The new student loan repayment method called SAVE has an interesting loophole for current graduate and professional school students. Under the SAVE, unpaid interest is fully subsidized, resulting in no negative amortization. It becomes an interest-free loan if the borrower’s Adjusted Gross Income (AGI) is below the poverty level allowance level using their family size.
Graduate and Professional School students can elect to enter repayment while in school and not use the standard in-school deferment rule. Traditionally, the in-school deferment was used by students so that there would not be payments while in school, and the loans accrued interest while using the in-school deferment.
Now, with the new rules of SAVE, students with minimal income could use this SAVE loophole. They would have a 0 payment and have the normal interest accrual eliminated due to the SAVE interest subsidy rule. Hence, an interest-free loan.
Risk of SAVE Program Viability
The SAVE program was one of the Department of Ed’s (DOE) responses to the Supreme Court’s decision on the One-time forgiveness proposal. The Supreme Court based its decision on the authority of a Federal Agency making a program modification that added significant cost to the taxpayer without Congressional approval.
Another issue with the one-time forgiveness is it was an Executive Order and needed to follow the rules change requirements. On the other hand, SAVE did follow the required procedure of the rule change but ignored the program cost restriction.
Congress has submitted a program request to have the SAVE program reviewed under the Congressional Review Act. They did the same thing for the one-time forgiveness, but the legal challenges preceded the Congressional Review. The lawsuits went to the Supreme Court, so the Congressional Review did not happen. It appears that the SAVE program will most likely be processed through the Congressional Review Process.
Wharton is the only organization I know that made an updated cost projection for the SAVE program. It ranges from $390 billion to over $550 billion over ten years. The new SAVE repayment strategy does not include this additional cost of entering repayment early.
Based on the CBO and Wharton estimate projection, the SAVE program will cost more than the One-time forgiveness program.
Other Congressional Risks for the SAVE Program
Under the debt ceiling rules, Congress is limited to increases and must find trade-offs to new program costs via other budget reductions. The appropriation review Congress is seeking some budget cuts for the DOE. We have already seen these implemented in the loan servicers’ cutbacks.
Yet the DOE is seeking a significant increase to fund new programs like SAVE. The DOE budget could be another hurdle that SAVE may not be able to jump once Congress finalizes the budget bill for 2024.
Enrolling in SAVE While Still In School
Enrolling in SAVE is a new strategy that could be halted at any time, not just by Congress but by the schools. The DOE has not addressed this loophole or given further guidance. It puts the institution in a difficult situation, primarily impacting the internal financial aid process.
You need to have Grad PLUS loans. For the students, it is a two-step process. The student needs to enroll in the SAVE program on the StudentAid.gov site. Once completed, the student must contact the loan servicer and opt out of the in-school deferment. It is that simple.
Who the SAVE Loophole Will Not Work For
If you plan to pursue Public Service Loan Forgiveness (PSLF) and are still enrolled in school, this strategy does not need to be implemented. The negative amortization risk or accumulation of unpaid interest is eliminated when using PSLF. After completing the PSLF, the original loan and any unpaid interest are forgiven. The amount forgiven is tax-free, also.
Who should use the SAVE Loophole
Under the end-of-term loan forgiveness, the unpaid interest is also forgiven, but the forgiven amount is taxable under current IRS rules after December 31, 2025. By using the SAVE program, the unpaid interest never accumulates and reduces the tax exposure. This is why this strategy is so important.
The borrowers who are most likely not employed by a government agency or 501c3 are the prime users of this strategy. This would include dentists, pharmacists, veterinarians, lawyers, MBAs, and other post-graduate students who will not be employed by the proper employer to qualify for PSLF.
Forfeiting the Direct Stafford Graduate Loans Risk Strategy
Some students and schools promote taking only the Grad PLUS loans and forfeiting the Direct Stafford Graduate loans. The risk here is the Grad PLUS loans have a much higher fee, and the interest rate charge is 1% higher. If this is rescinded, the borrower will pay a lot more for the borrowed amount.
Conclusion of the SAVE Loophole Strategy
We are just starting to see some of the new SAVE program’s problems. Before making any changes, I would wait to see if it passes the Congressional review process and the 2024 appropriation bill. A few months of interest will not matter if it passes the upcoming Congressional hurdles.