How Student Loan Payment Plans Work and What Changed Recently
What student loan payment reform means for your monthly bill
Student loan payment reform refers to changes in how federal student loans are structured, how much you pay each month, and what happens if you can't pay. The most significant recent change is the SAVE plan (Saving on a Valuable Education), which launched in 2023 and changes how your monthly payment is calculated based on your income. Under SAVE, many borrowers pay less per month than they did under older plans, and some pay nothing at all if their income is low enough. Other reforms have extended the pause on loan payments that began in 2020, changed how interest accrues, and altered the path to loan forgiveness.
These changes affect only federal student loans — loans made by the Department of Education. Private student loans follow their own rules and are not covered by these reforms. If you have federal loans, understanding which plan you're on and whether you should switch can save you hundreds of dollars a year.
Key Takeaways
- The SAVE plan calculates your monthly payment as a percentage of your discretionary income, which often results in lower payments than older income-driven plans.
- You must enroll in a payment plan yourself — your loans do not automatically move to SAVE or any other plan.
- If your income is very low, SAVE may result in a $0 monthly payment, though interest still accrues unless you make voluntary payments.
- Loan forgiveness timelines have changed: SAVE forgives remaining balances after 20 years for undergraduate loans and 25 years for graduate loans, down from 25 and 25 years under older plans.
- You can switch between income-driven plans at any time, and switching to SAVE is free through the Department of Education's website.
How the SAVE plan calculates your monthly payment
Under SAVE, your monthly payment is 5% of your discretionary income. Discretionary income is your gross income minus 225% of the federal poverty line for your household size. For 2024, that means a single person earning $32,000 a year would have discretionary income of roughly $7,000 (the difference between $32,000 and $25,000, which is 225% of the poverty line for one person). Five percent of $7,000 is $350 per year, or about $29 per month.
The poverty line changes each year, so your payment can go down even if your income stays the same. You must recertify your income annually — usually through the Federal Student Aid website — or your payment will be recalculated based on an estimate. If you don't recertify, your payment may jump to a standard 10-year repayment amount.
If your discretionary income is zero or negative (meaning your income falls below 225% of the poverty line), your payment is $0. You are not required to pay, but interest continues to accrue on unsubsidized loans. Making voluntary payments, even small ones, prevents interest from capitalizing — being added to your principal balance — when you eventually resume regular payments.
Comparing SAVE to older income-driven plans
Before SAVE, most borrowers used one of three income-driven plans: Income-Based Repayment (IBR), Pay As You Earn (PAYE), or Revised Pay As You Earn (REPAYE). All three calculated payment as a percentage of discretionary income, but the percentages and poverty-line multipliers were different.
| Plan | Payment as % of discretionary income | Poverty line multiplier | Forgiveness timeline |
|---|---|---|---|
| SAVE | 5% | 225% | 20 years (undergrad), 25 years (grad) |
| PAYE | 10% | 150% | 20 years |
| REPAYE | 10% | 150% | 25 years |
| IBR (newer version) | 10% | 150% | 20 years |
For most borrowers, SAVE results in a lower monthly payment because it uses both a lower percentage (5% instead of 10%) and a higher poverty-line multiplier (225% instead of 150%). The forgiveness timeline is also shorter for undergraduate loans. If you are currently on PAYE, REPAYE, or IBR, switching to SAVE usually means a smaller monthly bill.
How to switch to SAVE or enroll in a payment plan
You enroll in SAVE through the Federal Student Aid website at studentaid.gov. Log in with your FSA ID, select "Repayment Plans," and choose SAVE from the list. You will be asked to report your current income and family size. The Department of Education will use this information to calculate your payment.
If you have never been on an income-driven plan, you will need to provide proof of income. Acceptable documents include your most recent tax return, a recent pay stub, or a statement from your employer. If your income has changed significantly since your last tax return, you can report your current income instead and provide documentation of the change.
Once you enroll, your new payment plan takes effect within one to two billing cycles. Your loan servicer will send you a new payment schedule showing your monthly amount. If you are currently on another income-driven plan, you can switch to SAVE at any time without penalty. There is no fee to enroll or switch.
What happens to interest under SAVE
Interest on federal student loans continues to accrue under SAVE just as it does under other plans. If your monthly payment is $0 or does not cover the interest that accrues that month, the unpaid interest does not automatically capitalize (get added to your principal). This is different from older plans like REPAYE, where unpaid interest on unsubsidized loans capitalized every two years.
Under SAVE, unpaid interest capitalizes only when you leave the plan — for example, if you switch to a standard 10-year repayment plan or if your loans go into default. This means you can stay on SAVE with a $0 payment indefinitely without your balance growing due to interest capitalization, though the interest itself continues to accrue and will be owed eventually.
If you want to prevent interest from accruing at all, you must make payments that cover the monthly interest charge. For a $30,000 loan at 6% interest, that is roughly $150 per month. Making even small voluntary payments while on SAVE reduces the total amount you will owe over time.
Loan forgiveness under SAVE and what it means for taxes
Under SAVE, any remaining balance on your loans is forgiven after 20 years if all your loans are undergraduate loans, or 25 years if any of your loans are graduate or professional loans. This is a shorter timeline than older plans offered (25 years for most borrowers). The forgiveness applies only to the balance remaining after you have made payments for that period — it does not forgive loans that are in default or that you have not been making payments on.
When a loan balance is forgiven, the forgiven amount may be counted as taxable income in the year of forgiveness. This means you could owe federal income tax on the forgiven amount. For example, if $50,000 is forgiven, you might owe income tax on $50,000 of income that year. However, the Public Service Loan Forgiveness program (for borrowers who work in government or nonprofit jobs) forgives loans without creating a tax bill. Check with a tax professional about your specific situation before relying on forgiveness as part of your repayment plan.
What to do if you cannot afford your SAVE payment
If your payment under SAVE is still too high, you have several options. First, recertify your income if it has dropped — your payment will be recalculated based on your current earnings. Second, you can request a temporary forbearance or deferment, which pauses your payments for a set period (usually three to six months). During forbearance, interest continues to accrue; during deferment on subsidized loans, it does not.
Third, if you work in government, the military, or a nonprofit organization, you may be on track for Public Service Loan Forgiveness. Under PSLF, after 120 may have access to payments (roughly 10 years), your remaining balance is forgiven without a tax bill. You must be on an income-driven plan like SAVE to count payments toward PSLF.
If none of these options fit your situation, contact your loan servicer to discuss what is available. Do not simply stop paying — missed payments damage your credit and can lead to default, which has serious long-term consequences including wage garnishment and loss of future federal aid.
Frequently Asked Questions
Do my loans automatically move to SAVE?
No. You must enroll in SAVE yourself through studentaid.gov. Your loans will stay on whatever plan they are currently on until you change them. If you are not on any income-driven plan, your loans are on the standard 10-year repayment plan by default.
What if I have both federal and private student loans?
SAVE covers only federal loans. Private loans have their own terms set by the lender and are not affected by federal payment reform. You will need to contact your private loan servicer separately to discuss your options. Some private lenders offer income-driven plans, but they are not required to.
Can I switch back to a different plan if SAVE doesn't work for me?
Yes. You can switch between income-driven plans at any time, and you can also switch to the standard 10-year plan or other repayment options. There is no penalty for switching. Keep in mind that switching away from SAVE may increase your monthly payment and extend your repayment timeline.
What happens to my payment if I get married or have a child?
Your payment is based on your household size and income. If you marry, you can choose to file taxes jointly or separately; filing separately keeps your spouse's income off your SAVE calculation but may cost you more in taxes overall. If you have a child, your household size increases, which increases the poverty-line threshold and may lower your payment. Recertify your income after major life changes.
How do I know if Public Service Loan Forgiveness is right for me?
PSLF is available if you work full-time for a government agency, the military, or a nonprofit organization with 501(c)(3) status. You must be on an income-driven plan and make 120 may have access to payments over roughly 10 years. Use the PSLF Help Tool on studentaid.gov to check your employment history and see how many may have access to payments you have made so far.