TLDR
Several months ago we received an interesting question from Ben Braun, a medical student who’d attended one of our financial literacy workshops. He realized the new SAVE payment plan presented an interesting opportunity for those with existing or new Direct PLUS loans to effectively set the interest rate on these loans to 0%.
Ben is a 4th-year student at the Frank H. Netter MD School of Medicine at Quinnipiac University going into radiology. Here was the summary of his observation:
Direct Plus loans accumulate interest while in-school. But with the SAVE repayment plan, interest does NOT accumulate during repayment. And if one doesn’t have income, loan payments under SAVE are not required. What if one were to opt-out of in-school status on Direct PLUS loans and enter repayment voluntarily?
The net result would be:
no loan payments due, and
no interest would accumulate
For those with new Direct PLUS loans, this results in a savings of over 8%.
While there are a few potential downsides to this plan, we didn’t otherwise see a reason it couldn’t work. So Ben and a colleague of his got to work and…success! He offered to write about his experience and elaborate on the pros and cons of this strategy.
Disclaimers, etc
Doctored Money is not actively recommending this strategy to readers. But we feel it’s meaningful enough to pass along. We also made some edits to Ben’s original text.
Interest Bites
Do you like paying interest? Probably not. Federal Direct loans for undergraduate education are subsidized while you’re in school, meaning that you are not charged any interest until after you graduate. In contrast, Direct PLUS loans for graduate or professional school are unsubsidized, meaning interest accrues as soon as you take out the loan. And boy does it accrue. The rate is based on the 10-Year Treasury Note Index + 4.6% for your Direct PLUS Loans. For loans that have been disbursed on or after July 1, 2023, and before July 1, 2024 that comes out to a whopping 8.05%. Student loans accrue simple interest rather than compound interest, but Direct PLUS Loans will still double every approximately 12 years at this rate. However, 2023 brought about the creation of a new payment plan, “SAVE”, and this has presented an extremely interesting opportunity to save some interest on student loans
Enter the SAVE Repayment Plan
What is SAVE? The SAVE (Saving on A Valuable Education) Plan is a new income-based repayment plan that was originally proposed by President Biden in 2022 and is now in place. There are several key things that make SAVE superior to the plan it replaces (REPAYE) and other repayment plans:
There is an increased poverty-line deduction compared to two other income driven repayment plans such as REPAYE and PAYE, from 150% to 225%. This results in a decrease of one’s calculated discretionary income such that a single person with an Adjusted Gross Income less than $32,900 will not have to make any loan payments.
You can exclude your spouse’s income from yours when determining loan payments as long as you have filed your taxes separately (REPAYE did not allow this).
Monthly payments for graduate loans are calculated at 10% of one’s discretionary income while undergraduate loans are calculated at 5% per year. However, this calculation for undergraduate loans doesn’t start until July 2024.
Every borrower (except Parent PLUS borrowers) is eligible for SAVE (in contrast to PAYE and IBR which have income and other eligibility criteria).
Any accumulated interest that is not covered by your monthly payment is immediately forgiven. This is one of the most significant features of the new SAVE payment plan.
This last point is critical for the purpose of this post. It means that any interest assessed will never result in an increased loan balance, even if your monthly payment is insufficient to cover the interest.
And this fact introduces the main reason for this post: medical students can benefit too. All of these features of the SAVE plan only apply when one is IN repayment. But while in-school, loans are placed into various types of “in-school” deferment type statuses and no payment plan is associated with the loans.
What normally happens while in school? Interest accrues on these Direct PLUS loans at a rate of 8.05% (or whatever rate happens to be in place for your loans), and borrowers therefore graduate with a much larger balance then they originally borrowed.
But at least for Direct PLUS Loans only, (and not other types of Direct loans), one can REQUEST to be taken out of this in-school type deferment even while still IN school. This means your PLUS loans can enter repayment status immediately. If one does not have any income (e.g. a typical full time student), choosing the SAVE plan will lead to a calculated payment of $0. This payment is obviously insufficient to cover any of the accumulating interest, but the SAVE plan waives this interest and your loan balance will never go up. Your interest rate is effectively zero.
Ok, enough blathering, how do you actually do it?!
1) Contact your servicer and tell them you want to take your Direct PLUS Loans OUT of deferment and INTO repayment. You may be able to do this online but be prepared to call (you might spend hours on hold, but it’s worth it!). You’ll have to do this at every servicer if you have more than one.
2) If you do this online through your servicer website, they may allow you to apply for SAVE at the same time. If you do, make sure that you click the button that you want to pay immediately and waive the post-enrollment deferment period (during the post-enrollment period you won’t pay on your loans but you also won’t get the interest subsidy on SAVE which is why we’re trying to do this in the first place).
3) If you call them, you will have to wait for the change to be processed (once I was told 8 business days and another time I was told 28 business days). If they don’t listen to you and put your loans in a post-enrollment deferment after they’re in repayment status, you’ll need to call again and they will remove it. If they say they can’t do it, escalate to a supervisor.
4) You may want to apply for SAVE through the studentaid.gov website. There, they have a tracker that shows you the progress of your application. In my case, with EdFinancial Services, it was a form and other than telling me it was submitted on the website there was no change for weeks on my account nor evidence that it was actually submitted; I would use the studentaid.gov website to apply for SAVE after your loans are put into repayment status.
5) Continually check the status of your loans on your servicer website. If some of the loans are in repayment status and others are not, call in to change it. If some of the loans are on SAVE and others are not, call back. If they are wrongly put into the grace period, call back (are you sensing a theme here?). This takes some legwork.
Ignoring the hassle, it sounds great right? It is, but there are some caveats.
This is likely an unintended loophole and there’s no guarantee that it will work indefinitely.
You may have to repeat this process if your school updates your enrollment status as “in school”, but you can choose to decline this in-school deferment.
If you're certain you’ll qualify for PSLF, then saving interest in this way doesn’t matter. If you are 100% doing PSLF all that matters is how much you pay during your 10 years of qualifying repayment (using income-based repayment plans). And keep in mind that these SAVE “payments” during medical school don’t count because you won’t have eligible employment (unless you are also working at a 501(c)3 during school for >30 hours per week).
Once you make 60 payments on SAVE on or after 07/2024, you will no longer be able to switch into Income Based Repayment (IBR). The current version of IBR has a provision where your loan payments can never exceed a certain amount, based on your original loan principal. For certain borrowers with high future salaries or low-moderate loan balances, this can result in a situation where payments are higher under SAVE, and in some cases much higher. It’s important to consider whether waived interest while in school will be more beneficial than future, potentially smaller, payments on IBR.
Well, that’s all folks!
Ben Braun, Frank H. Netter MD School of Medicine at Quinnipiac University, Class of 2024
Pics or it didn’t happen
Ben provided us with screenshots which illustrate that interest indeed stopped accumulating on one of his Direct PLUS loans which he had successfully put into repayment under SAVE. As you can see, there was no interest accumulation between September 6 and September 15 (first two images). In contrast, a second Direct PLUS loan which he did not yet put under SAVE accumulated almost $25 interest in 9 days (next two images).
