The Biden administration began implementing the Saving on a Valuable Education (SAVE) plan—a new income-driven repayment (IDR) plan for federal student loans—in 2023. Compared with prior IDR plans, the SAVE plan reduces payments and includes a new benefit that cancels unpaid monthly interest rather than allow a borrower’s balance to increase when required payments do not cover accruing interest. The SAVE plan is on hold because of pending legal challenges, but even if it is ultimately struck down, the interest waiver could be included in future IDR plans because it solves what many see as a flaw of IDR plans. It is therefore important for policymakers to know who benefits from this feature.

Key Takeaways

Using College Scorecard data on median earnings and federal student loan disbursements for the most popular fields of study across credential groups, the authors find the following:

• The typical borrower who completes an associate’s degree in liberal arts and sciences and general studies would see little benefit from the interest waiver. Because their incomes and debts are relatively low, borrowers would reach the loan forgiveness point under SAVE before they would have to repay the accrued and unpaid interest from early in their repayment term.
• Borrowers with bachelor’s degrees in nursing are likely to see modest to no benefits from the interest waiver, while borrowers who studied business would receive small benefits from the waiver. Borrowers with nursing degrees have initial earnings that are relatively high, and their monthly loan payments more than cover accruing interest. Those with business degrees have initial earnings that are low enough to benefit from the waiver but only for the first few years of repayment.
• Borrowers in professional fields are likely to receive the largest benefits from SAVE’s interest waiver. Graduates in fields such as medicine and law take on high debts, but their earnings often start out low relative to these debts before growing quickly enough to pay off the loan before receiving time-based forgiveness. A typical law graduate will have interest waived every month for the first six years of repayment under SAVE. Borrowers with professional degrees in medicine will have even more interest waived because their earnings start out lower than law graduates’ and their debts are much higher. The typical graduate with a degree in medicine will have more than $1,000 in interest waived each month during initial years of repayment under SAVE.

Implications

Allowing borrowers to make payments based on income always entails the possibility that the borrower’s loan balance increases, and the accruing interest could extend a borrower’s repayment term for many years. Though the SAVE plan is the first to fully protect borrowers from rising balances, the interest waiver does not provide much financial benefit to typical undergraduate borrowers. For undergraduate borrowers whose payments do not cover accruing interest, SAVE’s other provisions—such as lower total payments and earlier loan forgiveness—already protect them from having to pay any of the interest that accumulates during repayment. That means the interest waiver is mainly a benefit for graduate and professional borrowers.

Policymakers could consider a compromise between allowing unpaid interest to accrue on a loan repaid in IDR and forgiving all of it each month. Under this compromise approach, unpaid interest would be forgiven monthly but would be subject to a cap, with the amount being periodically adjusted for inflation and changes in loan limits and interest rates. 

Another alternative to the interest waiver in SAVE would restrict the monthly interest waiver to loans borrowed for undergraduate study. Policymakers historically have provided larger subsidies and more generous safety nets to undergraduates in part because graduate and professional borrowers tend to go on to higher-earning careers.

Whatever courts decide about the legality of SAVE, protecting borrowers from rising balances in IDR plans will continue to have broad appeal. Providing an open-ended interest waiver like in SAVE, however, may not be the optimal solution, and policymakers have options for how to provide benefits to low- and moderate-income borrowers in future IDR reforms.

Additional Resources

• Student Loan Repayment in the College Cost Reduction Act: Assessing How Benefits Change for Different Borrower Groups
• Income-Driven Repayment of Student Loans: Logic, History, and the Need for Reform
• Income-Driven Repayment: Options for Consideration as Part of the Department of Education’s 2021 Negotiated Rulemaking Process
• How Student Loan Balances Can Grow over Time
• Student Loan Repayment, 2009 to 2019