Does the SAVE Plan Eliminate Interest?

The Saving on a Valuable Education (SAVE) plan does not eliminate interest on federal student loans. But it does offer a unique interest subsidy benefit that can help borrowers who enroll in the new IDR Plan manage their debt more effectively.

In this article, we’ll dive into the details of the SAVE plan’s interest subsidy benefit and explore how it can help you better manage your student loan debt.

We’ll cover:

• How the new SAVE plan handles interest accrual

• Who is eligible for the interest subsidy benefit

• The potential consequences of leaving the SAVE plan

• Long-term benefits and loan forgiveness options

By the end of this article, you’ll have a clearer understanding of how the SAVE plan’s interest subsidy works and whether it might be a good fit for your financial situation. Let’s get started!

SAVE is a new income-driven repayment plan designed to help federal student loan borrowers manage their debt more effectively. Introduced during the pandemic, the SAVE plan replaced the Revised Pay As You Earn Plan. Since being implemented, SAVE has quickly gained popularity due to its affordability and faster path to loan forgiveness compared to other repayment options.

Key features of the SAVE plan include:

• Affordable repayment plan: The Biden administration designed the SAVE plan to provide borrowers with a more manageable income-driven plan, ensuring that monthly student loan payments are affordable based on the borrower’s discretionary income.

• Lower monthly payments: The SAVE plan calculates your monthly payments based on your income and family size, ensuring that your payments are more affordable than the Standard Repayment Plan.

• Interest subsidy benefit: If your monthly payment under the SAVE plan is less than the interest that accrues on your loans, the government will cover the remaining interest, preventing your loan balance from growing due to unpaid interest.

• Loan forgiveness: Like other IDR Plans, borrowers who make qualifying payments under the SAVE plan for 20 years (for undergraduate loans) or 25 years (for graduate school loans) can have their remaining loan balance forgiven. Additionally, as a one-time benefit, borrowers who have $12,000 or less in loans can have their remaining balance forgiven after making 10 years of payments under SAVE.

While the SAVE plan doesn’t eliminate interest entirely, its unique features make it an attractive option for borrowers seeking a more manageable approach to repaying their federal student loans.

Related: Is SAVE and IDR the Same?

One of the most attractive features of the SAVE plan is its interest subsidy benefit. While interest continues to accrue on your federal student loans under this plan, the SAVE plan offers assistance when your monthly payment doesn’t cover the full amount of interest owed.

Here’s how it works:

• If your income-driven monthly payment under the SAVE plan is less than the interest that accrues on your loans, the government will cover the remaining interest for that month.

• This means that even if your payment doesn’t cover all of the interest, your loan balance won’t grow over your repayment period due to the unpaid interest.

• The interest subsidy benefit applies as long as you remain on the SAVE plan and make your required payments.

For example, if your monthly accrued interest is $100, but your monthly payment under the SAVE plan is only $75, the government will cover the remaining $25 in interest for that month. You’ll still be responsible for paying the interest that your monthly payment does cover, as the government subsidy only applies to the portion of accrued interest that exceeds your monthly payment.

The SAVE plan’s interest subsidy benefit can significantly impact your total loan cost over time. By covering any unpaid monthly interest, the subsidy prevents your loan balance from growing due to accumulated interest. This means that even if your monthly payment doesn’t cover the full interest amount, your balance won’t increase as long as you remain on the SAVE plan and qualify for the subsidy.

Over the course of your repayment term, this can result in substantial savings compared to other repayment plans where unpaid interest is added to your principal balance. By keeping your loan balance in check, the SAVE plan’s interest subsidy benefit can help you pay off your loans more quickly and with less overall interest cost, potentially saving you thousands of dollars in the long run.

Related: How Student Loan Interest Works

Not all borrowers will qualify for the SAVE plan’s interest subsidy benefit. To be eligible, your income must be low enough relative to your debt that your monthly payment under the SAVE plan doesn’t cover the full amount of interest that accrues on your loans.

Generally, low-income borrowers with high loan balances are more likely to benefit from the interest subsidy, as their monthly student loan payments under the SAVE plan may not fully cover the accrued interest. For instance, if you have an annual income of $40,000 and a federal student loan balance of $60,000, your monthly payment under the SAVE plan may not fully cover the accrued interest, making you eligible for the subsidy.

Related: Is SAVE Plan Worth It? Not for High Earners

Conversely, if your income is high enough that your monthly payment covers all of the accrued interest, you won’t receive the interest subsidy benefit. This is more likely to be the case for borrowers with higher incomes or lower debt balances.

If your income increases to the point where your monthly payments start covering all of the accrued interest, you will no longer receive the interest subsidy. But you can still benefit from other features of the SAVE plan, such as more affordable monthly payments and potential loan forgiveness after 20 or 25 years of qualifying payments.

One thing to keep in mind is that if your income decreases in the future, you may once again become eligible for the interest subsidy benefit, providing you with additional financial relief when needed.

Related: SAVE Plan Student Loan Income Limits

To determine if you’re eligible for the SAVE plan’s interest subsidy benefit, you’ll need to consider your income and debt levels. Generally, if your monthly payment under the SAVE plan is less than the monthly accrued interest on your loans, you’ll qualify for the subsidy. This typically applies to borrowers with lower incomes relative to their debt.

To get a better idea of your eligibility, you can use the Department of Education’s Loan Simulator tool to estimate your monthly payments under the SAVE plan based on your income and debt information. If your estimated monthly payment is less than the projected monthly interest accrual, you’ll likely be eligible for the interest subsidy benefit.

While the SAVE plan’s interest subsidy benefit can be incredibly helpful for managing your student loan debt, it’s crucial to understand the potential consequences of leaving the plan.

• Interest capitalization: If you switch to a different repayment plan or fail to recertify your income as required, any unpaid interest that was previously covered by the government will be added to your loan balance through a process called interest capitalization.

• Increased loan balance: When interest capitalization occurs, the interest you didn’t pay while on the SAVE plan will be added to your principal balance, and you’ll start accruing interest on the new, higher amount.

• Long-term costs: Leaving the SAVE plan and triggering interest capitalization can lead to higher overall costs in the long run, as you’ll be paying interest on a larger loan balance.

For example, if you were on the SAVE plan for two years and had $2,000 in unpaid interest covered by the government, switching to a different repayment plan would cause that $2,000 to be added to your loan balance.

To avoid these consequences, it’s essential to carefully consider your long-term repayment strategy before choosing the SAVE plan. If you’re committed to staying on the plan and making your required payments, the interest subsidy benefit can be an effective tool for managing your debt and working towards loan forgiveness.

When enrolled in the SAVE plan, it’s important to understand how your loan servicer will display your accrued interest and payments. This can help you avoid confusion and make informed decisions about your student loan repayment.

Even though the government may be covering a portion of your accrued interest each month, your loan servicer will still display the full amount of interest that accrues on your account. As a result, when you log in to your student loan account, you may see your balance increasing, even if you’re making your required payments.

For example, if your monthly payment under the SAVE plan is $100, but your monthly accrued interest is $150, your loan servicer will show the full $150 in accrued interest on your account statement, even though the government is covering the additional $50.

If you have questions about how your accrued interest and payments are being displayed or need clarification on how the SAVE plan’s interest subsidy benefit is being applied to your account, reach out to your loan servicer for assistance. They can help you understand what you can expect to see in terms of your loan balance over time and provide guidance on managing your student loan debt effectively.

When enrolled in the SAVE plan, it’s important to understand how your loan servicer will display your accrued interest and payments. This can help you avoid confusion and make informed decisions about your student loan repayment.

Even though the government may be covering a portion of your accrued interest each month, your loan servicer will still display the full amount of interest that accrues on your account. As a result, when you log in to your student loan account, you may see your balance increasing, even if you’re making your required payments.

For example, if your monthly payment under the SAVE plan is $100, but your monthly accrued interest is $150, your loan servicer will show the full $150 in accrued interest on your account statement, even though the government is covering the additional $50.

One thing to keep in mind about the SAVE plan is that because it’s an income-driven plan, any payments made under it qualify for Public Service Loan Forgiveness (PSLF). If you work in a qualifying public service job and meet other PSLF requirements, you may be eligible for loan forgiveness after making 120 qualifying payments, regardless of the interest subsidy benefit.

Related: Does the SAVE Plan Qualify for PSLF?

If you have questions about how your accrued interest and payments are being displayed or need clarification on how the SAVE plan’s interest subsidy benefit is being applied to your account, don’t hesitate to reach out to your loan servicer for assistance. They can help you understand what you can expect to see in terms of your loan balance over time and provide guidance on managing your student loan debt effectively.

Related: SAVE Plan Tax Bomb

The SAVE plan’s interest subsidy benefit is a valuable feature that can help federal student loan borrowers manage their debt more effectively. By covering any unpaid interest each month, the government ensures that your loan balance won’t grow as long as you make your required payments under the plan.

But before you rush into this plan, make sure you understand the potential consequences of leaving the SAVE plan, such as interest capitalization, which can increase your overall loan balance.

That said, if you’ve done your research, and you’re committed to making your payments under the SAVE plan and working towards loan forgiveness, the interest subsidy benefit can be a powerful tool in minimizing the growth of your loan balance and maximizing the amount of debt that is ultimately forgiven.

To take advantage of the SAVE plan’s benefits, make sure you have eligible Direct Loans and submit an Income-Driven Repayment (IDR) Plan Request. If you have questions about your specific situation or need help understanding how the interest subsidy benefit applies to your loans, don’t hesitate to contact your loan servicer for assistance.

Remember, the SAVE plan is just one of several income-driven repayment options available to federal student loan borrowers. Take the time to explore all of your options and choose the plan that best fits your financial situation and long-term goals. And if you need help, book a call with our consultants.