New SAVE plan offers lower student loan payments, but is it right for you?

Millions have already signed up for the newest income-driven repayment plan—SAVE—but it may not offer savings for everyone. The new plan replaces the old REPAYE plan, and promises a number of benefits to borrowers, especially those with lower incomes:

• a larger exemption for low-income borrowers, which could lower payments to as little as $0 per month
• waiving excess interest over and above the monthly payment
• allowing married borrowers to file their taxes separately without counting their spouse’s income 

Further benefits will be incorporated into the plan over the next year, including a lower disposable income formula and a shortened timetable for loan forgiveness, as compared to existing IDR plans. While all of this sounds great—and don’t get me wrong, it is for most borrowers!—there are some for whom switching to the new plan could end up costing them more money. 

High-income earners looking to save should mind the cap

Did you know that most student loan plans have a cap on your monthly payment? Since IDR plans are calculated based on your income, your payment goes up when your salary increases: makes sense, right? Well, if your income increases significantly, that means your payment would as well, and there’s nothing to stop it from doubling, tripling, etc. Most borrowers don’t have to worry about this happening because their plan caps payments at the amount they would pay if they were on the standard 10-year plan. That means that your payment won’t balloon out of control, even if your income continues to rise. All of the old IDR plans make use of the cap except for the outgoing REPAYE plan. Unfortunately, the SAVE plan—which replaces REPAYE—also has no payment cap. 

Since the Senate defeated efforts to block the implementation of SAVE, there’s likely to be another wave of applicants signing up for the plan. We’re sure to hear more about it, too, as the Department of Education fleshes out the final details of implementation, payments formulas, and more. While it stands to save a lot of people money, borrowers should be cautious about jumping on the bandwagon too soon. Talk to your student loan professional before changing IDR plans to crunch the numbers and find out whether, and how much, you might save. Even if you save money right away, there’s no guarantee that you’ll save in the long run. Your student loan professional can show you how much your current plan and the SAVE plan stand to cost over the whole life of your loan.