Is the “PAYE Now, SAVE Later” Strategy Right for You? Time is Running Out

In 2012, the Obama administration introduced the Pay As You Earn (PAYE) plan to help borrowers manage federal student loan payments. PAYE reduces monthly payments by adjusting the percentage of discretionary income and shortens the timeline for loan forgiveness.

Now, over a decade later, the Biden administration is phasing out PAYE for new borrowers starting July 1, 2024. The goal is to simplify the range of income-driven repayment (IDR) options, making the new Saving on a Valuable Education (SAVE) plan the go-to choice. This change won't affect those already on PAYE but poses a conundrum for borrowers who must choose between the new SAVE plan or the old PAYE plan for their optimal path to loan forgiveness.

Complicating matters further is the political uncertainty surrounding the future of the SAVE plan, which was introduced in August 2023. Despite its intent to ease borrowers’ monthly payments and expedite loan forgiveness, SAVE faces strong opposition from House Republicans — 18 Republican-led states have initiated federal lawsuits against the plan, and there’s widespread speculation that a Trump re-election could lead to SAVE’s elimination. 

Borrowers are left with a rather tricky forced choice: should they secure a spot on PAYE before the deadline of July 1, 2024, or gamble on the uncertain future of SAVE?

Key differences between PAYE and SAVE to consider

The PAYE and SAVE plans are income-driven repayment plans that calculate a monthly payment based on a percentage of your discretionary income. However, the two plans work a bit differently to get borrowers to loan forgiveness. 

Loan forgiveness timeline

PAYE requires 20 years of payments before a borrower can achieve loan forgiveness, while SAVE requires between 20 and 25 years of payments, depending on your mix of undergraduate loans vs. graduate loans. 

However, if you’re pursuing Public Service Loan Forgiveness (PSLF), your timeline is 10 years regardless of which IDR plan you’re on.

Payment calculation

PAYE calculates payments using 10% of a borrower’s discretionary income. In comparison, the SAVE plan can take 5% to 10% percent based on whether you have loans from undergrad or graduate school. 

Discretionary income calculation 

Additionally, each plan calculates discretionary income differently. (Discretionary income = adjusted gross income, or AGI, minus your household federal poverty line.) 

PAYE magnifies a borrower's federal poverty line deduction by 150%, but SAVE magnifies it by 225%. A bigger deduction means less of a borrower’s income is considered, often resulting in a lower monthly payment on SAVE than PAYE. 

Related: Discretionary Income Calculator

Payment caps 

PAYE plan has a built-in payment cap that limits a borrower’s payments. This cap comes in handy if you’re anticipating a significantly rising income, as it often leads to saving more money over time than SAVE. 

SAVE plan doesn’t have a cap. There’s no limit to how high a borrower’s payment can get on SAVE, making it potentially punitive for high-income student loan borrowers.

Interest subsidy 

The SAVE plan also comes with an interest subsidy that protects unpaid interest from accruing and increasing a borrower’s balance. PAYE doesn’t protect against interest capitalization.

Related: 5 Myths About the New SAVE Plan, Demystified

Eligibility requirements

The last significant difference between PAYE and SAVE is the eligibility requirements of the two plans. To qualify for PAYE, a borrower cannot have had a loan balance before October 1, 2007, and must have taken out federal loans after October 1, 2011. SAVE allows borrowers to take out loans at any time to qualify.

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The “PAYE now, SAVE later” strategy

One approach I've discussed with clients who qualify for both PAYE and SAVE but are deciding between the two plans is what I call the “PAYE now, SAVE later” strategy. Here’s how it works:

• Enroll in the PAYE plan before the July 1 deadline to secure access to it, even if it results in a slightly higher monthly payment amount than the SAVE plan. (Borrowers on PAYE before the deadline are grandfathered in past the deadline.)
• Continue making your monthly payments toward loan forgiveness and wait for the election results in November 2024. 

If President Biden is re-elected, the SAVE plan is potentially secure for at least another four years, and you could consider switching to SAVE if it’s projected to save you more money over time than PAYE.

Alternatively, if former President Trump is re-elected, the SAVE plan would likely be in jeopardy and could be replaced with a potentially less generous and forgiving IDR plan. However, because you’re already on PAYE, you’ve preserved your access to what would likely be the next best IDR plan in this scenario, allowing you to remain on PAYE.

Who this strategy makes the most sense for (and who it doesn’t)

The “PAYE now, SAVE later” makes the most sense for borrowers who qualify for PAYE, meaning those who didn’t take out loans or have a student loan balance before October 2007. Having loans before this period makes you ineligible for PAYE, so you couldn’t execute this repayment option. 

It wouldn’t make sense for borrowers who took out their first student loans after July 1, 2014, since they qualify for a plan called New Income-Based Repayment (New IBR), a very close alternative to PAYE. New IBR is not due to sunset; enrollment can happen anytime. 

This strategy also wouldn’t make sense if switching to either plan (PAYE or SAVE) is projected to increase your payment substantially and costs over time. 

Will you miss out on student loan forgiveness with PAYE?

While this decision is time-sensitive, it’s also complex. Borrowers should weigh their options carefully by crunching the numbers to confirm that this strategy is right for them. Want expert guidance? Book a meeting with a Student Loan Planner consultant before time runs out and get the best advice on how to apply this strategy to your situation.