For most student loan borrowers, SAVE is by far the best federal student loan repayment plan. It has the most generous definition of discretionary income, requires borrowers to pay the smallest percentage of their income, and has a generous subsidy that can help borrowers with monthly interest charges.
Unfortunately, SAVE isn’t always the best choice.
SAVE doesn’t have a cap on monthly payments, and IBR and PAYE offer monthly payment caps.
What happens to borrowers earning so much money in the future that SAVE becomes more expensive than IBR and PAYE?
The PAYE and IBR Payment Caps and the Danger with SAVE
The “danger” with SAVE is that monthly payments are always based on what a borrower earns. In other words, the more money you make, the more money you pay on SAVE.
PAYE and IBR offer a payment cap. If you earn so much money that your monthly payment is greater than what your payment would be on the 10-year standard repayment plan, your monthly bill is based on the 10-year plan. This offers protection for those in lucrative fields who fear that a SAVE payment could become unreasonably large.
The big fear for many borrowers is that they make many years of SAVE payments but then have to leave income-driven repayment because the bill becomes too large
Eligibility Issues
A secondary problem with SAVE is that enrollment after July 1, 2024, will limit IDR options in the future.
Borrowers on SAVE after this date lose access to PAYE immediately. They also lose access to IBR after five years of SAVE payments.
This means you can’t sign up for SAVE while it is cheaper and then jump into IBR or PAYE when they become the more affordable option. Instead, borrowers must commit long before they know what their earnings will be in the future.
The Partial Financial Hardship Part of the Equation
Anyone can sign up for SAVE, but to enroll in PAYE or IBR, you have to have a partial financial hardship.
What is a partial financial, and how does it impact the payment caps on these plans?
To show a partial financial hardship to qualify for IBR or PAYE, a borrower’s income cannot be so large such that their monthly IDR payment is larger than what the payment would be on the 10-year standard repayment plan. In other words, if PAYE and IBR don’t save money, you can’t enroll.
However, once you are enrolled in IBR and PAYE, you won’t get kicked out for earning too much money. Instead, your monthly payment hits the 10-year standard repayment cap and stays at that number until your income drops, you repay the loan in full, or you earn forgiveness.
If you are early in your repayment journey and you don’t have a partial financial hardship, barring a major financial setback, forgiveness is an unlikely outcome.
Don’t Lose Sight of the Real Goal
Before going further in our analysis, it is probably a good idea to remind ourselves of the real goal we are chasing: spending as little as possible on debt elimination.
When we become too focused on student loan forgiveness and IDR options, sometimes it is easy to lose sight of this goal.
You don’t get any special prize because you qualify for IDR forgiveness instead of paying off your entire balance. What you do receive is a large tax bill on the forgiveness if it happens in 2026 or later, though there is some hope this gets repealed.
In some cases, repaying the debt as quickly as possible and minimizing interest spending is the best way to eliminate debt. Playing games with IDR plans and prolonging the time could just mean that you spend more in interest over the life of the loan.
At the point your SAVE payment is greater than the standard 10-year payment, there is a real chance that payment in full as quickly as possible is the best approach. The sooner this happens in your repayment journey, the less likely you are to benefit from any sort of IDR forgiveness.
In other words, the lack of a SAVE cap only matters in a narrow set of circumstances. If you never reach the point where your SAVE payment is greater than the 10-year standard payment, the absence of a cap doesn’t matter. If you blow past the cap early in your repayment journey, it won’t matter either. The PAYE and IBR cap only offers value if you reach that point late in your forgiveness journey.
Changes on the Horizon
The big wildcard is that we don’t have any idea what federal student loan repayment will look like in the future.
Consider how much has changed in the last five years. We had a global pandemic, payments paused for years, a new repayment plan created, and numerous temporary programs to help borrowers qualify for forgiveness.
This site has been around for just over a decade. In that time we’ve seen the following repayment plans become available: PAYE, REPAYE, IBR for New Borrowers, and SAVE. Each successive new IDR plan offered some improvements over previous options.
If that history tells us anything, it is that we are likely to see more student loan changes in the future.
The impact on our present analysis boils down to one simple thought: paying extra today because it might save you money in the future may not make sense.
PAYE and IBR forgiveness timeline vs. SAVE
Our discussion of payment caps should also cover one other critical point: forgiveness timelines.
Borrowers on PAYE and IBR for New Borrowers can qualify for IDR forgiveness after 20 years. Borrowers on SAVE have to make 25 years of payments if they have any graduate debt (those with only undergraduate loans will only have to make payments for 20 years).
Thus, the two biggest arguments for PAYE and IBR are caps on payments and earlier forgiveness.
This site has already done a deep analysis of the risks and benefits of early PAYE or IBR forgiveness compared to SAVE.
Like the payment cap analysis, there isn’t an easy or obvious answer, just a number of considerations and angles to approach things.
The “Worst-Case” Scenario when Signing Up for SAVE
Some borrowers fear that they will reach a point with SAVE where their income becomes so high that the lack of a payment cap becomes relevant.
To be fair, that is a realistic concern, especially in some higher-earning fields. That said, it is kind of like worrying about all the taxes if you win the lottery. File it away as a good problem to have.
In this circumstance, a borrower could switch back to the 10-year repayment plan. The downside is that the payment would not count toward IDR forgiveness – notably, it would still count toward PSLF.
With the ability to hide income away in retirement accounts, and the ability to exclude spousal income by filing separately, many borrowers can find a way to keep SAVE payments below the standard 10-year plan. Those that cannot either have a very large income or a smaller loan balance. In either of these scenarios, repayment in full will merit serious consideration.
The Risk to Choosing PAYE or IBR for Payment Cap Protection
The alternative approach yields a much different worst-case scenario.
If you stick with PAYE or IBR and willingly pay extra in the hopes that one day your earnings justify the decision, things could go quite poorly.
For starters, this route is especially risky if you qualify for any subsidy on the SAVE plan. In this circumstance, not only are you paying more each month, but your balance may also be growing. The impact here is that if you reach a point where payment in full makes the most sense, you’ve left yourself with a bigger balance to eliminate.
The biggest danger is that your income never justifies opting for payment cap protection. In that scenario, you make years of unnecessarily larger payments, forgo interest assistance, and never utilize the cap that requires so much sacrifice.
Choosing Between PAYE and IBR or SAVE
There isn’t a guaranteed better option. However, factors can tip the scales one way or another.
If you only have undergraduate debt, SAVE forgiveness happens as early as PAYE and IBR, so that might tip the scales toward SAVE.
As your future high-earning years become less speculative, opting for payment cap protections makes more sense. For example, someone who just finished law school shouldn’t assume they will be making a partner salary in 15 years. There are too many variables in the way. However, a physician who just finished their residency might be comfortable projecting a larger income.
If your peak income is really high and your income could also be really low, SAVE makes more sense. For example, suppose you are a struggling musician or actor. If things go poorly, the SAVE subsidy and lower payments are extremely valuable. If things go really well, your income is so large that payment in full is likely the best strategy.
Opting for IBR or PAYE makes more sense if you are further down the repayment journey and have a high-income floor. The cap isn’t valuable if you use it for 10 years because you will have paid off your loan in full before getting any forgiveness. However, the cap is useful if it saves you some money for three years and you are getting forgiveness earlier.
How to Run the Numbers
Two important items are necessary to do these projections. First, you need to know your loan balance. Second, you need a crystal ball so that you can figure out how much money you will earn over the next 20-25 years.
Without a working crystal ball, you will need to run the numbers a few different ways.
First, consider what your payments will look like if things go well for you in the coming years. Assume you get that promotion and that your housing costs stay stable. Assume nobody gets sick and there are no unexpected expenses.
Then look at the downside. You don’t have to think about what it will look like if you get fired and your house burns down. Just think about what might happen if you don’t get the promotion or if you leave for a less lucrative position.
Think about different career scenarios that might realistically play out for you in the coming years.
For each scenario, consider what it means for your student loan payments. Is the SAVE subsidy and lower payments the better option? Does potentially earlier forgiveness and payment caps make PAYE or IBR for New Borrowers the better route? Is it best to just knock out the debt in full to save money on interest?
Going through each scenario and running the numbers may not give you one answer that is clearly the best route. However, you may see a pattern emerge. You may decide that one option usually is the best, and in the rare circumstance that it isn’t, you can live with that outcome.
If you have questions about your options or you want to know how this choice can impact your retirement planning or your ability to buy a house, let’s schedule a consultation to see how all of these plans and programs apply to your specific situation.
