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 as simple.

Borrowers with graduate debt can qualify for IDR forgiveness after 20 years on PAYE or IBR for New Borrowers. On SAVE, borrowers with graduate debt need to make payments for 25 years before earning forgiveness.

Essentially, the issue boils down to a simple question: Is it better to get lower payments on SAVE, or is it better to get forgiveness faster on PAYE or IBR?

Some Ground Rules for Comparing SAVE to PAYE and IBR

For this comparison to be helpful, there are a few details with these plans that borrowers must first understand.

First, borrowers can switch from their current IDR plan to SAVE without losing progress toward IDR forgiveness. In other words, if you already have 11 years of progress, you will keep that progress even if you switch to SAVE.

Second, when we talk about IBR in this case, we are talking about 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 “old” IBR, the decision is much easier as old IBR requires 25 years for forgiveness, so there isn’t a possibility of getting forgiveness faster than SAVE.

Likewise, it is worth noting that PAYE is only available to new borrowers as of Oct. 1, 2007, who received a disbursement of a Direct Loan on or after Oct. 1, 2011. If your student debt is older, this particular issue won’t apply to you.

Finally, this issue only applies to borrowers with graduate debt. If you have any graduate loans, IDR forgiveness on SAVE takes 25 years. If you only have 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 look different for every borrower.

There won’t be a right answer and a wrong answer. Instead, there will be factors that tip the scale toward SAVE and factors that tip the scale toward PAYE/IBR.

To help borrowers understand this issue, I will run some sample calculations to see how the numbers might play out.

Next, I’ll discuss the many variables that can shift the numbers.

The goal is to provide as many relevant factors as possible when making this decision. If you think there is another factor that I’m missing that might influence your decision, please leave a note in the comments. I can share my thoughts on your situation and, if needed, update the article to cover this additional issue.

Running the Numbers

Estimating SAVE payments is a bit tricky because the exact payment will depend on how much graduate debt you have. If you have only graduate loans, your payment will be 10% of your monthly discretionary income. If you have mostly undergraduate debt, the number will be closer to 5%.

Likewise, different income levels will change monthly payments and the value of SAVE vs. PAYE and IBR.

Finally, increases in income will shift the math.

The big question will be when we break even. If you have already completed 19 years of PAYE, one more year of PAYE is clearly better than six years of SAVE. However, there will likely be a point where the annual savings from SAVE becomes more valuable than the extra five years of payments.

With this in mind, I’ve run the numbers for a few different scenarios.

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

For this question, I will assume the borrower has only graduate loans. This will result in a very conservative SAVE payment estimation. I will also assume this borrower never gets a raise and has a flat salary the entire time.

Assuming a flat salary for 20 years might seem unreasonable, but because the federal poverty level guidelines are updated yearly, this particular analysis will be accurate for borrowers who get small yearly raises.

If we have a single borrower with an AGI of $60,000 per year, enrollment in SAVE results in a yearly savings of just under $1,100 per year compared to PAYE. The savings on SAVE more than covers the five years of extra payments. A borrower just starting repayment in this example would save nearly $4,500 by choosing SAVE.

However, if this borrower already made four years of payments with PAYE, meaning they had 16 years remaining, SAVE and PAYE/IBR nearly break even.

If we bump this borrower’s income from $60,000 per year to $120,000 per year, 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 mostly or only graduate debt. The more money you make, the less likely it becomes that SAVE is the better option.

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.