Minding the Cap: Saving Money on Your Student Loans 

If you’re one of our clients, and you have a substantial salary, there’s a chance you’ve heard us use the phrase, “Mind the cap.” We’re referring to the student loan payment cap, which applies to most of the income-driven repayment (IDR) plans. It exists to keep your payment in check if your salary balloons beyond the partial financial hardship that initially qualified you. Since IDR plans calculate your monthly payment on your income, your payment increases as your salary does—makes sense, right? But if your salary increases significantly, should your student loan payment keep pace, up and up and up forever? Thankfully, the payment cap comes into play before this happens, and levels your payment off at the amount that you would normally make on the standard 10-year payment plan. At that point, the IDR isn’t saving you money every month, anymore, but it can still be of use if you’re working toward loan forgiveness, for example. 

IDR Plans without Caps

Of the IDR plans available to federal student loan borrowers, only one does not have a cap. This used to be the REPAYE plan, which subsidized borrowers’ interest on payments. In turn, it didn’t have a cap, making it less useful to high-income borrowers. This plan has now been replaced by SAVE, which was rolled out by the Department of Education last year. This newest plan touts a lot of benefits, and should be a serious boon to most borrowers, who can look forward to things like waived interest over and above the monthly payment and a lower disposable income formula. High-income borrowers should continue to be wary, however, because SAVE has no cap just as its predecessor. 

Saving with SAVE or the Cap?

Changing IDR plans can be tricky, especially since you can’t always switch back to an old plan after you’ve moved to a new one—so it can pay to be leery of a new plan. For many, however, SAVE can result in big savings on your student loans over the life of the loan, which makes it worth considering a couple of questions: 1) Just how much money would you have to make before you hit the cap? and 2) Could you still save in the long run even if your payment exceeds it? Unfortunately, there’s no hard-and-fast answer to the first question, since your payment amount is influenced by a number of factors beyond income, such as family size, total loan balance, and more. If you plan to work in one place for a long time, it can be fairly easy to calculate and compare options based on your particulars. 

One of our clients, Dr. Ella, is an administrator at a non-profit hospital. She makes good money, but not as much as many of the providers at her work. She heard about SAVE and wondered if it might be right for her, but worried that she might make enough that she could exceed her payment cap, so she’d been sticking with her PAYE plan she’d had since grad school. Speaking of, after all her degrees, she wound up with about $250k in federal loans, which put her standard 10-year payment plan at about $1600 per month. On her current plan, she pays about $1100/mo. If she switched to SAVE, she would pay about $1000/mo., and would end up spending about $10k less on her loans before they’re forgiven, and even as her salary crept up over the years, she still wouldn’t hit her payment cap. It gets even better: these estimates are before SAVE takes on lower income requirements later this year.

If you’re a moderately-high earner, you may still be able to save with SAVE. Talk to your student loan professional to find out if you’re eligible, and if your situation makes sense to change. Let us crunch the numbers for you so you can spend less time wondering, and more time savoring!