Lower Payments on SAVE vs Faster Forgiveness on PAYE or IBR

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.