a $20 per month SAVE payment. In this scenario, the loan charges $50 per month on interest, and because your payment is only $20, the subsidy covers the remaining $30 of unpaid interest.

Now, suppose you diligently make extra payments and cut your balance in half. Instead of owing $12,000, you owe $6,000. These additional payments mean your loan now generates $25 per month. You’ve cut interest charges in half.

However, because your monthly payment is $20, the only difference is that the SAVE subsidy is now $5 per month instead of $30 per month. Paying an extra $6,000 doesn’t reduce interest spending!

The lesson here is that paying extra doesn’t necessarily save you money on interest. Additional payments won’t make a difference until your monthly payment exceeds the monthly interest charges.

Many borrowers have large balances with interest charges much larger than their monthly SAVE payment. In this circumstance, paying a little bit extra will reduce the loan balance, but it won’t save any money on interest charges.

I see this as an opportunity for borrowers.

Maximizing the SAVE Subsidy Benefit

Borrowers with a SAVE subsidy, especially those making $0 per month payments, find themselves with a unique opportunity.

Typically, in debt repayment, paying an extra $100 today is much better than paying an extra $100 next year. Because this isn’t necessarily the case for SAVE subsidy recipients, a different strategy could make sense.

Many high-yield savings accounts now pay between 4% and 5%. Instead of putting that extra money toward the student debt, borrowers could put that money in a savings account and earn some interest.

Returning to our example borrower, instead of putting that extra $6,000 toward student debt, the borrower could have put the money in a high-yield savings account earning 5%. In one year, that puts an extra $300 in the hands of the borrower!

Putting money in savings instead of reducing the loan balance has many other advantages beyond the ability to earn interest.

Perks of Minimum Payments and Maximum Subsidy

Even if your savings account paid 0% interest, there are still some significant advantages to putting the extra payments into a savings account.

Build Up an Emergency Fund

When you have lots of student debt, building up an emergency fund may seem like a luxury, but in reality, it is a necessity.

Having money set aside for your federal loans doesn’t mean you must use it for your federal loans. For the borrowers who lack self-control, this can be a significant issue. For others, it is a great asset.

Putting money in savings rather than making a student loan payment means you can pay for an unexpected car repair or medical emergency. If that money was used to pay down your student debt, it is gone forever.

Ideally, you can earn money on interest and then make a large lump sum payment to knock out the loan. If the unexpected happens, you have some flexibility.

Keep the Door Open to Forgiveness

Typically, borrowers employ one of two strategies to eliminate their student debt. They can either make minimum payments and hope to get as much forgiven as possible, or they can aggressively repay their debt to spend as little as possible on interest.

By utilizing the interest subsidy and a high-yield savings account, borrowers can put money aside for aggressive repayment and make minimum payments toward forgiveness.

If your finances change and aggressive repayment becomes the obvious choice, you have money to attack the loan. If you realize that forgiveness is the ideal approach, you will be glad you didn’t make extra unnecessary payments on the loan.

Finding the Best Strategy

The strategy I’ve outlined won’t work for everyone.

If there is a risk that you might use the money in your high-yield savings account toward an unnecessary expense, forcing yourself to make extra payments could be the better approach.

There is also some math required. If you are not getting a subsidy, this strategy becomes far less effective.

How do I know if I get a SAVE subsidy? The math on this question is pretty simple. For each loan, multiply the balance by the interest rate. This number will give you the yearly interest charges on the loan. Divide that number by 12 to estimate the monthly interest charges for that loan.

If you don’t want to do the math, this calculator will provide SAVE payments and monthly subsidy amounts.

However, if you are willing to run the numbers and able to stick to your plan, you can get interest working for you instead of against you.

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.

2 thoughts on “SAVE Repayment Strategy: Balancing Extra Payments, $0 Payments and the Subsidy”

  1. So if, for example, my required payment on SAVE is $0, but my loan balance generates $300 in interest each month. Let’s say I decide to make a $500 payment outside of the regular payment schedule. Would the $500 go directly to the principal balance? Or would the first $300 go towards the interest until the accrued interest was entirely paid, before anything goes towards the principal?

    • It should be applied entirely to principal (though you will want to make sure your servicer applies the payment correctly). That said, I’ve not really seen many cases where it makes sense to pay extra when you are receiving the subsidy. You can always just put that extra payment in a high yield savings account. Then you earn some interest with the money and when it is large enought to pay off the loan, or you no longer qualify for a subsidy, you can make a large payment.


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