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Lower Payments on SAVE vs Faster Forgiveness on PAYE or IBR

For graduate borrowers, SAVE isn’t always the best student loan repayment plan. Some people might be better off with quicker forgiveness on PAYE or IBR.

Written By: Michael P. Lux, Esq.

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For many student loan borrowers, the new SAVE plan is objectively the best repayment option available. It offers lower monthly payments, quicker forgiveness, and a generous subsidy.

However, for one group of borrowers, the analysis isn’t so simple.

Borrowers with graduate debt can qualify for forgiveness after 20 years on the PAYE or IBR for New Borrowers plans. On the SAVE plan, borrowers with graduate debt must make payments for 25 years before earning forgiveness.

The issue essentially boils down to a simple question: Is it better to have lower payments for a longer period or faster forgiveness with higher payments?

Some Ground Rules for Comparing SAVE to PAYE and IBR

To make a useful comparison between these student loan repayment plans, it’s important to understand a few key details.

First, borrowers can switch from their current IDR plan to SAVE without losing any progress made toward IDR forgiveness. For example, if you have already completed 11 years on another IDR plan, your progress will carry over when you switch to SAVE.

Second, the IBR plan mentioned here specifically refers to IBR for New Borrowers. If you borrowed your first student loan before July 1, 2014, you are not eligible for IBR for New Borrowers. For those of us on the “old” IBR plan, the decision of whether or not to switch to SAVE is a much easier one. Old IBR requires 25 years to achieve forgiveness, so switching to SAVE wouldn’t slow down your forgiveness timeline.

Likewise, it is worth noting that the PAYE plan is available only to those who were new borrowers as of October 1, 2007 and received a disbursement of a Direct Loan on or after October 1, 2011. If your student loans are older, you wouldn’t be eligible for PAYE, and this particular issue won’t apply to you.

Finally, this issue applies only to borrowers with graduate debt. If you have any graduate loans, IDR forgiveness through SAVE takes 25 years. If you have only undergraduate loans, SAVE forgiveness takes 20 years – just like PAYE and IBR for New Borrowers.

A Note About Repayment Plan Eligibility: Right now, borrowers can sign up for SAVE, and if they decide it was a mistake, they can switch back to PAYE or IBR.

Starting July 1, 2024, borrowers on the SAVE plan cannot enroll in PAYE. Similarly, once a borrower makes 60 payments on SAVE, they lose IBR eligibility.

Finding the “Right” Answer

This analysis will vary for each borrower. There won’t be a straightforward “right” or “wrong” answer. Instead, the decision will be influenced by various factors that tip the scale in favor of the SAVE plan or the PAYE/IBR plans.

To aid in understanding these nuances, I’ll perform some sample calculations to illustrate potential outcomes. Following that, I’ll explore numerous variables that could impact these figures.

The aim here is to present as many relevant considerations as possible to help borrowers make an informed decision. If you believe there’s another factor that could influence your choice, feel free to mention it in the comments. I can provide feedback on your specific scenario and, if necessary, update the article to include any overlooked aspects.

Sherpa Tip: The faster forgiveness question isn’t the only consideration when deciding between SAVE and PAYE/IBR.

Unlike SAVE, PAYE and IBR have monthly payment caps, which could come into play if you are nearing forgiveness and start earning more money. Deciding between lower payments on SAVE and the caps offered by PAYE and IBR is a similarly complicated question.

Running the Numbers

Estimating your monthly SAVE payments can be a bit tricky because it largely depends on how much graduate school debt you have. If your debt is exclusively from graduate studies, your payment will be 10% of your monthly discretionary income. However, if your debt is primarily from undergraduate studies, that figure drops to around 5%.

Your income level will also play a role in determining your monthly payments and how beneficial the SAVE plan is compared to PAYE and IBR plans. Moreover, any increase in your income over time will affect these calculations.

The key point determination is finding the break-even point. For example, if you have already completed 19 years under PAYE, one more year of PAYE is clearly better than six years of SAVE. Yet, there will likely be a point in which the annual savings from SAVE outweigh the additional five years in repayment.

With this in mind, I’ve analyzed a few different scenarios to illustrate the point.

Annual Income $60,000 per year vs. $120,000 per year

For this example, I’ll focus on Borrower A, who has graduate loans only. This will result in a conservative estimate of Borrower A’s payments under the SAVE plan. I’ll also assume that Borrower A’s salary remains the same throughout the repayment period.

Federal poverty level guidelines influence the repayment calculations. These guidelines are updated annually. So, although keeping a flat salary for 20 years might seem unrealistic, it makes sense for this analysis. Accordingly, this analysis will still be valid for borrowers who receive small annual raises.

If Borrower A’s AGI is $60,000 per year, enrollment in SAVE results in savings of just under $1,100 per year compared to PAYE. The savings on SAVE more than covers the five years of extra payments. Over the course of the repayment period, choosing SAVE could lead to a savings of nearly $4,500.

However, if Borrower A already made four years of payments under PAYE (meaning they had 16 years remaining on the loan), the financial outcome of sticking with PAYE/IBR or switching to SAVE would be nearly the same.

If we bump Borrower A’s annual income from $60,000 to $120,000, the analysis changes considerably. SAVE is still cheaper by nearly $1,100 per year, but the extra five years of payments on SAVE are substantially more expensive. In this instance, choosing SAVE costs over $30,000 more per year.

Lesson: Income level makes a huge difference for borrowers with primarily or exclusively graduate debt. The higher your income, the less advantageous SAVE becomes.

A 50/50 Split of Graduate and Undergraduate Debt

If we assume our borrower has even amounts of undergraduate and graduate debt, their SAVE payment drops from 10% of discretionary income to 7.5% of their discretionary income.

Keeping everything else the same, the numbers change considerably.

Our borrower making $60,000 per year saves over $21,000 by sticking with SAVE. The breakeven point now moves to year 12, meaning eight years of PAYE is about the same cost as 13 years on SAVE. If this borrower had already made ten years of PAYE payments, switching to SAVE would still be better.

For the borrower making $120,000 per year, opting for SAVE results in a total savings of nearly $23,000. The breakeven point is right around year seven. In this scenario, a borrower with less than seven years of PAYE payments in the bank should switch to SAVE.

Lesson: The more undergraduate debt you have, the more valuable SAVE becomes.

Annual Raise of 3%

If a borrower gets an annual raise of 3% each year, the five years of extra payments will be more expensive.

That said, it is crucial to consider that the federal poverty level guidelines used in the discretionary income analysis also go up yearly.

In other words, this example assumes the borrower is getting a raise of 3% per year above the poverty level guideline adjustment.

If this borrower starts at $60,000 per year and has only graduate debt, choosing SAVE will cost over $27,000 more in the long run. However, if this borrower has a 50/50 split of graduate and undergraduate debt, SAVE comes out about $6,500 ahead, with the breakeven point coming after about 3.5 years.

Lesson: If your income is steadily growing relative to the poverty level guideline adjustments, SAVE is probably a bad choice unless a sizable portion of your debt is undergraduate.

SAVE is the Better Choice if the Numbers are Close

The lesson from the simple calculations seems to be that five years of extra payments really add up. This makes sense.

The earlier in repayment you are, and the lower your income, the more beneficial SAVE becomes.

If things are close, a few factors might tip the scale toward picking SAVE.

The SAVE Subsidy

If your monthly payment is lower than the monthly interest charges on SAVE, the SAVE subsidy is a huge perk.

If your loans will ultimately get forgiven, it might seem like a growing balance doesn’t matter.

However, there are a couple of circumstances where keeping the balance in check could be significant.

  • If you pay off your loan in full – Many borrowers start on IDR payments to keep their debt affordable but eventually realize that repayment in full is the most cost-effective option for them. If this happens to you, that SAVE subsidy from your lower income days could mean less debt that has to be repaid.
  • If forgiveness is taxed – Right now, there isn’t a federal tax on forgiven debt, but it is scheduled to return in 2026. I’m hopeful that it won’t happen, but I have a backup plan just in case. If you end up getting a federal or state tax bill, the SAVE subsidy will keep your balance lower and reduce that eventual tax bill.

The Time Value of Money

Much of this analysis comes down to weighing spending less now against spending more in the future.

Spending $100 today to save $100 in 20 years is a horrible investment. Spending $100 today to save $105 in 20 years is also a horrible investment. Leaving that money in a savings account earning just 2% would be a much better choice.

Inflation and opportunity cost make having more money today more valuable than having that money in the future. The concept at play here is the time value of money.

If you run your numbers and discover that you are pretty close to a breakeven point, opting for SAVE could be the better choice because it puts more money in your pocket right away.

Getting Creative for Recent Grads Eligible for IBR for New Borrowers

There is a strategy nugget worth considering for the recent graduates eligible for the IBR for New Borrowers plan.

The SAVE rules specify that IBR remains available until borrowers have made 60 payments on the SAVE plan.

A borrower could spend four years on SAVE and then switch back to IBR for the earlier forgiveness. This also provides four extra years to consider your options as variables may change.

Sadly, this tactic isn’t available for PAYE borrowers. Once you are on SAVE after July 1, 2024, you permanently lose PAYE eligibility.

Factors that will Change the Analysis

Several circumstances could dramatically alter which approach is best.

Retirement Planning

If the five extra years of SAVE payments happen during retirement, SAVE becomes far more appealing.

Many retirees qualify for $0 per month payments. If you will be living on social security, the five extra years of SAVE may not cost any extra money.

Starting a Family

All the numbers run so far assume a family size of one.

Getting married and having kids could significantly alter these numbers.

The larger family size means smaller monthly payments on both SAVE and PAYE. If you have a large family and make $90,000 per year, the math will look much closer to the $60,000 income example than the $120,000 salary example.

Who Should Pick Early Forgiveness on PAYE or IBR for New Borrowers?

Our analysis shows that high earners, people with growing incomes, and borrowers with mostly graduate debt may be better off with early forgiveness.

A young doctor could be a classic example of someone who should stick with PAYE.

For a recent medical school graduate, the present income is small compared to the reasonably expected future earnings. Additionally, because of the high cost of medical school, the vast majority of a doctor’s student debt will be graduate.

Earning forgiveness five years earlier can eliminate income-driven student loan payments during five lucrative years.

The Best Candidates for Choosing SAVE and Lower Monthy Payments

On the opposite side of the spectrum, we might find teachers and social workers.

These borrowers may have limited graduate debt relative to their undergrad debt. This makes the SAVE payments considerably cheaper than PAYE.

Additionally, many teachers and social workers can also qualify for PSLF. If you are working toward PSLF, SAVE is often the best choice as it usually offers the lowest monthly payments.

Living with Uncertainty

While SAVE is undoubtedly a step forward for student loan borrowers, the slower forgiveness wrinkle for graduate students is a big issue.

With so many variables at play, it will be impossible for any borrower to know the best option for certain.

Consider some of the unknowns that could impact which option is best:

  • Taxes on loan forgiveness,
  • Future income levels,
  • New repayment plans and/or forgiveness options,
  • Future financial hardships,
  • Future windfalls or pleasant surprises.

Any one of the above could completely change your analysis.

In 2032, President Dwayne “The Rock” Johson could create a new repayment plan that offers even lower payments and earlier forgiveness. This might reward the borrowers who picked SAVE and mean those who went with PAYE paid extra unnecessarily.

Stranger things have happened.

Nobody expected a three-year payment and interest pause for COVID-19.

Politics, national events, and your personal circumstances all represent significant variables.

The best a borrower can do is to consider the different variables at play and make a decision based on the information currently available.

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.

16 thoughts on “Lower Payments on SAVE vs Faster Forgiveness on PAYE or IBR”

  1. I am struggling with whether to switch from PAYE to SAVE. My wife is on PAYE so we can file taxes married separately given our income differences. Mathematically it makes sense to switch to SAVE given the part about not having negative amortization. Currently we’re going to end up with around $550k of medical student loans forgiven on the PAYE plan versus $350k forgiven 5 years later on the SAVE plan. If the tax code doesn’t change, its a pretty significant change in tax bomb we need to save for. My big worry is the SAVE plan will be overturned and we will have no options left to file separately. How are you advising clients when it comes to the SAVE plan being overturned by republican president? There have already been multiple attempts by congress to overturn this plan and I worry it will go through with a Republican in the whitehouse

    • This is a really hard question to answer. Ultimately, I can’t say for certain what will happen.

      However, I can share my thoughts as a SAVE borrower.

      I’m cautiously optimistic that it will exist in some form moving forward. There are a lot of hoops to jump through for an adminstration to create new repayment plan, but to eliminate one is even more complicated. You may notice that there are a long list of repayment plans now available. We keep adding to it without ever subtracting one. Additionally, I think SAVE becomes even more difficult to eliminate once language gets added to the master promisory note (as of the last time I looked, it isn’t in there yet).

  2. I have 16k in direct student loans as a graduate. Is the SAVE programs still worth signing up for even for this amount? I know I qualify, but if it just means lowering my payments then I presume it will just take longer for me to pay off my loan by paying nearly half the amount. Am I correct in making this assumption?

    • It will depend on a couple of factors. The big quesiton is whether or not you recieve a SAVE subsidy. This calculator will help you answer that question. If you do qualify for a subsidy, it will help you pay off the debt more efficiently.

      The next consideration is how much extra you can afford to pay and your repayment strategy. Generally speaking, the more you pay each month, the faster your debt gets eliminated and the less you spend on interest. However, it is worth noting that you can pay extra no matter what repayment plan you are on. Thus, you could opt for the plan with the lowest monthly payment to give yourself flexibility and then use whatever extra funds are available to attack the highest interest loans.

  3. I am currently on IBR with $0 monthly payment. It is for undergrad from 2009. I owe $75k. (I originally borrowed $15k) Does it make sense for me to switch to SAVE? I’m counting on the 20 year forgiveness and want to make sure I don’t mess that up.

  4. $256K total debt. $153k graduate, $103k undergrad. Current salary $115K and expected to increase steadily over the years. 7 years into PAYE. I also am paying parent PLUS loan in my parent’s name for me (approx $63K). I reread your article many times and my gut is to stick with PAYE?

    • I’d encourage you to run the numbers. See how much it will cost for 13 years of PAYE and compare it to the cost of 18 years of SAVE. This is one of those situation where there really isn’t a simple answer. However, if you have some level of confidence about your income over the next decade or so, it can take away some of the guesswork.

  5. I graduated from medical school in 2015 and started my IBR payment right away. I just applied to change plan (potentially to SAVE) and got a summary the loan forgiveness date to be 2044.
    Does the 3 years of COVID not counting towards the 25 years term or did they restart my loan term for forgiveness?
    Thank you for your guidance.

  6. I have approximately $150k in graduate debt and am 6 years into repayment under PAYE. If I switch to SAVE my payment would be $0 for one year. When I recertify next year my income will be $120k and increase significantly over the next 20 years.

    My husband is not working but will in the next 3-4 years. We have 2 children.

    Is it worth it to switch to SAVE to avoid the 6% interest for at least the next year then possibly switch to a more aggressive payoff plan once our income has increased considerably? Is there another strategy I’m not considering?

    • That is tricky. As I noted in the article, if you spend the next year on SAVE, PAYE won’t be avaialble going forward.

      That said, if you have $0 per month payments on SAVE and a balance as large as yours, the subisdy for just that one year is worth thousands.

      In your comment, I’m already seeing a lot of variables like your significant increases over the next 20 years as well as your husbands income when he starts working. Sadly, this is one of those cases where the actual numbers matter considerably. Additionally, your confidence in your future earnings is also important. For example, my thoughts for someone in a high commission sales job that might not last would be different than my thoughts for a young physician in their residency.

      You might also benefit from some personalized guidance. If that is of interest, send me an email.

  7. I am probably overthinking this, but is it possible to switch over to REPAYE/SAVE plan from PAYE and then switch back to PAYE (before it gets sunsetted) to buy myself some time to decide what the “best” repayment and financial strategy is?


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