Written By Travis Hornsby, CFA®, CFP®
Can you make student loan IDR payments while enrolled in graduate or professional school? And can you strategically take out certain types of loans to get the maximum amount of credit towards forgiveness?
Amidst the confusion and chaos of borrowers entering repayment for the first time in years after the pandemic, many legitimate and questionable loopholes have come out of the woodwork. One of these is what we’ll call the “SAVE Student Loophole.”
The dream of many students is to make payments on the SAVE plan while still in school. Why? Because of the new interest subsidy provisions of SAVE, any interest above your required payment is covered. Since most students would have low or no income, most would qualify for a payment of $0 a month with all of the interest covered.
Many claim this is a back door way to turn graduate school loans into completely subsidized loans.
Furthermore, others are advocating for turning down Stafford loans and demanding their program only provide them with Grad PLUS loans, to take full advantage of this strategy.
There are real opportunities, risks, and problems with the SAVE Student Loophole. We’ll cover them here and discuss how you might be able to “SAVE” money (no pun intended).
Why only grad and professional students can make payments while enrolled in school
This loophole would only apply to those enrolled in a graduate or professional program.
Why?
Stafford loans are the only federal borrowing option for undergraduate borrowers. This type of loan has a strict limit and has a statutory requirement to have deferment while a student is enrolled.
Would this work for Parent PLUS? No, because those loans are expressly prohibited from using SAVE.
Graduate and professional programs allow students to take out far more Stafford loans. The limit is $20,500 per academic year, and up to $40,500 per year for certain programs, like medical school.
The key distinction that makes graduate funding unique is that any loan amount above the Stafford limit can be funded with Grad PLUS up to the cost of attendance.
And PLUS loans have no statutory requirement to use deferment for the entire length of a student’s study, unlike with Stafford loans.
Those hoping to push the SAVE Student Loophole to the max are seeking to borrow zero Stafford loans, take out all Grad PLUS loans, and then enter repayment into the SAVE plan right after borrowing in order to get maximal subsidies and credit towards IDR forgiveness.
It’s not that simple. We’ll discuss why shortly.
Why have students not used this “In School IDR loophole” before?
Pre-Covid, some financial aid offices used to recommend students sign up for REPAYE on their PLUS loans while enrolled in school in the past.
This would get students a 50% subsidy on the Grad PLUS portion of their debt. The Stafford loans would have to remain in deferment.
The problem with this approach was that any time the school reported a student as being enrolled, it would switch the student back into in-school deferment. So a student might think that they did what they needed to do, but the student would have to repeatedly reach out to the servicer in order to request a waiver on the in-school deferment.
If the student ran into any uninformed customer service agent, which many of them are, the student would hit a dead end.
Additionally, after consolidating their loans together, the payment count would reset pre-COVID. If the student was going for forgiveness anyway, the strategy was moot, since the only benefit would be having a slightly lower interest balance and no additional credit towards forgiveness.
So, essentially, pre-COVID, getting your loans out of in school deferment and into REPAYE (the predecessor plan to SAVE) just wasn’t worth all the effort.
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Should students try to waive in-school deferment, now that SAVE is an option?
The subsidy under SAVE is 100% of interest that your payment doesn’t cover. The REPAYE plan subsidy was only 50% of the interest your payment didn’t cover.
Additionally, consolidation rules have changed. Instead of having your payment count reset after a consolidation, the payment count post-consolidation is now the weighted average of whatever IDR payment credit you have on the loans being consolidated.
In other words, the incentives of getting your loans into an IDR plan while still in school have soared because of the creation of the SAVE plan.
Let’s look at a scenario of a student enrolled in medical school who borrows $40,500 of Stafford loans and $40,000 of Grad PLUS loans a year, to see how this could work.
Example of signing up for SAVE in grad school
Remember that the Stafford loans would be in deferment during all four years of med school in this example.
A precise analysis would count four years of interest subsidies on the first semester of borrowing, three and a half years of subsidies on the second semester of borrowing, etc., but only on the PLUS loan portion.
And for IDR credit, year one would have a weighted average of 3.75 years of IDR credit on the PLUS loans only, and zero years of credit on the Stafford loans.
Here’s the full picture in this med student example below.
| Year | Stafford | Grad PLUS | Interest subsidy (on PLUS loans) | Years of IDR credit (on PLUS loans) |
|---|---|---|---|---|
| Year 1 | $40,500 | $40,000 | $12,000 | 3.75 |
| Year 2 | $40,500 | $40,000 | $8,800 | 2.75 |
| Year 3 | $40,500 | $40,000 | $5,600 | 1.75 |
| Year 4 | $40,500 | $40,000 | $2,400 | 0.75 |
What happens after a consolidation?
Remember that the new rules on consolidations after the student loan pause allow you to use weighted average for IDR credit.
So a student would consolidate the loan balance after graduating, and the weighted average payment count would include all the Grad PLUS credit mixed in with zero credit from the Stafford loans.
That’s roughly 1.1 years’ worth of IDR credit.
But what if you could take out only Grad PLUS?
Risks of taking out only Grad PLUS loans to get the maximum SAVE benefits?
This strategy is one that financial aid administrators are getting asked about but are rightfully being very cautious in recommending.
The idea goes like this: refuse the school’s offer of Stafford loans and request that all your aid be distributed as Grad PLUS.
Since Grad PLUS loans have no requirement to remain in deferment, you can sign up for SAVE on your entire balance, instead of the PLUS balance only.
There are numerous risks and problems with this approach. We’ll cover a few below.
Risk of a new administration with the difference in interest costs on PLUS
First, note that Grad PLUS has an origination fee of roughly 4.2% vs about 1% for Stafford. Grad PLUS costs about 8% interest a year vs. 7% for Stafford.
There’s no guarantee that the SAVE plan will stick around. In fact, if a Republican wins in 2024, given the precedent of removing borrowers by force from the REPAYE plan that President Biden created, a Republican administration might seek to undo the SAVE plan and put everyone on it back into REPAYE.
Risk that your school loses access to the PLUS program
This is the very serious risk that any aid professional who encourages this strategy faces. The school’s risk is that if the Department of Ed noticed that a very high proportion of revenue the school earns is coming from PLUS loans, there’s a small but not insignificant chance that PLUS loans could get restricted at the school.
One borrower reported this occurring at a health sciences university, where they lost access to PLUS loans and were restricted to private borrowing.
If such a thing occurred, many students would lose five or six figures due to needing to borrow loans that could not be forgiven (private).
Alternatively, students could transfer, but that might set back their schedule for graduation.
This risk is the most serious with this strategy.
Risk that this accelerates the end of PLUS loans
This blog article discussed strategies to go to college for free using Parent PLUS and the double consolidation loophole.
A few months later, the administration instituted a rule that would end this practice starting in 2025.
PLUS loans are obviously a troubled program. It’s the fastest growing type of debt. And in the absence of PLUS loans, many graduate and professional programs would go out of business, because private lenders would refuse to provide financing for degrees with high debt-to-income ratios.
So, pretend you go to a high cost law, vet med, physical therapy program, etc..
If you’re a financial aid administrator suggesting this strategy and it accelerates the end of the PLUS program, it could lead to a school closure.
But there’s a more conservative way to get benefits of signing up for SAVE while in school that likely minimizes the risks discussed above.
Take out the normal loan awarded, but request every semester to use SAVE on PLUS loans
A student does not need to take any action with this approach, except to request to enter repayment every semester on their PLUS loans.
The risk to the school is minimal since the student is taking out the balance anyway. In fact, by producing a lower debt amount at graduation, this might even enhance a school’s debt-to-income ratio statistics.
The work required with this approach
The issue with doing this is that you’ll have to call or message your servicer consistently throughout school to request to enter repayment, and you’ll be fighting the automated deferment that all of your PLUS loans will continue to be placed into at each moment the school reports enrollment statistics.
Will students benefit from the work involved?
Strong payoff from signing up for IDR in grad school for everyone except for PSLF borrowers and those with small balances
If you’re going for PSLF, the balance doesn’t matter, because it all gets forgiven tax-free anyway.
If you’re trying to pay off your balance though, the above example of interest subsidies suggests this strategy could lower your entire balance at graduation by about 10%.
So a med student borrowing $300,000 might expect to leave with $30,000 less in interest if they got all of their Grad PLUS loans into the SAVE plan on-time every semester, by cancelling their in-school deferment.
That $30,000 is definitely worth the time it takes to request the in-school deferment waiver from your servicer each semester. But it’s a strategy that only high information borrowers will want to pursue.
Additionally, those going for 20 and 25 year forgiveness could get about one year towards the time needed for the loans to be forgiven, thanks to the new weighted average payment credit rules post-consolidation.
Also note that this strategy only benefits those who need to take out large grad school balances. If you’re only taking out Stafford loans because your financial need is minimal, you won’t be able to get subsidies, because this strategy only applies with PLUS loans.
Use the SAVE Student Loophole if you want, but focus on the big picture
It’s very easy to get lost in the minutiae of student loans but miss the forest for the trees.
Some borrowers could benefit significantly from what looks like a real loophole for signing up for the SAVE plan while in grad school on any PLUS loans.
However, servicers are notoriously difficult to work with, and using this loophole will require constant engagement on the part of the student, which is unlikely to occur for most borrowers.
Furthermore, students in fields like medicine might see a vast majority of their graduates become eligible for PSLF anyway, making this strategy useless for most students in this type of population.
The strongest use case would be for dental, vet med, physical therapy, chiropractic, law and other programs with a relatively low incidence of PSLF use.
If you want to see the big picture customized for your own student loan situation, hire our top rated student loan experts to make a custom plan for you.
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