PAYE vs. SAVE: Which Plan Is Right for Me?

If you’re a federal student loan borrower, you have several options to lower your monthly payments through income-driven repayment (IDR) plans. These plans reduce monthly payments by capping them at a percentage of your discretionary income. Two options include the Pay As You Earn (PAYE) plan and the Saving on a Valuable Education (SAVE) plan. But which one is better?

In this guide, compare PAYE vs. SAVE to figure out which plan makes sense for your situation. 

PAYE vs. SAVE: What’s the difference? 

When choosing between PAYE and SAVE, consider the following terms, eligibility requirements, and benefits of each plan. 

PAYE overview

The PAYE plan is a type of income-driven repayment plan available to some federal loan borrowers. To qualify for the plan, borrowers need to have a partial financial hardship and meet the eligibility requirements of the plan. 

You must also be a “new borrower.” You are considered a new borrower if:

• You had no outstanding Direct Loans or FFEL program loans when you received these types of loans on or after Oct. 1, 2007.
• You received a Direct Loan disbursement for students (not parents) on or after Oct. 1, 2011. You may also be eligible if your application for a Direct Consolidation Loan was received on or after Oct. 1, 2011.

If you meet these conditions, you could qualify for monthly payments that are based on 10% of your discretionary income. The major point here is that PAYE has a cap so that your payments will never exceed what you might pay on the 10-year Standard Repayment plan. 

The PAYE plan has a flat repayment term for all borrowers of 20 years. After that period, any remaining balance will be forgiven. This repayment option is also available for borrowers interested in Public Service Loan Forgiveness (PSLF). If eligible for PSLF, loans will be forgiven after 10 years of qualifying payments. 

PAYE also offers limited interest subsidies. If you have Direct Subsidized Loans and have unpaid interest after making monthly payments, the government will pay the remaining interest for up to three straight years. The same is true for the subsidized portion of a Direct Consolidation Loan. After this period, this benefit isn’t available. The interest subsidy isn’t available for unsubsidized loans. 

SAVE overview 

The SAVE plan is the newest repayment option, replacing the Revised Pay As You Earn (REPAYE) plan. The SAVE plan significantly reduces costs for federal loan borrowers due to several major changes. 

The SAVE plan changes how payments are calculated. Currently, borrowers under the SAVE plan have their monthly payments calculated as 10% of their discretionary income. Undergraduate borrowers will see their payments lowered to 5% of their discretionary income beginning in July 2024. Graduate loan borrowers will pay 10% of their discretionary income, and those that have a mix of both will have payments based on a weighted average between 5% and 10%. 

Another way that SAVE helps reduce payments is by adjusting the income exemption from 150% to 225% of the poverty guideline. This means that more of your income is protected when your monthly payment amount is calculated. 

The most generous benefit of the SAVE plan is that unpaid interest is eliminated if you make your full scheduled payments. This means that your balance will not grow due to unpaid interest.  

Undergraduate borrowers can get their remaining loans forgiven after 20 years. Graduate loan borrowers have a longer repayment term of 25 years, then they can receive forgiveness. The SAVE plan is also available to borrowers pursuing PSLF, and may result in lower student loan payments. 

More SAVE benefits in 2024 

The SAVE plan was recently rolled out but has even more benefits slated for July 2024, including:

• Reduced payments: Undergraduate loan payments drop from 10% to 5% of income.
• Faster forgiveness: If your original principal balance was $12,000 or less, you may be eligible for forgiveness after 10 years.
• Consolidation benefits: If you consolidate your loans, your progress will still count toward student loan forgiveness. 
• Deferment and forbearance benefits: Some periods of deferment and forbearance may now count toward your forgiveness timeline. 
• Missed payment changes: If you miss a payment for 75 days or more and have offered access to your tax data, you’ll be automatically enrolled in an IDR plan. Out of the four plans, you’ll be enrolled in the plan that offers the lowest payment. 

When to choose PAYE 

If you’re considering PAYE vs. SAVE, here’s when PAYE may make more sense:

• If you’re a graduate loan borrower: Under PAYE, graduate borrowers will get forgiveness in 20 years, compared to 25 years under SAVE. 
• If you expect to earn a higher income later on: PAYE has a cap so that you don’t end up with monthly payments higher than the Standard Repayment plan amount. SAVE has no cap, so if you earn a higher income, it may not help you lower monthly costs. 

PAYE can be more advantageous in these situations. Let’s say your monthly payment is $300 per month as a graduate borrower. Under the SAVE plan, you’d make $18,000 in additional payments with a repayment term of 25 years, compared to PAYE’s 20 years. 

When to choose SAVE

When looking at PAYE vs. SAVE, here’s when the SAVE plan may win out: 

• You have a low income: If your annual earnings are $32,800 or less, you may qualify for $0 monthly payments. 
• You only have undergraduate loans: Being eligible for payments that are just 5% of your income is a huge bonus available to borrowers that only have undergrad loans. This could lead to significant savings. 
• You have a large family: The increased income exemption to 225% of the poverty line based on family size may help reduce payments even more. If you have a family of 3 and earn $50,000, you could qualify for a $0 payment. 

Not sure which plan is best for your situation? Use Federal Student Aid's loan simulator tool to compare your options. 

Check Out: 8 Ways To Lower Your Student Loan Payments

PAYE vs. SAVE FAQ

If you’re considering an income-driven repayment plan, here are the answers to some common questions about PAYE vs. SAVE. 

What’s the difference between PAYE and SAVE? 

The PAYE plan and SAVE plan are two income-driven repayment options available to federal loan borrowers. The PAYE and SAVE plans both calculate monthly payments using 10% of your discretionary income. However, starting in 2024, the SAVE plan will reduce it to 5% for borrowers with only undergraduate loans. 

The PAYE plan offers student loan forgiveness after 20 years, while SAVE offers forgiveness after 20 years for undergraduate borrowers and 25 years for graduate borrowers. PAYE also has a payment amount cap, while the SAVE plan does not.

Is PAYE or SAVE better?

Whether PAYE or SAVE is better for you will depend on your situation. SAVE may offer more affordable payments for low-income borrowers, while PAYE may be better for borrowers with graduate loans, as it offers a shorter repayment term. Use Federal Student Aid's loan simulator tool to compare your options. 

Can I switch from PAYE to SAVE?

Federal loan borrowers can switch from PAYE to SAVE. However, it’s important to evaluate which plan will be best in the long run. The PAYE plan is set to be phased out starting July 1, 2024, and won’t be available to switch back to. The good news is that if you do switch from PAYE to SAVE, any unpaid interest won’t be capitalized.