Should I Switch From IBR to the SAVE Plan?

Federal student loan repayment plans offer various pathways for managing educational debt, with options designed to align monthly payments with a borrower’s financial capacity. Among these, the Income-Based Repayment (IBR) plan has long been a common choice, adjusting payments based on income and family size. The Saving on a Valuable Education (SAVE) plan presents a new set of considerations, prompting many to evaluate whether a switch from IBR to SAVE would be advantageous for their individual financial circumstances.

Key Distinctions Between IBR and SAVE

The core differences between the Income-Based Repayment (IBR) and Saving on a Valuable Education (SAVE) plans lie in their payment calculation methodologies, treatment of interest, loan forgiveness timelines, and handling of spousal income. Both plans aim to make monthly payments more affordable by basing them on a borrower’s discretionary income.

Monthly payment calculations represent a significant divergence. Under IBR, a borrower’s payment is generally 10% or 15% of their discretionary income. The specific percentage depends on when the loans were first disbursed: 15% applies to loans taken out before July 1, 2014, while 10% applies to loans disbursed on or after that date. Discretionary income for IBR is calculated as the difference between a borrower’s adjusted gross income (AGI) and 150% of the federal poverty guideline (FPG) for their family size.

In contrast, the SAVE plan typically calculates monthly payments at 10% of discretionary income for all loan types. Starting in July 2024, payments for undergraduate loans are reduced to 5% of discretionary income. Borrowers with a mix of undergraduate and graduate loans will have their payment calculated as a weighted average between 5% and 10%, based on the original principal balances of each loan type. The SAVE plan defines discretionary income more generously, subtracting 225% of the FPG from a borrower’s AGI, which generally results in a lower discretionary income and, consequently, a lower monthly payment. For example, a single borrower earning around $32,800 annually or a family of four earning approximately $67,500 may qualify for a $0 monthly payment.

Another critical difference emerges in how each plan handles accrued interest. Under the IBR plan, if a borrower’s monthly payment does not cover the full amount of interest that accrues, the unpaid interest typically capitalizes, meaning it is added to the principal balance, causing the loan balance to grow.

The SAVE plan offers a significant benefit by preventing loan balances from growing due to unpaid interest. If a borrower makes their required monthly payment, any interest that accrues beyond that payment amount is fully subsidized by the government. As long as a borrower makes their scheduled payment, their loan balance will not increase, even if their payment is $0. This applies to both subsidized and unsubsidized federal loans.

Loan forgiveness timelines also vary. Under IBR, any remaining loan balance is typically forgiven after 20 or 25 years of qualifying payments. Borrowers who first took out loans before July 1, 2014, generally qualify for forgiveness after 25 years, while those who borrowed on or after that date may receive forgiveness after 20 years. This provides a defined endpoint for repayment, after which the remaining debt is discharged.

The SAVE plan offers a faster path to forgiveness for some borrowers. Those with original loan balances of $12,000 or less can see their remaining debt forgiven after just 10 years of payments. For each additional $1,000 borrowed above $12,000, one additional year of payments is required before forgiveness, up to a maximum of 20 years for undergraduate loans and 25 years for graduate loans. This tiered forgiveness timeline can significantly benefit those with smaller initial loan amounts.

The treatment of spousal income is another distinction for married borrowers. For the IBR plan, if a married borrower files taxes jointly, both incomes are included in the payment calculation. If they choose to file separately, only the borrower’s income is considered. The SAVE plan also permits married borrowers to exclude their spouse’s income from the payment calculation if they file taxes as “married filing separately.” This flexibility can be particularly beneficial for borrowers married to higher earners, as it allows their student loan payments to be based solely on their individual income.

Regarding eligibility, both plans cater to federal student loan borrowers. IBR is generally available for most federal Direct Loans and Federal Family Education Loan (FFEL) Program loans, including consolidated Perkins Loans. To qualify for IBR, a borrower typically needs to demonstrate a “partial financial hardship,” meaning their payment under IBR would be less than what they would pay under the 10-year Standard Repayment Plan.

The SAVE plan is available for most federal Direct Loans, including subsidized, unsubsidized, and graduate PLUS loans, as well as Direct Consolidation Loans that did not repay Parent PLUS loans. Parent PLUS loans are generally not eligible for the SAVE plan directly.

Personalized Assessment for Your Decision

The optimal choice depends on factors such as your income level, loan balance, loan types, family size, and marital tax filing status.

Borrowers who generally stand to benefit most from switching to the SAVE plan include those with lower incomes relative to their student loan balance. The SAVE plan’s more generous definition of discretionary income often results in lower monthly obligations, or even $0 payments, compared to IBR. Borrowers with only undergraduate loans will also see their payment rate drop to 5% of discretionary income starting in July 2024.

The interest subsidy is another significant advantage of SAVE. If your calculated monthly payment is not enough to cover the interest that accrues each month, the SAVE plan ensures that the remaining unpaid interest is fully covered by the government, preventing your loan balance from increasing.

Conversely, there are specific scenarios where staying on IBR might be more appropriate. Borrowers with very high incomes might find that the payment difference between IBR and SAVE is minimal or that the standard repayment plan becomes a more effective way to pay off their loans quickly. While SAVE offers a 25-year timeline for graduate loans, borrowers with mixed loan types or significant graduate debt might need to carefully compare the overall payment structure and forgiveness period. Parent PLUS loans are generally not eligible for SAVE.

To make an informed decision, calculate your potential monthly payments under both IBR and SAVE. Determine your adjusted gross income (AGI) from your most recent tax return and identify your family size. Locate the federal poverty guidelines for your family size for the current year. For IBR, calculate your discretionary income by subtracting 150% of the FPG from your AGI, then multiply that result by 10% or 15% (depending on your loan disbursement date). For SAVE, calculate your discretionary income by subtracting 225% of the FPG from your AGI, then multiply that result by 10% (or 5% for undergraduate loans).

Beyond monthly payments, consider your long-term financial goals. If your aim is to achieve Public Service Loan Forgiveness (PSLF), payments made under both IBR and SAVE can count towards the 120 qualifying payments required. If your goal is to pay off your loans as quickly as possible, a standard repayment plan could be preferable, assuming you can afford the higher monthly payments.

Steps to Change Your Repayment Plan

To initiate the switch, apply for a new income-driven repayment (IDR) plan, including SAVE, through StudentAid.gov. This online portal is the primary resource for managing federal student loans. Alternatively, contact your student loan servicer directly for assistance.

When applying, you will need to provide specific information and documentation, including contact details, personal identification, and income documentation. The most common method for income verification is to grant consent for the Department of Education to securely access your federal tax information directly from the Internal Revenue Service (IRS) using the IRS Data Retrieval Tool. This method is generally the quickest and most efficient, as it automatically populates your income data.

If your current income has significantly changed since your last tax filing, or if you prefer not to use the IRS Data Retrieval Tool, you may be required to provide alternative income documentation. This could include recent pay stubs, a letter from your employer detailing your current gross income, or other acceptable proof of income.

After logging into your StudentAid.gov account, navigate to the income-driven repayment application section. Input the required personal and income details, then review the available repayment plan options. The system will show which plans you qualify for and the estimated monthly payment under each.

After reviewing your options, select the SAVE plan and formally submit your application. You should receive an email confirmation. Student loan servicers typically take several weeks, often around four weeks, to process these applications. Once processed, your loan servicer will communicate when your new payment amount under the SAVE plan will take effect. Annual recertification of your income and family size will be required to maintain your income-driven payment.