PAYE vs. SAVE: Compare your options

As of April 2024, the Biden administration approved $7.4 billion in student loan forgiveness for over 270,000 borrowers through the SAVE income-driven repayment plan. However, recent legal challenges have thrown the future of SAVE into uncertainty, leaving many borrowers in limbo. With new enrollments into the PAYE Plan now closed as of July 1, 2024, borrowers are facing limited choices.

While PAYE may still offer financial benefits for those who applied before the cutoff, the SAVE Plan remains a viable option for low-income borrowers with undergraduate debt — if it survives the ongoing legal battle.

PAYE vs. SAVE: Key differences

The chart below gives a high-level overview of the key differences between PAYE and SAVE.

What is the PAYE Plan? 

The Pay As You Earn (PAYE) Plan is one of the income-driven repayment plans available to federal student loan borrowers. You must meet the eligibility requirements, such as having partial financial hardship and being a new borrower. Federal loans made to parents are not eligible for PAYE. 

Monthly payments are based on 10% of your discretionary income, and the repayment term is 20 years. After that period, any remaining loan balance will be forgiven. The PAYE Plan places a cap on your monthly payments, so they never go above the amount you’d pay on the 10-year Standard Repayment Plan. There’s also an interest subsidy available to subsidized loan borrowers for three consecutive years of repayment if monthly payments don’t cover all the accrued interest.

Before July 1, 2024, to qualify as a new borrower under the PAYE Pplan, you needed to have: 

• Taken out Direct Loans or FFEL program loans on or after Oct. 1, 2007
• Not have had an outstanding loan balance at that time
• Received a Direct Loan disbursement on or after Oct. 1, 2011

Related: 10 ways to pay off student loans fast

What is the SAVE Plan? 

The Saving on a Valuable Education (SAVE) Plan is another income-driven repayment plan available to nearly all federal Direct Loan borrowers (except parent PLUS borrowers). The Biden administration unveiled the SAVE Plan in the summer of 2023, and it replaced the Revised Pay As You Earn (REPAYE) Plan.

Under the SAVE Plan, monthly payments are set at 5% of your discretionary income if you have only undergraduate loans. Borrowers with both undergraduate and graduate loans will see a weighted average between 5% and 10% of their income as their payment rate.

The repayment term under SAVE is also flexible. If your original loan balance is $12,000 or less, you can expect forgiveness after 10 years of payments. For every additional $1,000 borrowed beyond $12,000, one more year of payments is required before reaching forgiveness. Undergraduate borrowers with significant debt may still qualify for forgiveness after 20 years, while graduate borrowers will need 25 years.

The SAVE Plan may offer lower payments for many borrowers. The calculation for discretionary income has been updated under the SAVE Plan, with an increased income exemption from 150% to 225% of the poverty line. Plus, there’s an interest subsidy available during the course of your repayment. The government will cover any unpaid interest that remains after you make each on-time monthly payment.

How the interest subsidy works 

Let’s say $70 in interest accrues each month and your scheduled monthly payment under the SAVE Plan is $47. If you make your scheduled monthly payment on time, you won’t be charged the remaining $23 in interest. 

Keep in mind that some borrowers may face higher payments since the SAVE Plan doesn’t have a payment cap. So if you have a high income, your calculated payment may exceed what you’d pay on the Standard Repayment Plan.

Related: 5 factors that increase your total student loan balance

When is SAVE a better option?

If you’re comparing PAYE vs. SAVE, there are some specific instances when SAVE might be the better option:

• You have low income: If you earn $32,800 or less annually, you may qualify for a $0 monthly payment on the SAVE Plan. SAVE raised the income exemption from 150% to 225% of the poverty line, resulting in lower payments. Additionally, low-income borrowers with monthly payments that don’t cover all the accrued monthly interest benefit the most from the interest subsidy. When you make your scheduled monthly payments on time, any interest that’s not covered will be paid for by the government.
• You have a large family: The SAVE Plan benefits borrowers with a large family size, which is considered in the IDR calculation. For example, borrowers with a family size of four or five can qualify for $0 payments with an income up to $60,000 per year.
• You only have undergraduate loans: Undergraduate loan borrowers will pay only 5% of their discretionary income for their monthly payments instead of 10%.
• Your original loan balance was low: If your original loan was for $12,000 or less, you’ll qualify for loan forgiveness after just 10 years of payments.

When is PAYE a better option?

Choosing the PAYE Plan may be a better option for federal student loan borrowers in the following situations: 

• You can qualify: Only borrowers with demonstrated partial financial hardship and who received a Direct Loan on or after Oct. 1, 2011 can benefit from PAYE. You have partial financial hardship if the annual amount you'd owe on the Standard 10-year Repayment Plan exceeds 10% of the difference between your adjusted gross income (AGI) and 150% of the poverty line for your family size and state. 
• You have graduate loans: All borrowers under PAYE benefit from a 20-year repayment term, compared to a maximum repayment period of 25 years for graduate loans under the SAVE Plan. 
• You expect your income to increase: PAYE comes with a cap on the amount you’ll pay each month. So if you start earning more money, your monthly payment will adjust accordingly, but it'll never surpass the Standard Repayment Plan amount. The SAVE Plan has no cap in place, so if your income goes up, you might risk paying more than the standard plan. 

Related: 5 factors that increase your total student loan balance

Can I switch from SAVE to PAYE?

Switching from SAVE to PAYE is no longer an option. As of July 1, 2024, new enrollments in the PAYE Plan have been closed. The U.S. Department of Education has streamlined income-driven repayment plans by limiting access to options like PAYE, directing most borrowers toward the SAVE Plan instead. 

If you applied for PAYE before the deadline but haven’t had your application processed yet, you may still be placed on the plan if approved. 

Compare PAYE and SAVE to other IDR plans

PAYE and SAVE are two out of the four income-driven repayment (IDR) plan options. Other plans include the Income-Based Repayment (IBR) Plan, and the Income-Contingent Repayment (ICR) Plan. 

Regardless of which plan you choose, all four IDR options are eligible for student loan forgiveness. This means if there is a remaining balance after you complete your repayment term, the rest will be forgiven. Compare all income-driven repayment plans below: