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Why would someone get on the SAVE plan if you pay more interest over time than the standard plan/PAYE/IBR plan?

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Abbey Johnson, Helping with Student Loan Documentation
Answered on October 02,2023

Here are a few reasons.

  • Interest isn’t added to your loan balance after you make your payment, which may reduce the effective interest rate each year.

  • Any loan that has a longer repayment period results in more interest. Compare a 15 year mortgage to a 30 year mortgage at the same interest rate.

  • It typically is the lowest monthly payment of all the IDR plans. The only other possibility is ICR when it's calculated based on the loan balance rather than your income.

  • If a borrower is seeking forgiveness and their debt amount greatly exceeds their income, they may have to pay taxes on their forgiven income. Because of the interest subsidy, the amount forgiven will be lower, so the tax liability may be lower than on PAYE or IBR.

  • If the borrower expects their income to increase (see medical residents) and they’ll have to repay their loans in full, the short term interest subsidy could make their loan repayment cheaper and faster.

 

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Ultimate Guide on SAVE Plan - Payment Calculation, Interest, Forgiveness

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