3 Backup Plans If SAVE Is Eliminated

On July 18, 2024, the Saving On a Valuable Education (SAVE) plan was temporarily blocked by a legal injunction. This move, driven by Republican lawmakers from several states, is being reviewed by the conservative-leaning Eighth Circuit Court of Appeals. This court previously played a critical role in halting President Biden's initial attempt at student loan forgiveness, and many anticipate a similar fate for the SAVE plan.

Here's what we know about a timeline on SAVE.

• July 18, 2024: Legal injunction halts SAVE, placing borrowers in forbearance. Loan servicers stop processing applications for Income Driven Repayment (IDR) plans, temporarily pausing progress toward loan forgiveness.
• October 24, 2024: Oral arguments to be heard in the Eighth Circuit Court.
• November 2024: A ruling from the Eighth Circuit Court is expected, with a likely appeal to the Supreme Court, regardless of the decision.
• Spring 2025: Oral arguments at the Supreme Court.
• Summer 2025: The Supreme Court’s final ruling on SAVE, deciding its fate.

Given the current 6-3 conservative majority on the Supreme Court, it's very difficult to envision SAVE surviving. The result of our upcoming election could also play a role. Under a Kamala Harris presidency, we might see more proposals for loan forgiveness and more generous repayment options. Under another Donald Trump presidency, I'd anticipate efforts to end loan forgiveness and upend pro-borrower initiatives.

Immediate Impact on SAVE Borrowers

While this legal case ensues, borrowers currently in the SAVE plan are placed into forbearance, similar to the COVID-era pause. No payments are due, and interest is frozen. Not a bad deal while the legal case shakes out, right? Well, here's another other piece about this type of forbearance: it does NOT COUNT toward PSLF or IDR forgiveness. That means your clock for either forgiveness track is temporarily halted.

Moreover, if you want to enroll in another IDR plan, loan servicers aren't even processing applications to switch plans now. It's an administrative mess leaving millions of borrowers in limbo. Hopefully, IDR application processing will resume soon and prior to the legal resolution.

One more thing regarding the legal forbearance. You may have the chance to get PSLF credit for all of these months in forbearance using the PSLF Buyback Program.

3 Backup Plans If SAVE Is Eliminated

If SAVE is blocked, here are three alternative strategies to consider.

#1 Income Based Repayment to Public Service Loan Forgiveness

Currently, there is only one income driven repayment plan available to borrowers: the Income Based Repayment (IBR) Plan. IBR has two versions, each with specific criteria:

• Old IBR (borrowed before July 1, 2014) requires 15% of discretionary income.
• New IBR (began borrowing after July 1, 2014) requires 10% of discretionary income (similar to PAYE and SAVE).

However, IBR has an income qualification called a Partial Financial Hardship (PFH). If your income exceeds what you owe, you may not qualify for PFH, making it impossible to enroll in IBR. Many will need to apply for IBR while in training (usually physicians) to meet the PFH requirement. This is a key consideration you should look at, particularly if you've recently graduated training or your income is on the rise. I suspect there will be many docs who try to switch into IBR who make too much.
Suppose you're a doctor who is pursuing PSLF with $325,000 in federal student loans. You have six more years to go with PSLF and make $275,000. Here's an idea of your monthly payments in SAVE, Old IBR, and New IBR.

Monthly payments in SAVE and New IBR are comparable. But Old IBR is quite a bit more.

Here are the total payments over six more years.

Switching into IBR is not usually a deal breaker for PSLF. In a lot of cases, it still makes sense. This doc is still saving over $100,000 to do PSLF over private refinancing. New IBR vs. SAVE is quite similar in overall payments. But you'd end up paying quite a bit more if you only qualify for Old IBR as an alternative to SAVE.

If you're contemplating the move into IBR, it's best to run the numbers to ensure you can qualify and if it's still going to save you money.

More information here:

The Role of Student Loan Refinancing in 2024

#2 REPAYE to Public Service Loan Forgiveness

If SAVE is struck down, there's a chance its predecessor, Revised Pay As You Earn (REPAYE), could be reinstated. REPAYE was a great option for many borrowers and was generally more affordable than Old IBR. Payments in REPAYE were 10% of discretionary income. REPAYE had no PFH, so borrowers could enroll in it even with incomes greater than their student loan balance.

However, there are two key pitfalls to REPAYE.

1. Spousal Income: REPAYE does not allow you to exclude spousal income if you file separately
2. No Payment Cap: Unlike IBR and PAYE, REPAYE does not cap payments at the 10-year standard repayment

Generally, docs liked REPAYE while in training or early career because payments were affordable and there was an interest subsidy to help keep the loan balance from spiraling out of control.

Say you're a doctor who is married to an attorney. You make $250,000, and your spouse makes $225,000. Your student loan balance is $250,000, and you're four years out from PSLF.

If you file jointly, here's an idea of your payments:

Monthly payments are not too different across the IDR spectrum. Payments in IBR would be lower, though, because of the payment cap.

Over a four-year period of time, you can see the difference grows larger.

Suppose the doc is looking to file taxes separately to keep their high-earning spouse's income out of the picture.

Payments in REPAYE still take into account spousal income, whereas both IBRs and SAVE exclude it. Over a four-year period of time, this has massive ramifications for future payments.

New IBR vs. REPAYE payment difference is almost $100,000 over four years! It's very important you get into the right repayment plan for your unique situation. Otherwise, you could be throwing away tens to hundreds of thousands of dollars.

Once the dust settles on SAVE, you should run the numbers on the existing IDR options to ensure you're on the optimal path forward to being debt-free.

#3 Private Refinancing

The private refinancing of student loans has taken a backseat in recent years—largely due to rising interest rates, which increased by roughly 5% over the past 2-3 years. During the COVID-19 pandemic, federal student loan payments were paused and interest was frozen, making refinancing less appealing. Most borrowers opted to keep their loans federal to benefit from zero interest and potential forgiveness options. Generous repayment plans, like SAVE and REPAYE, helped subsidize interest for borrowers. And the effective interest rate (after the interest subsidy was applied) was often lower than what they could receive from private lenders while in their early careers. All of these factors made refinancing federal student loans a much harder sell. One private refinancer even left the business altogether.

However, the refinancing landscape may be changing. For the first time in over four years, the Federal Reserve cut interest rates in September 2024. It lowered the rate by 0.5% with another cut expected in November and more reductions anticipated in 2025. This is fantastic news for those who were planning to refinance their loans and not do PSLF.

Say a cardiologist owes $250,000 in federal student loans at 7% and works in private practice. They are contemplating exiting the federal 10-year standard repayment plan for private refinancing. In recent years, they hadn't applied because their rate was zero during COVID and they knew interest rates weren't great. They receive quotes from private lenders, and they are pleasantly surprised with the lower rates. They pull the trigger and refinance their loans to a 5% interest rate on a 10-year term.

They pay their loans down over a 10-year term. As a result of privately refinancing their student loans, they save $30,129 in interest.

Refinancing your loans is always a no-brainer on your private student loans whenever you can lower the interest rate. However, refinancing your federal loans is a harder decision. It converts your federal loans into private, and those loans would no longer be eligible for any federal programs, such as IDR or PSLF. But if you're positive you're not going for PSLF, it's a surefire way to save you money and reduce the hassle. Plus, you'll no longer have to be on the federal student loan rollercoaster.

More information here:

Refinancing Medical Student Loans in Residency – A Step-by-Step Guide

The Bottom Line

With the fate of SAVE tied up in the courts, having a backup plan is essential. Whether it’s switching to IBR or REPAYE or considering private refinancing, the path forward requires careful planning. Stay informed and run the numbers with a student loan pro to ensure you’re making the best decision for your financial future.

What do you think? What actions will you take if you have student loans? What is your backup plan during the SAVE legal proceedings?