How Much Will My Student Loan Payment Be on the SAVE Plan?

Navigating the complexities of student loan repayment can be a daunting task for many borrowers in the United States. One of the newer options available is the SAVE (Saving on A Valuable Education) Plan, which aims to make repayments more manageable by tying them to the borrower's income and family size. But how much exactly will your student loan payment be on the SAVE Plan? In this comprehensive guide, we will delve into the details of the SAVE Plan, discuss how it works, and provide step-by-step instructions to calculate your potential payments.

What is the SAVE Plan?

The SAVE Plan, officially known as the Saving on A Valuable Education Plan, is one of the income-driven repayment (IDR) plans introduced by the U.S. Department of Education. The main goal of this plan is to provide relief to borrowers by adjusting monthly payments based on their income and family size. This approach ensures that payments are affordable and prevents borrowers from falling into financial hardship due to high monthly loan payments. The SAVE Plan replaced the former REPAYE (Revised Pay As You Earn) Plan and incorporates several borrower-friendly changes.

Key Features of the SAVE Plan

1. Income-Based Payments: Under the SAVE Plan, monthly payments are calculated as a percentage of the borrower's discretionary income. Discretionary income is defined as the difference between the borrower's adjusted gross income (AGI) and 225% of the federal poverty guideline for their family size and state of residence.

2. Interest Subsidy: One of the notable features of the SAVE Plan is the interest subsidy. If a borrower's monthly payment does not cover the full amount of interest that accrues on their loans, the government will cover any remaining interest, preventing the loan balance from growing due to unpaid interest.

3. Family Size Consideration: The size of the borrower's family plays a significant role in determining the monthly payment amount. Larger families result in higher poverty guidelines, which can lower the borrower’s discretionary income and, consequently, their monthly payments.

4. Forgiveness After a Set Period: For undergraduate loans, any remaining balance is forgiven after 20 years of qualifying payments. For graduate loans, the forgiveness period extends to 25 years. However, the forgiven amount may be considered taxable income in the year it is forgiven.

5. No Borrower’s Income Threshold: Unlike some other repayment plans, there is no income cap to qualify for the SAVE Plan. Any borrower with eligible federal student loans can apply, regardless of their income level.

How to Calculate Your Payment on the SAVE Plan

To determine how much your student loan payment will be on the SAVE Plan, you need to follow a few steps:

1. Calculate Your Discretionary Income:

   • Start with your Adjusted Gross Income (AGI), which you can find on your federal tax return.
   • Subtract 225% of the federal poverty guideline for your family size and state of residence. The federal poverty guidelines vary by state and are updated annually.

   For example, if your AGI is $50,000 and you are a single borrower living in the continental U.S., with a federal poverty guideline for a single person at approximately $14,580 (as of 2024), your discretionary income would be:

   $\text{Discretionary Income}=\$50,000-(225\%\times \$14,580)=\$50,000-\$32,805=\$17,195$Discretionary Income=$50,000−(225%×$14,580)=$50,000−$32,805=$17,195

2. Determine the Percentage of Discretionary Income:

   • Under the SAVE Plan, payments are capped at 10% of your discretionary income. Therefore, using the example above:
   $\text{Monthly Payment}=\left(\frac{10\%\times \$17,195}{12}\right)\approx \$143.29$Monthly Payment=(1210%×$17,195​)≈$143.29

   This would be your estimated monthly payment under the SAVE Plan.

3. Consider Family Size and Additional Factors:

   • If you have a larger family or live in a different state with a different poverty guideline, you will need to adjust the calculation accordingly. The more dependents you have, the higher the federal poverty guideline, which could reduce your discretionary income and, consequently, your monthly payment.

Examples of Payment Calculations for Different Scenarios

These examples demonstrate how the SAVE Plan tailors payments to borrowers' financial situations, ensuring that payments remain affordable and do not exceed a manageable portion of their income.

Pros and Cons of the SAVE Plan

Like any repayment plan, the SAVE Plan has its advantages and disadvantages:

Pros:

• Lower Monthly Payments: Because payments are based on income and family size, borrowers often find that their monthly payments are more manageable than under standard repayment plans.
• Interest Subsidy: The plan prevents loan balances from growing due to unpaid interest, which can be a significant benefit for borrowers with large loan amounts.
• Forgiveness After 20 or 25 Years: Borrowers can have their remaining loan balance forgiven after making qualifying payments for 20 or 25 years, depending on the type of loans they have.

Cons:

• Extended Repayment Period: Borrowers may end up paying for a longer period compared to standard plans, which could result in paying more interest over time.
• Potential Tax Implications: The forgiven loan amount could be considered taxable income, which might lead to a significant tax liability in the year of forgiveness.
• Eligibility Requirements: Not all loans qualify for the SAVE Plan. Borrowers must have eligible federal student loans, and certain private loans or Parent PLUS loans are not eligible for this plan.

Conclusion

The SAVE Plan offers a viable solution for many borrowers looking to manage their student loan payments more effectively. By adjusting payments based on income and family size, and providing an interest subsidy, the plan can significantly ease the financial burden on borrowers. However, it is essential to weigh the benefits against potential drawbacks, such as the extended repayment period and potential tax consequences.

If you are considering the SAVE Plan, it is advisable to use the U.S. Department of Education's Loan Simulator tool to estimate your payments and determine if this plan aligns with your financial goals. Always consider consulting a financial advisor to explore all available options and make an informed decision that best suits your financial situation.