Is the SAVE Plan Worth It? Not For High Earners

For many federal student loan borrowers, the Saving on a Valuable Education (SAVE) Plan is definitely worth considering. Introduced by the Biden Administration, this new income-driven repayment plan offers the lowest monthly payment of all IDR Plans. It also provides federal student loan borrowers with an interest waiver and a faster path to loan forgiveness.

The new SAVE Plan is an attractive option for those with lower incomes and larger family sizes.

But if you’re a high-income earner, the SAVE Plan might not always be the best choice for you.

Unlike other IDR Plans, SAVE doesn’t have a payment cap. If you’re someone earning over $100,000 annually or have a smaller loan balance, or both, switching to SAVE might significantly increase your monthly payments.

Like other income-driven repayment plans, the SAVE Plan determines your monthly student loan payments based on your income and family size. But unlike those other plans, SAVE has three unique advantages that make it a more attractive repayment option than other IDR Plans:

• A faster path to loan forgiveness. The SAVE plan offers loan forgiveness after 10 years if your original principal balance was $12 thousand or less. The other IDR Plans require at least 20 years of repayment.

• An interest subsidy that waives the unpaid interest. The Department of Education will waive the monthly interest that accrues so long as you stay current on your payments. The interest will still accrue, but it will be waived in the future.

• An increased income exemption. The SAVE Plan protects more money from payment calculations than other plans. Specifically, payments are based on your discretionary income, which is your adjusted gross income (AGI) minus 225% of the federal poverty line for your family size. This is a significant increase from the 150% exemption found in plans like PAYE and REPAYE.

These benefits are great — if you can get them.

Related: Is SAVE and IDR the Same?

While the SAVE Plan offers several attractive benefits, such as a faster path to loan forgiveness, an interest subsidy, and an increased income exemption, it may not be the best option for everyone.

High earners and those with smaller loan balances might pay more under the SAVE Plan than they would under other IDR plans.

The main reason is that the SAVE Plan doesn’t have a payment cap.

Even though more of your income is protected, if you have a high income or a smaller loan balance, your payment could increase significantly under the SAVE Plan.

Factors That Can Lead to Higher Payments

1. Annual Income: The SAVE Plan calculates monthly payments based on discretionary income, which is your adjusted gross income minus 225% of the poverty guideline. For high-income earners, a larger portion of their income is considered discretionary, which can directly increase monthly payments.

2. Family Size: The plan considers family size in its calculations, with larger families having a lower discretionary income due to the higher poverty guideline threshold. High earners who are single or have a small family will see a higher discretionary income calculation, leading to higher monthly payments.

3. Loan Balance: Although the SAVE Plan’s monthly payment calculation does not directly consider the loan balance, it influences the overall cost and repayment timeline. High earners with smaller loan balances may find that while their monthly payments are higher under the SAVE Plan, they could pay off loans faster, with less potential for loan forgiveness than other plans.

Related: SAVE Plan Income Limits

To better understand how the SAVE Plan can impact high earners and those with smaller loan balances, let’s look at some borrower profiles:

As you can see, while the SAVE Plan may result in lower monthly payments for some high earners, it can also lead to longer repayment terms and potentially higher total costs over the life of the loan.

Related: SAVE Plan: When and How to File Taxes Separately

If you’re a high earner or have a smaller loan balance, carefully evaluate your options before choosing the SAVE Plan. Look at factors such as:

• Your current and projected future income

• Your family size and potential changes to it

• Your loan balance and the proportion of undergraduate vs. graduate loans

• Your long-term financial goals and priorities

By weighing these factors and comparing the SAVE Plan to other IDR plans, you can make an informed decision that aligns with your unique circumstances and minimizes the potential drawbacks of the SAVE Plan.

Related: Are Parent PLUS Loans Eligible for the SAVE Plan?

Before deciding whether to switch to the SAVE Plan, it’s crucial to understand how it would affect your unique financial situation. Fortunately, tools and resources are available to help you make an informed decision.

Using the Federal Student Aid Loan Simulator

The Federal Student Aid Loan Simulator is a powerful tool that allows you to input your specific loan information, income, and family size to compare the costs and benefits of different repayment plans, including the SAVE Plan.

To use the loan simulator:

1. Visit the Federal Student Aid website at https://studentaid.gov/loan-simulator/.

2. Log in with your FSA ID or proceed as a guest.

3. Input your loan information, income, and family size.

4. Compare the results for different repayment plans, focusing on the SAVE Plan and any other IDR plans you’re considering.

The loan simulator will provide you with estimated monthly payment amounts, total interest paid, and projected loan forgiveness for each plan, allowing you to make a side-by-side comparison based on your specific circumstances.

Keep in mind that the loan simulator provides estimates based on your current financial situation. It’s essential to consider potential changes to your income, family size, or other factors that may impact your eligibility for the SAVE Plan or other IDR plans in the future.

Related: Does SAVE Plan Eliminate Interest

Get Help From a Pro

For high earners with complex financial situations or those who need additional guidance, consulting with a student loan lawyer or financial professional can be invaluable. They can provide personalized advice based on your unique circumstances, help you navigate the pros and cons of different repayment options, and develop a strategy that aligns with your long-term financial goals.

When choosing a student loan lawyer or financial professional, look for someone with experience in student loan repayment strategies and a track record of helping clients in similar situations. Ask for references or read reviews from past clients to ensure you’re working with a reputable and knowledgeable professional.

The SAVE Plan may not be the most attractive option for high earners currently, but two upcoming changes in July 2024 could make it more appealing.

• Reduced Payments for Undergraduate Loans. Starting in July, the SAVE Plan will reduce the discretionary income required for undergraduate loans from 10% to 5%, making payments more affordable for high earners with significant undergraduate debt. For example, for a borrower with $30,000 in undergraduate loans and $70,000 in graduate loans, the weighted average payment rate would be 8.5%, resulting in a lower monthly payment than the current 10% rate for all loans.

• Earlier Loan Forgiveness for Some Borrowers. The Biden administration already used this benefit in February. But starting this summer, the SAVE Plan will adjust loan forgiveness eligibility criteria based on the original amount borrowed. Borrowers with original loan balances of $12,000 or less will be eligible for forgiveness after just 10 years of payments, with the repayment term increasing by one year for every additional $1,000 borrowed.

Of course, this depends on the SAVE Plan surviving the legal challenges lodged against it by 11 Republican-led states, including Kansas, Nebraska, Iowa, Texas, Alabama, Alaska, Idaho, Louisiana, Montana, South Carolina, and Utah.

The lawsuit, led by Kansas Attorney General Kris Kobach, argues that the administration is using the plan to provide mass student loan debt forgiveness, which they claim oversteps the executive authority.

This case may end up before the Supreme Court, as did Biden’s initial broad student loan forgiveness plan. If it does, the Court could kill the SAVE Plan. And if that happens, borrowers will likely be returned to the REPAYE Plan.

While the REPAYE Plan protects less income than the SAVE Plan, it has a payment cap. Ironically, this means that some borrowers could end up with a lower monthly payment under REPAYE than they had under SAVE.

While the SAVE Plan’s earlier loan forgiveness provisions may be less relevant for high earners who are likely to repay their debt before reaching the forgiveness mark, it’s still important to consider the potential tax implications of any forgiven debt.

If high earners have a remaining balance at the end of their repayment term, they may face a tax liability on the forgiven amount. Under current tax law, forgiven student loan debt is treated as taxable income in the year it is forgiven.

But that’s just what the law is today. Keep in mind that tax laws can change over time. The tax implications of student loan forgiveness may differ by the time high earners reach their forgiveness mark, which could be decades into the future.

To prepare for potential tax liabilities and ensure a comprehensive approach to student loan repayment, high earners should:

1. Stay informed about changes to tax laws related to student loan forgiveness.

2. Consult with a tax professional to understand the potential tax consequences of loan forgiveness based on their financial situation.

3. Develop a long-term financial strategy that considers the possibility of a tax liability associated with loan forgiveness.

4. Consider setting aside funds in a dedicated savings account to prepare for potential tax obligations.

By proactively addressing the tax implications of loan forgiveness and incorporating them into their overall financial planning, high earners can make more informed decisions about their student loan repayment plan strategy and avoid unexpected financial burdens in the future.

Related: SAVE Plan Tax Bomb

For high earners who have determined that the SAVE Plan doesn’t suit their financial needs, alternatives such as refinancing with a private lender or adopting an aggressive repayment strategy might seem attractive. But you have to look out for the long-term consequences.

Refinancing with a Private Lender

Refinancing federal student loans with a private lender can lead to lower interest rates, potentially reducing the total cost over the life of the loan. However, this option also means forfeiting federal protections:

• Loss of Federal Benefits: Refinancing converts federal loans into private ones, removing access to income-driven repayment plans, loan forgiveness programs, and forbearance options provided by federal loans.

• Risk Assessment: Ensure stable income and job security within your industry before refinancing. Economic downturns or unexpected job losses make new, potentially less flexible repayment terms challenging to manage.

Adopting an Aggressive Repayment Strategy

Paying off loans quickly by allocating extra funds toward your student loan debt can free you from debt sooner and reduce overall interest paid. This strategy also comes with significant considerations:

• Financial Flexibility: Aggressively paying down debt might restrict your ability to fund other goals, such as saving for retirement, purchasing a home, or building an emergency fund.

• Economic Vulnerability: In the event of job loss or major financial setbacks, having invested heavily in debt repayment could jeopardize your financial stability due to the lack of a robust safety net.

Evaluating Your Financial Stability

Before committing to these alternative strategies, consider the following:

• Emergency Fund: Aim to have a substantial emergency fund that can cover several months of expenses, including loan payments, to cushion against potential income disruptions.

• Understanding Terms and Conditions: Thoroughly research private lenders and fully understand the terms of refinancing, such as any fees, prepayment penalties, or policies on loan discharge.

Making a Well-Informed Decision

Deciding to pursue alternative repayment strategies should be based on a comprehensive understanding of the risks and rewards. Here are key considerations for high earners:

• Job Security and Financial Resilience: Assess the stability of your job and the broader market conditions. Ensure you have the financial resilience to handle possible economic fluctuations without federal loan protections.

• Long-term Financial Goals: Weigh the potential savings from lower interest rates or faster loan repayment against the benefits of federal loan flexibility and protections.

If job security is uncertain or if you highly value federal loan benefits, sticking with an income-driven repayment plan like SAVE may be more prudent, even if it involves higher short-term costs.

The SAVE Plan offers several compelling benefits, including an interest subsidy, a faster path to loan forgiveness for some borrowers, and more affordable income-based repayment amounts. But most of those benefits work best for borrowers with low incomes. The plan’s unique features and lack of a payment cap can lead to varying outcomes for high-earning borrowers.

For some high income borrowers, such as those with large loan balances or married borrowers who file taxes separately, the SAVE Plan may provide a more attractive repayment option than other IDR plans. It does so by allowing you to remove your spouse’s income from the SAVE Plan calculation.

On the other hand, high earners with smaller loan balances or those who are single or have smaller families may find that the SAVE Plan results in higher monthly payments.

Book a call with our team if you want help finding the right plan for your situation. We’ve helped many high-earners like you find a strategy that fits their personal finances and goals.