When it comes to student loan repayment things get confusing very fast. Especially when it comes to income driven repayment plans. Therefore, I break down the primary differences between PAYE vs IBR vs SAVE in this article so you can compare easily compare them.
I’ve included suggestions for when you should possibly use PAYE vs IBR vs SAVE.
Summary Of Similarities
Before diving into the differences, let’s briefly summarize the similarities between PAYE, IBR and SAVE:
- All are income-driven student loan repayment plans;
- Your payments are capped at a percentage of your discretionary income;
- They only apply to Federal student loans, therefore if you want to use one of these plans do not refinance your Federal student loans;
- Each forgives the amount you owe after a given period of time;
- The forgiven amount is treated as regular income and taxed as such; and
- Married filing separately vs jointly will effect your overall monthly payment. I.e. If you file separate, your monthly payment is based on your income and Federal student loan debt instead of combined amounts.
PAYE vs IBR
PAYE and IBR are essentially the same thing. The only difference is which one you qualify and this is based on when you took your first Federal student loans.
You can only qualify for PAYE if you have no loans prior to 10/2007 and at least one loan after 10/2011.
Borrowers qualify for IBR if they borrowed for the first time after 7/2014.
Note: There are two IBR plans: New and Old IBR. In this article I’m only referencing New IBR. For more info on Old IBR check out our income-driven repayment plan guide.
The rest of this article will treat PAYE and IBR as the same thing and compare them to the new SAVE student loan repayment plan.
Difference #1: Length Of Repayment
PAYE and IBR are 20 years long for both undergrad and graduate loans. This means if you are on this plan for 20 years, all loans are forgiven and the remaining balance is taxed.
SAVE is 20 years long if you only have undergraduate loans. If any of your loans are from graduate school, the term is 25 years. This would apply to all your loans, i.e. your undergrad and graduate school loans would be on a 25 year term.
This is an extremely important when comparing PAYE, IBR, and SAVE because the extra 5 years can cost you a lot. I will discuss the cost later on in the article.
Difference #2: Interest Deferral
In our income-based repayment guide, we discuss how the difference between your interest charge and the required monthly payment is deferred onto the loan. Therefore, most borrowers will be deferring interest.
On PAYE and IBR, you defer 100% of the interest for unsubsidized loans. For subsidized loans, the government pays the deferred interest for you for 3 years. Thereafter, you defer 100% of the interest on subsidized loans as well.
On SAVE, the government pays 100% of the deferred interest on all Federal loans. Therefore, your loan balance doesn’t grow. We refer to this as the SAVE interest subsidy.
To illustrate the difference of PAYE vs SAVE, I’ll use the following example:
- Your interest charge is $700 per month,
- Your required monthly payment on both PAYE, IBR, or SAVE is $300 per month.
On PAYE and IBR you would differ $400 of interest per month ($700 – $300).
On SAVE you wouldn’t defer interest and your loan balance stays the same.
Difference #3: Capped Monthly Payments
On PAYE and IBR, your required monthly payments are capped. This cap is based on the original amount that you owed and what your payment would be on the Standard 10 year plan. Since the payments are capped, you must qualify for partial financial hardship to qualify.
For example, if when you entered repayment your required payment would have been $1,000 on a standard 10 year plan, then that is the highest your monthly payment would be on PAYE. This holds true regardless of how high your income goes up.
On SAVE there is no cap. Therefore, if your income increases significantly your monthly payments will as well.
Difference #4: Calculating The Cost Difference Between PAYE, IBR and SAVE
It is tricky to calculate the true cost difference between PAYE, IBR, and SAVE.
The reason is one is a 20 year repayment plan the other is a 25 year plan. (Note: This problem only exists for Grad students. For undergrads they are both 20 year plans.)
Borrowers are enticed to use SAVE because of the interest subsidy mentioned previously.
However, because SAVE is 5 years longer, it can become much more expensive when doing an “apple to apple” comparison.
Not only does it cost you in regards to having to make a payment for an extra 60 months, you could be investing that money instead in retirement accounts such as 401(k)s and Roth IRAs.
Therefore, you have to factor into the equation the fact that you’ll be giving up money for 60 months using SAVE that you’d otherwise be investing if you used PAYE or IBR.
Difference #5: Catch Up Payments
In the past, you had to make your payment on time in order to have it count towards the 20 or 25 year term. In addition, if you missed a payment there was no way to make it up.
The new SAVE student loan repayment plan will allow you to make up late or missed payments. This is a big deal for people that have been behind on payments in the past.
PAYE vs IBR vs SAVE: How To Decide Which One To Use
Choosing PAYE vs SAVE can be a hard decision to make.
For many PAYE is the better option. It has a shorter term and often cost less in the long-run.
From what we’ve seen at FitBUX, for those that benefit from SAVE, the size of the benefit doesn’t justify making five extra years of payments.
For example, a borrower may have about $50k more after 25 years using SAVE vs using PAYE. However, borrowers tell us being out of student loan debt 5 years earlier is more beneficial than $50k after 25 years.
The bottom line, you have to build your financial plan and simulate it to see what the difference is in long run so you can make an educated decision.
When Would SAVE Be Better?
There are three scenarios where it makes sense to use SAVE.
- If you are pursuing PSLF.
- If you are an undergrad and you don’t plan on pursuing education further.
- If you are paying off your loans.
You may be thinking how would using the SAVE student loan repayment plan be good if I’m paying off my loans?
The details haven’t been released yet by the Biden administration but this is the theory on how it would work.
You make your required monthly payment. Then wait for the government to forgive the accrued interest. Then make a big prepayment towards the highest interest rate loans.
Once we receive the final word on this whole process, we’ll be updating this section so be sure to bookmark this page.
Rapid Fire FAQ
Is SAVE or PAYE Better?
It depends primarily if you have a graduate degree or not. If you don’t, then SAVE would be the better option. If you do, it depends on a number of factors such as total owed and income levels.
What is the difference between SAVE & PAYE?
The two primary differences is that PAYE is 20 years for graduate students and doesn’t have an interest subsidy.
Can you switch from PAYE to SAVE?
Yes. However, the details haven’t been confirmed by the Biden Administration in regards to how to do this yet.
PAYE vs SAVE vs IBR Conclusion
As I mentioned previous, choosing PAYE vs SAVE vs IBR is a hard decision.
Its difficult because you have to consider the impact today, over the next few years, and long into the future. Think about it, this choice can have an impact on you 25 years from today!
If you need help deciding between PAYE, IBR and SAVE, FitBUX is here for you. Our financial planning software is designed specifically to help young professionals make this decision as well as many others.
Plus, you can always schedule a call with one of our student loan planners and get your questions answered.
