Can You Switch From the SAVE to PAYE Plan?

Federal student loan repayment can present challenges, and Income-Driven Repayment (IDR) plans offer a way to manage monthly payments based on a borrower’s financial situation. These plans adjust payments to income and family size, making repayment more affordable. Borrowers may find themselves considering a switch between different IDR plans, such as from the Saving on a Valuable Education (SAVE) Plan to the Pay As You Earn (PAYE) Plan, due to evolving financial circumstances or a deeper understanding of each plan’s features. Changing repayment plans is a common option available to federal student loan holders.

Understanding SAVE and PAYE Plans

The SAVE Plan and the PAYE Plan are distinct federal Income-Driven Repayment options, each with unique features influencing monthly payments and forgiveness timelines. Both plans calculate payments based on a borrower’s discretionary income. Discretionary income is determined by subtracting a percentage of the federal poverty guideline for a borrower’s family size and state from their adjusted gross income (AGI).

Under the SAVE Plan, discretionary income is calculated as a borrower’s AGI minus 225% of the federal poverty guideline. For undergraduate loans, monthly payments are set at 5% of this discretionary income, while graduate loans are set at 10%. If a borrower has both undergraduate and graduate loans, a weighted average of these percentages is applied. The SAVE Plan includes an interest subsidy, which prevents a loan balance from growing due to unpaid interest if the monthly payment is less than the interest accrued. The repayment period before potential forgiveness is 20 years for undergraduate loans and 25 years for graduate loans. Unlike PAYE, the SAVE Plan does not have a cap on monthly payments, meaning payments can increase with rising income.

Conversely, the PAYE Plan calculates discretionary income as a borrower’s AGI minus 150% of the federal poverty guideline. Monthly payments are 10% of this discretionary income for all loan types. PAYE includes a payment cap, ensuring monthly payments will never exceed what would be owed under the 10-year Standard Repayment Plan. The PAYE Plan offers an interest subsidy for the first three years of repayment on subsidized loans, preventing capitalization of unpaid interest during this period. The repayment period under PAYE is 20 years for all loan types before any remaining balance may be forgiven.

Eligibility Requirements for PAYE

Switching to the PAYE Plan involves meeting specific eligibility criteria, which include both a “new borrower” requirement and a “partial financial hardship” demonstration.

To be considered a “new borrower” for PAYE, a borrower must not have had an outstanding balance on a Direct Loan or Federal Family Education Loan (FFEL) Program loan when they received a new Direct Loan or FFEL Program loan on or after October 1, 2007. They must also have received a disbursement of a Direct Loan on or after October 1, 2011. The opportunity to apply for PAYE concludes on July 1, 2027.

The second requirement is demonstrating a “partial financial hardship” (PFH). This condition is met if the borrower’s monthly payment amount calculated under the PAYE Plan would be less than the amount they would pay under the 10-year Standard Repayment Plan. PFH is met if annual payments under the 10-year Standard Repayment Plan exceed 10% of the difference between the borrower’s adjusted gross income (AGI) and 150% of the poverty line for their family size. If a borrower’s total student loan debt is higher than their annual income, they will likely qualify for a PFH. For married borrowers, a spouse’s income is included in the calculation if taxes are filed jointly, but generally not if filed separately.

The Switching Process

Changing a federal student loan repayment plan, such as moving from SAVE to PAYE, involves a straightforward application process. Borrowers can initiate this change through various methods.

Borrowers can apply for a new Income-Driven Repayment plan online via the StudentAid.gov website or submit a paper application directly to their loan servicer. If a borrower has multiple loan servicers, a separate request must be submitted to each one for the loans they wish to include in the IDR plan.

For the application, borrowers provide information regarding their income and family size. The preferred method for income verification is to consent to the Department of Education obtaining federal tax information directly from the IRS. This direct data retrieval streamlines the process. If a borrower’s income has recently changed or they haven’t filed taxes, alternative documentation such as a recent pay stub or W-2 may be submitted.

After submitting the application, the loan servicer processes the request. During this processing period, the loan servicer might place the borrower’s account into an administrative forbearance. This temporary pause means payments are not required, though interest may continue to accrue. Borrowers can check the status of their application through their StudentAid.gov account. Once processed and approved, the new repayment plan takes effect.

Key Considerations When Making the Switch

Switching from the SAVE Plan to the PAYE Plan requires careful evaluation of the financial and long-term implications for a borrower’s student loan debt. This transition extends beyond immediate monthly payments, affecting interest accrual, forgiveness timelines, and potential tax liabilities.

Monthly payments differ as the two plans use different formulas for calculating discretionary income. The SAVE Plan excludes 225% of the poverty line, potentially leading to lower monthly payments than PAYE, which excludes 150% of the poverty line. For example, a borrower with only undergraduate loans on SAVE pays 5% of their discretionary income, while on PAYE, it’s 10% for all loans.

PAYE includes a payment cap, ensuring monthly payments never exceed the 10-year Standard Repayment Plan amount, which can be beneficial for borrowers expecting significant income growth. The SAVE Plan does not have this cap, meaning payments could rise with increased earnings.

Interest accrual and subsidies also differ between the plans. The SAVE Plan offers an interest subsidy, where any unpaid interest not covered by the monthly payment is eliminated, preventing the loan balance from growing. The PAYE Plan provides an interest subsidy, covering unpaid interest on subsidized loans for only the first three years of repayment. After this period, or if a borrower leaves the plan, unpaid interest may capitalize, adding to the principal balance.

The loan forgiveness timeline is another factor. The PAYE Plan offers forgiveness after 20 years of qualifying payments for all loan types. The SAVE Plan distinguishes between loan types, providing forgiveness after 20 years for undergraduate loans and 25 years for graduate loans. For borrowers with graduate student loans, switching from PAYE to SAVE could extend their repayment period by five years before achieving forgiveness.

Borrowers must consider the tax implications of loan forgiveness. Under current law, federal student loan debt forgiven through an Income-Driven Repayment plan is considered taxable income by the IRS after December 31, 2025. While the American Rescue Plan Act of 2021 made IDR forgiveness tax-free through 2025, this exclusion is set to expire.

Some states may also tax forgiven loan amounts. Forgiveness received through Public Service Loan Forgiveness (PSLF) remains tax-exempt at the federal level. Borrowers can utilize the Loan Simulator tool on StudentAid.gov to estimate payments and explore how different plans align with their financial goals.