Saving on a Valuable Education

The Saving on a Valuable Education (SAVE) option affords student loan borrowers the opportunity to have the monthly payment on their federal loans calculated as a percentage of available income rather than being dependent upon the amount borrowed. This will make a significant difference to borrowers with lower incomes and large federal student loan debt.

This program is available to all Federal Direct Loan borrowers with the exception of Parent PLUS Loan borrowers.

The amount of the payment is calculated by calculating a borrower’s “discretionary income” and limiting the loan payment to 10% of that discretionary income. Discretionary income is calculated by subtracting 225% of the poverty guideline for that borrower’s family size and location from the adjusted gross income. The remaining amount is the annual discretionary income. That amount is then multiplied by 10% to calculate the annual loan payment responsibility. That amount is divided by 12 to arrive at the monthly payment amount.

For example:

• Assume borrower earns $40,000 annually
• SAVE monthly payment = $60/month to start

    $40,000 (AGI)
— $32,805 (225% of poverty guideline for a single person in the 48 contiguous United States)
=  $7,195 (discretionary income)
x  10%
=  $720 (annual loan payment responsibility)
÷  12 months
=  $60/month

You may wish to use the online calculator at https://studentloans.gov to estimate monthly payments under SAVE.

The borrower’s monthly payment amount will be re-evaluated annually. For borrowers who have borrowed for graduate level education, after 25 years of on-time payments on the SAVE plan, the remaining federal loan balance will be forgiven.  SAVE is a qualifying payment plan for Public Service Loan Forgiveness.  Any accruing interest that is not covered by the monthly payment will be forgiven, so there is no negative amortization.

There are a couple of negatives attached to SAVE, however. First, there is a marriage penalty associated with this program. If the borrower is married, the spouse’s income is included in calculating the income based payment unless the borrower files taxes as married filiing separately.

The other area of concern associated with SAVE is tied to the forgiveness of the debt after 25 years of payments. The way the law reads at this time, this type of forgiveness is a taxable event, so the borrower would need to be prepared for increased tax liability in the year the forgiveness occurs.  There is currently a waiver on the taxability of this loan forgiveness effective through 2024, but it is set to expire at that point.