A recent change in federal student-loan repayment plans could offer physician borrowers savings in the short- and long-term.
A new income-driven repayment plan—Saving on a Valuable Education (SAVE)—was introduced and offers the potential to lower monthly payments and changes the way interest accrues.
What should physician borrowers know about the plan? Here are a few key takeaways.
Why is SAVE helpful to trainees?
The plan bases monthly payments on a smaller portion of a borrower’s adjusted gross income, ranging from 5% to 10%. For physicians still in training, this will go a long way toward reducing the burden of monthly student loan payments. Under the plan, a borrower making $60,000 would pay around $225 per month, according to the U.S. Department of Education website, studentaid.gov.
“Generally, for initial eligibility for SAVE, your calculated monthly payment should be less than what you would pay under the 10-year Standard Repayment Plan,” said Alyssa Schaefer, general manager and chief experience officer at Laurel Road. “Given that medical school graduates have a median average of $215,000 in student loan debt and residents earn an average annual salary of $64,700 , the SAVE plan could make more financial sense than the Standard Repayment Plan for young physicians.”
How does SAVE change interest accrual?
The SAVE Plan may be a game-changer for borrowers with high loan balances. In legacy income-driven repayment (IDR) plans, a borrower’s monthly payment amount (based on their income) was often not enough to cover the interest accumulating on the account over time. In these old income-driven repayment plans, any unpaid interest was added to the principal balance. This is why some borrowers' balances actually went up over time, even if they were making payments.
The SAVE plan improves how interest is factored into payments by eliminating the remaining interest when scheduled payments are made on time. This means if your monthly payment is lower than the accumulated interest you would normally have to pay, the remainder won’t be capitalized or added to your balance when you make your regular payments.
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How does SAVE affect loan forgiveness?
For physicians who are pursuing forgiveness via the Public Service Loan Forgiveness (PSLF) avenue—which aims to offer debt relief for physicians and others working for a nonprofit or government entity who make 120 qualifying student loan payments—they may benefit from the new SAVE plan.
But this repayment plan is not exclusive to loan forgiveness, meaning physicians working in for-profit organizations can also repay loans through SAVE. And experts say the SAVE plan still may make sense for many physicians.
“Even if you’re not pursuing PSLF by working for a nonprofit, the SAVE program could still help by making your monthly student loan payment amount more manageable for your budget and potentially saving you money in the long run,” Schaefer said.
If your payments increase with your income to a figure that makes less sense financially, borrowers can switch from SAVE to standard repayment or another IDR plan.
Are there any deadlines to keep in mind?
There are no hard deadlines associated with SAVE and borrowers who were enrolled in the program’s predecessor—REPAYE—will be automatically enrolled in SAVE.
However, some key elements of the program that can help physician borrowers will take effect this summer.
“Starting in July 2024, an important change to SAVE could significantly lower your monthly payments,” Schaefer said. “SAVE’s current calculation is based on 10% of your discretionary income, but as of July, this will be reduced to 5% for undergraduate loans and 10% for graduate loans, or a weighted average for borrowers with both.
“For physicians with a mix of undergrad and graduate loans—and especially for early career physicians—this could let you save with lower monthly payments and could help you qualify for a higher forgiveness amount at the end of your term,” she added.
You can switch into the SAVE plan by contacting your loan servicer. You can also schedule a free student loan consultation with a Laurel Road specialist to understand whether SAVE is the right plan for your unique financial situation.
