The SAVE Plan: What Is It And How Does It Work?

If you're carrying student loan debt, you're probably familiar with Income-Driven Repayment Plans. Say "hi" to the newest kid on the block — the Saving on a Valuable Education (SAVE) Plan. In repayment plan news, the SAVE Plan is essentially a revamped version of REPAYE; if you're currently on the REPAYE Plan, you automatically benefit from the SAVE Plan. Here’s what you need to know.

The New SAVE Plan At A Glance

First, let's start with the basics of the SAVE Plan, the income-driven repayment plan from the U.S. Department of Education:

• SAVE is the new plan that calculates your monthly federal student loan payments based on your family size and income. This is instead of the balance on your student loan.
• The SAVE Plan offers an interest benefit, which prevents your balance from growing.
• Among the four Income-Driven Repayment (IDR) plans — SAVE, Income-Based-Repayment (IBR), Pay as You Earn (PAYE), and Income-Contingent Repayment Plan (ICR) — SAVE gives you access to the lowest monthly payments.  
• Borrowers on the SAVE Plan can be eligible for student loan forgiveness.

What Is The SAVE Plan For Student Loans?

SAVE launched in the summer of 2023. By determining one's monthly student loan payments based on family size and income instead of loan balance, it aims to lower the monthly payment for folks with student loan debt.

As of June 2023, 43.3 million borrowers in the U.S. have student loans, for a grand total of $1.63 trillion in student loan debt, according to a Federal Student Aid (FSA) Quarterly Report. The SAVE Plan will help lower monthly payments for the 7.5 million borrowers currently enrolled in the plan as of February 2024 U.S. Department of Education data. Of those enrolled, at least 4.3 million people now have a $0 loan payment.

How Does This New Student Loan Repayment Plan Work?

According to a White House release from August 2023, the SAVE Plan bases monthly payments on your discretionary income. For those enrolled in SAVE, discretionary income is the difference between two things: your adjusted gross income (AGI) and 225% of the poverty guideline. These poverty guidelines are based on your family size and the state you live in.  

As mentioned, the main difference between the SAVE Plan and REPAYE is that instead of basing your monthly payments on your remaining balance of your loan, it's based on how many people are in your family and your income.

If you have undergraduate loans, your monthly payments will be cut in half, from 10% to 5% of your discretionary income. If you have undergraduate and graduate loans, your payments will be a weighted average between 5% and 10% your income, and is based on the original principal balance of your student loans.

Those already on the REPAYE Plan don't need to reapply for SAVE, as you'll be automatically enrolled. If you aren't enrolled in SAVE, you can apply by filling out an IDR application by logging into the StudentAid.gov website and submitting an application.

What Are Some Key Benefits Of The SAVE Plan?

A few of the main perks of the SAVE Plan include cutting your monthly student loan payments in half. Plus, as long as you stay current on your monthly loan payments, your loan balance won't increase. Student loan forgiveness is also available to eligible borrowers who have completed a certain number of monthly payments and have a certain principal balance.

How Is The SAVE Plan Different From Other IDRs?

To help you figure out if the SAVE Plan is the best option for you, let's look at some of the key differences between the SAVE Plan and the other income-driven repayment (IDR) plans, such as IBR, PAYE, and ICR.

Lower Monthly Payments

The biggest draw of SAVE is that it could cut your student monthly loan payments in half. Instead of calculating your payments based on 10% of your discretionary income, starting in July 2024 SAVE will base it on 5% of your discretionary income. Plus, the income exemption goes up from 150% to 225%. So no matter how much you earn, you will be paying less on your federal student loans.

To illustrate, let's follow an example from the FSA: Say your adjusted gross income is $60,000 with a family size of two. Under SAVE, $44.370 of your income is protected, versus only $29,580 with other IDR plans, such as PAYE and IBR. In turn, your monthly payments will go from $253.50 to $130.25 a month. Starting in July, your current monthly payment could be even lower.

Earlier Loan Forgiveness

The SAVE Plan can help you reach loan forgiveness earlier than you could with other IDRs. Starting in February 2024, loan forgiveness for borrowers can be accessed with as little as 10 years of payments, whereas with other IDRs, loan forgiveness is typically between 20 to 25 years.

Your student loan forgiveness time frame hinges on how much you borrowed when you went to school. For instance, if you took out $12,000 or less of student loans, after 10 years of making payments, you're eligible for loan relief. Each additional $1,000 you initially take out, you'll receive loan forgiveness after another year of payments.

In fact, in February 2024, the White House announced the approval of $1.2 billion in student debt cancellation for almost 153,000 borrowers currently on the SAVE Plan.

Cancellation Of Unpaid Interest

The SAVE Plan might also result in cancellation of unpaid federal student loan interest. That's because the government will not add accrued interest to your principal balance if you pay in full each month. Because of that, your principal balance of your student debt won't go up.

Keep More Of Your Discretionary Income

As SAVE reduces your monthly student loan payment, it frees up more of your discretionary income. That's money that you can put to work toward other financial goals — paying off other debt, saving for an emergency fund or toward a big-ticket purchase, to name a few.

Who Can Sign Up For The SAVE Plan ?

If you have direct subsidized loans, direct unsubsidized loans, and direct PLUS loans for graduate or professional studies, then you are eligible for the SAVE Plan. If you have direct consolidated loans that weren't used to repay PLUS parent loans, those might also be eligible.

The following types of student loans aren't eligible for the SAVE Plan:

• Subsidized Federal Stafford Plans (from the FFEL Program)
• Unsubsidized Federal Stafford Loans (from the FFEL Program)
• FFEL Plus Loans for graduate and professional students
• FFEL Consolidation loans
• Federal Perkins Loans
• Direct PLUS Loans made to parents and Direct Consolidation Loans that repaid PLUS loans

Curious about how student loan consolidation can impact your eligibility for SAVE? If you consolidate the following loans into a Direct Consolidation Loan, you might be able to enroll in the new IDR:

• Federal Perkins Loans
• FFEL Consolidation Loans
• FFEL Plus Loans (for graduate or professional students)
• Subsidized and Unsubsidized Federal Stafford Loans (from the FFEL Program)

How Much You Might Save With The SAVE Plan

Depending on your situation, you can save a significant amount of money by enrolling in the SAVE Plan. The exact amount depends on your income, principal loan balance and kinds of loans you have.

But going back to the original example from the FSA, where you earn $60,000, your monthly payments will go down from $253.50 to $130.25 a month. Starting in July 2024, that amount will be cut in half again to $65 on direct undergraduate loans. For direct graduate and undergraduate loans, your monthly payment will be lowered to $108, and $130 if you have direct graduate loans.

When The SAVE Plan Might Not Be Your Best Option

While the SAVE Plan has attractive benefits which makes it a great option for low-income borrowers, there are instances when it might not be the best fit for you.

If you only want to pay a certain amount during a specific time frame, or you want to crush your debt as quickly as possible, you might want to choose a different IDR. It depends on your loan type, income level and principal balance.

In some scenarios, you might score a lower monthly payment under a different IDR. For example, if you have a higher income, the Standard Repayment Plan might mean a lower monthly payment. Consult a financial aid professional for more information.

How To Sign Up For The SAVE Plan

If you were previously enrolled in REPAYE, you have been automatically enrolled in SAVE. If you weren't already on REPAYE, you can apply for SAVE by enrolling on the Federal Student Aid website. You'll need your FSA ID to get started. Have your personal and income information handy, as you'll be asked to provide that. From there, you can review your plan options, and submit your application.

The Bottom Line

The SAVE Plan can help you save significantly on the remaining balance on your federal student loans. Freeing up income that would otherwise go toward debt on your higher education can help reduce financial stress, and can mean more take-home pay to put toward your other goals.

To make sure SAVE is the best fit for you, you'll need to see if you're eligible and weigh the pros against the cons. To help you find ways to save money and budget, download the Rocket Money℠ app. It will help you keep track of your spending, and pinpoint areas where you can cut back.