The SAVE In-School Loophole

I wrote about this last September, but it’s important enough that I’ll repeat myself with more bullet points and shorter sentences.

The Summary

  • The new SAVE student loan plan has a generous unpaid interest subsidy: every dollar of accrued interest that isn’t covered by your monthly payment is waive.
  • SAVE also has a feature (“loophole”) that allows some borrowers to enter repayment early and benefit from that 100% subsidy on unpaid interest, effectively making qualifying loans (Grad PLUS loans, old loans from undergrad) interest-free while in school.

The Background

  • The SAVE plan’s 100% unpaid interest subsidy is a significant benefit, especially for those with low incomes that allow for qualifying $0 payments.
  • Normally, you cannot enter repayment for the loans you take out while in school. As in, you cannot enter repayment during medical school for the regular Direct Unsubsidized (“Stafford”) loans you take out to pay for medical school. Ditto for undergrad loans during undergrad.
  • There are two exceptions: 1) Grad PLUS loans 2) Regular Direct loans taken out for previous schooling (e.g. undergraduate loans while in graduate school)

The Benefit

  • Graduate students like medical students with undergraduate loans can waive the in-school deferment and enjoy 0% interest on those undergrad loans during graduate school.
  • Graduate students with new PLUS loans can waive the in-school deferment and also benefit from the subsdized interest rate during school.
  • (The income limit for an individual to have $0 loans in the continental US is ~$32,800, so you can earn some money and still do this.)

The Risk

  • PLUS loans have higher interest rates and origination fees. While the interest rate will be lower in school with this loophole, the origination fee is unavoidable. If/once you make enough money to lose out on the unpaid interest subsidy, PLUS loans have higher rates.
  • The temptation to try to exclusively use PLUS loans to benefit from the subsidy is risky as the SAVE program isn’t codified in law, and PLUS loans cannot be converted to conventional unsubsidized loans. You’re also really not supposed to, your school may not let you, and those schools that do could ultimately get in trouble for going out of order and lose access to the Direct loan program.

The Plan

  • Contact your servicer and request the removal of the in-school deferment.
  • Choose the SAVE plan and make monthly payments. Unless you are gainfully employed, it will likely be $0. If you have a working spouse who earns a substantial income, you may need to file taxes separately in order to exclude their income and benefit the most from the subsidy.
  • You will need to repeat the process every semester for new loans as your school will update your servicer that you’re in school and the servicer will automatically apply the in-school deferment.
  • If for some reason you want to stop repayment (e.g. get a good job while in school, get married and don’t want to file taxes separately), no biggie. You still have access to the in-school deferment while in school.


  • The extra effort and decreased interest have no benefit if you achieve Public Service Loan Forgiveness (PSLF), as PSLF is a time-based program. It doesn’t matter how much you owe.
  • However, this technique could still be a reasonable hedge given you never know what kind of job you’ll end up wanting/taking.



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