I’m confused how the SAVE plan of Student loan works. I thought there was no interest that accrues. Can anyone share their knowledge?
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Abbey Johnson, Helping with Student Loan DocumentationAnswered on October 02,2023
Interest still accrues on the SAVE plan, but if the amount of interest that accrues is greater than your monthly payment, that excess interest is waived, forgiven or subsidized. If your payment is $100 and interest is $150, you get a $50 subsidy. Your loan balance stays the same. If interest is $150 and your payment is $200. You get no subsidy and your loan balance decreases by $50. You get the most benefit the lower your student payment is in comparison to your interest that accrues monthly.
If I am eligible for the interest subsidy and pay extra, will that reduce my interest subsidy that month by paying the potentially waived interest? No, all extra payments will go straight to your loan balance, and it won’t reduce your interest subsidy this month. If you have any accrued interest that hasn’t capitalized from before you entered the SAVE plan, it will be applied to that balance first, then principal once that’s eliminated.
This is always how student loan repayment works. I use the word “loan balance” instead of principal because there may be some interest that is part of the loan balance that hasn’t capitalized. However, by reducing your principal amount, it will reduce the interest that accrues and thus reduce your interest subsidy over time. I have said “goes straight to principal” multiple times for simplicity’s sake.
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Ultimate Guide on SAVE Plan - Payment Calculation, Interest, Forgiveness
Under the Saving on a Valuable Education (SAVE) plan, a single borrower who makes less than $15 an hour will not have to make any payments. Borrowers earning above that amount would save mor..Click here to get a detailed guide
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