The name of the game may be changing, but the goal remains the same for those of us with student loans: pay off as much debt as quickly as possible while spending as little of your own money as possible. Under the new Income Driven Repayment (IDR) plan known as SAVE, this goal is more realistic than ever for some individuals and married couples completing their professional training who have a daunting amount of student loan debt. Whether you are just beginning your graduate education, preparing to enter residency training, or navigating through your professional career, there is no better time than now to educate yourself on the various repayment strategies that are available to you. For students specifically, it is absolutely crucial to plan ahead and chart your repayment journey as early as possible.
In today’s post, we’ll review some of the most significant changes under the new SAVE plan and discuss how they relate to strategies that may allow you to capitalize on SAVE for your own benefit. In addition, you will have the opportunity to utilize free spreadsheet tools that allow you to simulate various repayment approaches and brainstorm how you can best tackle your debt.
What Is SAVE and What Is Changing?
The SAVE plan is the federal government’s latest approach to Income Driven Repayment (IDR)—a system in which borrowers’ monthly payments are based upon their income. The most important changes to SAVE include:
- Discretionary income is calculated as your gross income minus 225% of the poverty level, which essentially protects that amount from being used against you in the determination of your monthly payments (other IDR programs use gross income minus 150%). For a single individual, that protects $32,805 in 2023—a number that increases based on your number of dependents.
- The percentage of your discretionary income that must be paid has also decreased from the 10%-20% range under previous IDR plans. Now, under SAVE, you pay a weighted average of 10% for graduate loans and 5% for undergraduate loans.
- Couples that file their taxes Married Filing Separately will have their incomes considered separately under SAVE for the purposes of calculating monthly payments. This change allows borrowers with a high loan burden who are married to high earners (or those with varied residency lengths) to maintain minimal payments for a longer period of time than previously possible.
- As long as a borrower makes the minimum monthly payment, no interest above that amount will accrue for the month. With this change, anyone whose monthly interest accrual is higher than their minimum monthly payment is having interest “forgiven” every single month rather than added to their total loan balance.
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What Do the SAVE Changes Mean?
The combination of these programmatic changes sets up a perfect scenario for borrowers with a high loan burden to substantially alter their path to repayment. Perhaps most obviously, the lower monthly payments sweeten the deal for those who are pursuing Public Service Loan Forgiveness (PSLF). PSLF allows borrowers who have made 120 eligible monthly payments (10 years) while working for a qualifying nonprofit or government agency to have their loan balance forgiven tax-free. This scenario is particularly enticing for those who undergo longer residency programs and/or an obligatory fellowship.
Likewise, for a married couple undergoing residency training of variable length, income disparities can now be sheltered by filing taxes as Married Filing Separately. Although this may raise your direct tax burden, it will allow the individual who is still in training to continue paying a significantly lower monthly payment. This strategy can be employed to maximize small qualifying payments toward PSLF or to “freeze” the loan balance for an impending lump sum payment.
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Freezing Your Federal Loans
The concept of putting a freeze on your federal student loan balance is entirely new and only possible due to the new interest rules afforded under SAVE. As mentioned before, any interest above your minimum monthly payment is immediately forgiven as long as you make that payment on time. Because of that, if your monthly interest accrual is higher than the minimum payment, there is often no financially sound reason to pay more than your monthly payment. Instead, you would be better suited to set aside that additional budgeted amount for later. This is best illustrated with an example:
Jim has $100,000 in federal loans split evenly between undergraduate and graduate debt. These loans capitalized to a new annual interest rate of 7%, meaning that the monthly interest accrual is $575.34.
If Jim is making $75,000 per year, his monthly payments on these loans under SAVE come out to just $263.72. This figure is calculated by taking $75,000 minus 225% of poverty level for a discretionary income of $42,195. His discretionary income is then multiplied by the weighted balance of undergraduate loans and graduate loans (50% * 5% + 50% * 10%) to get an annual SAVE payment of $3,164.63. This amount can be divided by 12 months for the monthly payment of $263.72.
Because Jim’s interest accrues at a higher rate than his minimum SAVE payment ($575.34 vs. $263.72) he should only pay the minimum amount. If he does, the difference of $311.62 is automatically forgiven, leaving his total loan balance at $100,000 for the next month. Thus, his loans are “frozen” until his income changes such that the required SAVE payment is greater than his interest accrual. If Jim were to pay an extra $50 that month, it would all go toward interest that is otherwise forgiven.
With these new rules, it is easy to conceptualize your individual interest circumstances as falling into one of two categories: “winners” or “losers.” Winning months are those in which your monthly interest accrual is higher than your minimum SAVE payment, allowing you to take advantage of automatic interest forgiveness by only making the minimum payment. During a winning month, you can set aside the additional amount that you would have otherwise paid toward interest (or better yet, a higher budgeted amount) to be paid later.
Losing months, on the other hand, are those in which your minimum SAVE payment is higher than your monthly interest accrual. During losing months, you must pay your entire interest accrual before making any dent in your principal loan balance. For this reason, it is advantageous to take the extra money that you set aside during winning months (either from forgiven interest that you accounted for or a higher budgeted total) to pay down your principal in one lump sum. For most people, once your income hits a level where your interest circumstances become a loser, it remains a loser thereafter while your salary increases. Because of this, as soon as your interest begins to lose, it is in your interest to rapidly accelerate payments against the principal balance of your loans unless you are pursuing PSLF, in which case minimum payments under SAVE are likely the most prudent choice.
Loan Repayment Strategies Simulator
If you are a student loan borrower and would like to simulate various scenarios for your repayment strategy, please explore my Loan Repayment Strategies simulator in Google Sheets (as seen in the links below). This document has a self-explanatory Read-Me page that provides all necessary instructions to supplement the contents of this article, and it will provide scenario readouts for each of the major scenarios discussed below, as well as a summary page that gives bottom-line results.
As it is currently developed, this spreadsheet is best used by students planning their post-graduation repayment strategies or those who have yet to begin repayment. For those who have already begun repaying their student loans, it is certainly possible to use the various simulations, but some adjustments may be necessary to account for prior payments.
Please note that the accuracy of your own information, spreadsheet formulas, and student loan repayment policies cannot be guaranteed, and they are therefore not warranted in any way. These materials are purely educational and should not be construed as financial advice.
Now, let's take a look Scenarios 1, 2, and 3 that you'll find in the simulators.
Scenario 1: Traditional Budgeting
Scenario 1 involves a traditional budgeting approach in which the borrower elects to pay down their student loan balance based on either: 1) a percentage of gross income deducted each month or 2) a fixed amount deducted each month. Borrowers electing to take part in the Standard Repayment Plan (fixed amount payments over the course of 10 years), Graduated Repayment Plan (increasingly larger payments over the course of 10 years), or Extended Repayment Plan (fixed or graduated payments over the course of 25 years) could enter their corresponding monthly payments to chart their repayment under Scenario 1. For most individuals with a high loan burden who are graduating from professional school, this approach is not the most economical.
Scenario 2: SAVE and PSLF
Scenario 2 applies the new SAVE policies to generate your minimum monthly payments, as described above, and pays only that minimum amount each month. This approach maximizes interest forgiveness in “winning” months and runs out the timer until 120 monthly payments have been made, at which point the borrower is eligible for PSLF (assuming all other criteria are met). For individuals considering PSLF, this serves as a valuable tool to map out their path to repayment by calculating total out-of-pocket costs in comparison to the amount of loans eventually forgiven.
Scenario 3: SAVE and Lump Sum Payments
Scenario 3 also makes use of SAVE minimum monthly payments, but only during “winning” interest months. During these months, the difference between the budgeted amount for repayment (specified by the borrower) and the minimum payment is continually set aside for lump sum repayment once interest becomes a “loser.” Thereafter, the entire budgeted amount is paid monthly until the loan balance is eliminated. For borrowers with a high loan burden who don’t intend on utilizing PSLF, this is an incredibly useful approach that takes full advantage of interest forgiveness while positioning themselves well for later repayment. However, this scenario also involves setting aside money during winning months that simply must not be touched except for loan repayment—a tricky proposition that is not without risk.
Discipline: An Uncontrolled Variable
As with treatments in medicine, any given strategy is only as successful as your adherence to it. Discipline is a key factor that cannot be considered with a simple formula. Some of the repayment strategies discussed here, particularly Scenario 3, involve accumulating large sums of money that are earmarked for later spending toward student loans. However, maintaining these funds and either investing them wisely or not touching them entirely is not without both temptation and risk. Financial plans can take a wide variety of forms from self-developed to professionally drafted, but they should always be written down.
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“Plans Are Nothing . . . Planning Is Everything”
As noted at the outset of today’s article, it is absolutely crucial to plan ahead when it comes to student loan repayment. As your debt continues to grow and feels increasingly insurmountable, it is more and more tempting to consider student loan debt a “problem for tomorrow.” Taking that approach, however, can cost you valuable time and money by failing to participate in the appropriate repayment plan, delaying qualifying repayment months that could lead to eventual forgiveness, and making payments that aren’t in your best financial interest.
You may not know exactly what your financial and professional future holds, and that makes drafting a rigidly precise plan impossible. Despite that, simply immersing yourself in the process of financial planning and doing so to the best of your ability will make you wiser and more adaptable for whatever obstacles lie ahead.
Student loans and the many programs are challenging to navigate. If you need help, look to StudentLoanAdvice.com, a WCI company that helps the average client save $191,000 in loans! Check it out today!
Have you checked out my loan repayment simulators? Which do you think would be the best plan for you? Does using SAVE make sense in your situation? Comment below!
[Editor's Note: Adrian Cavender is a fourth-year medical student at Southern Illinois University School of Medicine pursuing residency training in diagnostic radiology. This article was submitted and approved according to our Guest Post Policy. We have no financial relationship.]