SAVE is the New REPAYE

The Biden student loan forgiveness plan was blocked by the Supreme Court, but the new repayment changes are currently (and will likely stay) alive and well. The “New REPAYE” plan has been rebranded: SAVE (“Saving on a Valuable Education,” in case you were wondering).

Here are the take-home points, mostly courtesy of this brand new White House briefing:

Lower Payments for Undergrads

For undergraduate loans, cut in half the amount that borrowers have to pay each month from 10% to 5% of discretionary income.

SAVE–like PAYE and REPAYE–uses 10% of discretionary income for graduate borrowers as well as a weighted average of those numbers if you have debt from both undergrad and grad school.

Lower Payments for Everyone

Raise the amount of income that is considered non-discretionary income and therefore is protected from repayment, guaranteeing that no borrower earning under 225% of the federal poverty level—about the annual equivalent of a $15 minimum wage for a single borrower—will have to make a monthly payment under this plan.

Discretionary income is currently defined as 150% of the poverty line. This change will decrease payments for all borrowers except those with very high incomes.

For example, in the continental US, the poverty line for an individual in 2023 is $14,580. This means the income excluded for a single person for PAYE/REPAYE is $21,870 and for SAVE will be $32,805.

In practice, this means that not only will PGY1 residents have $0 payments, a lot of PGY2 residents probably will too. A later years resident certifying an income of $60k for example would have their payment decreased from $318/mo to $227/mo under the new plan.

10-year Forgiveness for Low-volume Borrowers

Forgive loan balances after 10 years of payments, instead of 20 years, for borrowers with original loan balances of $12,000 or less. The Department estimates that this reform will allow nearly all community college borrowers to be debt-free within 10 years.

This long-term non-PSLF forgiveness takes place after 20 years for undergrad borrowers and 25 years for graduate borrowers, which is unchanged from REPAYE. This income-driven repayment (IDR) loan forgiveness is currently set to become taxable again in 2025 and is irrelevant for the majority of doctors.

A Full Unpaid Interest Subsidy

Not charge borrowers with unpaid monthly interest, so that unlike other existing income-driven repayment plans, no borrower’s loan balance will grow as long as they make their monthly payments—even when that monthly payment is $0 because their income is low.

This will be huge for residents, who often find themselves in the situation of “negative amortization” when their calculated monthly payments do not cover accruing interest.

The REPAYE unpaid interest subsidy waived half the unpaid amount; SAVE waves it all.

It also means those $0 payments interns typically enjoy yield an effective 0% interest rate. Amazing!

But furthermore, no matter what you owe, you’ll probably feel like you have a 0% interest rate loan outside of the mandatory monthly payment. Technically, our example resident with that $227 monthly payment would have an effective rate of 1.36% on a $200k loan balance (less than inflation = free money)

Truly, one of the great pains for residents–especially those with big loans–was to watch the amount they owed balloon while they slogged through training. No more! You might not make any progress, but your loans won’t grow.

The generousness of this combination–lower payments, waived interest, and more built-in forgiveness–has raised the possibility that some private companies will sue the government to shut this down. I don’t think they have a real chance of winning that case.

The unpaid interest subsidy also means that waiving the in-school deferment for undergraduate loans while in graduate school (or the deferment for any PLUS loans) would be also an easy way to save a lot of interest, as those loans would effectively become 0% interest rate while in school with a typical student’s income.

The Married Filing Separately Loophole

Not mentioned but still important: The Married Filing Separately Loophole, which was closed in REPAYE, has been reopened. This means that married borrowers can choose to file taxes separately in order to exclude their spouse’s income from the payment calculation.

This has historically been especially important for residents with high-earning spouses and has been a key reason to pick PAYE (and occasionally IBR) instead of REPAYE (discussed at length in the Maximizing PSLF chapter).

With everything else + the reopening of this loophole, SAVE is a great plan for borrowers and overall greatly simplifies student loan management.

The Payment Cap

The one important “loophole” of PAYE and IBR that remains closed from REPAYE appears to be the removal of The Payment Cap. With the older plans, your monthly payments were capped at the amount of the standard 10-year repayment even if 10% of your discretionary income would be a larger number. This created a PSLF boon for doctors with long training because even with their subsequent high income they would never “pay their fair share.” Even so, for the vast majority of people nationwide, SAVE will be better than PAYE.

The government’s plan is that SAVE replaces REPAYE, and they close PAYE and ICR to new borrowers. The intention is also to close PAYE to even current borrowers who simply want to switch starting summer 2024, but doing so would actually go against precedent, so we’ll see how that plays out when some of these operational details are finalized. If your income is set to rise high enough in the future for the payment cap situation to be relevant–and PAYE is closed–IBR (which is in the actual 2007 law passed by Congress) will probably always be available. We’ll know more when the plan is fully in effect.

For those currently in PAYE or considering choosing it now while still available, the only practical consideration that is relevant is this payment cap situation with regard to loan forgiveness. For doctors set on PSLF, one would need to compare the savings from lower payments during residency with the potential savings from capped payments as an attending.

As an example, the maximum monthly payment on the older plans for our hypothetical $200k borrower was $2,220. In SAVE, you only hit that amount with an annual income of around $330k. So the “optimal” choice depends on how much you borrow, how much you earn, and how many years of attending income you have before achieving PSLF.

This would mostly affect people with relatively high attending incomes relative to their debt. The most future-proof plan given the uncertainty of a medical career would be to choose SAVE, and that is what I suspect the vast majority of residents would choose even if they had the option. If nothing else, the lower payments during residency will probably impact your life more than lower payments as an attending.

For those with massive loan balances and plans for work that wouldn’t qualify for PSLF, then the payment cap consideration is also potentially relevant to the 25-year IDR loan forgiveness, but this is a very uncommon scenario for physicians (further discussed in this chapter).

Conclusion

Because the plan only improves upon REPAYE without downsides, all borrowers on REPAYE will automatically be switched over to the new plan:

Borrowers who sign up or are already signed up for the current Revised Pay as You Earn (REPAYE) plan will be automatically enrolled in SAVE once the new plan is implemented.

Easy peasy.

For recent graduates, the COVID payment freeze has been and the new SAVE plan will be a huge boon, even if the $10k student loan forgiveness that some residents would have received didn’t pan out.