As a Certified College Planning Specialist (CCPS) it becomes one of my responsibilities to help clients with borrowing strategies. But there continues to be confusion regarding some of the student loan payoff plans currently available. As such I have become familiar with the Pay As You Earn (PAYE) Repayment plan. This is an income-based repayment plan and will cap the payment at 10% of a borrower’s monthly income and will ultimately forgive any remaining balance on your undergraduate student loans after 20 years of qualifying repayment.
One of the main problems that the PAYE Repayment Plan is that only recent borrowers over the last five years are able to apply for the plan. Meaning if you have received a disbursement of a Direct Loan on, or after Oct. 1, 2011, you can apply for the program. But if your loans are before this date, you are not eligible to apply for this plan. Additionally, a student will have had to show a partial financial hardship to become eligible.
So this leads to a question about the other majority of student who may have student loans that are older than Oct. 1, 2011. The government realized this predicament and introduced the new Revised Pay As You Earn Repayment Plan (REPAYE). This plan is meant for borrowers that graduated years ago, are in graduate school or have old, expensive loans.
The REPAYE Plan will allow Direct Loan borrowers to cap their monthly student loan payment to 10 percent of their monthly discretionary income and it does not matter when the borrower first obtained these loans. What the REPAYE plan did was improve on the current PAYE but also extending its protections to all student loan borrowers who have Direct Loans. This plan is less than a year old and was made available to borrowers on December 17, 2015.
Here is a breakdown of these new loans:
- Direct Subsidized and Unsubsidized Loans
- Direct PLUS loans made to students
- Direct Consolidation Loans that do not include (Direct or FFEL) PLUS loans made to parents
Monthly Payment and Time Frame
- Max payment is 10% of discretionary income. *Discretionary income is the difference between your adjusted gross income and 150 percent of the poverty guideline for your family size and state of residence (other conditions apply)
- As your income changes, your payments will change
- Forgiveness after 20 years for undergraduate loans, 25 for graduate loans
Quick Comparison with Other Income-Based Repayment Plans
- Loan payment capped at 10% regardless of when the loan was taken out
- REPAYE borrowers do not have to show a “financial hardship” like other payment plans may require
- If your monthly payment does not cover the interest, REPAYE will pay more of the remaining interest when compared to PAYE or IBR.
- REPAYE forgives remaining debt after 20 years for undergraduate students and 25 for graduate students.
- The difference for PSLF will not matter as your remaining balance will be cleared after 10 years of qualifying payments.
- Income taxes will be paid on any amount that is forgiven
How is REPAYE different from the other income-driven plans?
The REPAYE program is a good option for many people and the differences need to be pointed out between it and other income-driven plans.
Here are some of the differences:
There’s no income requirement to enter the plan.
This means that borrowers will not need to show any sort of financial hardship to qualify. Additionally the payment will be calculated at 10% of discretionary income, regardless of income. So income is not a factor, whether you are a low income or higher income student loan borrower. However, this can mean for high income borrowers that the payment will be higher than the standard payment plan.
Different repayment period for undergraduate and graduate borrowers.
REPAYE is different from other income-driven repayment plans when discussing the repayment period. If students only repay the loans they received for undergraduate studies, then the maximum repayment period is 20 years. However, if even one loan received is as a graduate or professional student, then the maximum repayment loan period (including loans received as undergrad) are for 25 years.
Married borrowers’ payments are calculated differently.
This is a big change especially for households where one spouse income is significantly higher than another. The other income-driven repayment plans use the combined income of student and spouse (if married) to set the payment amount, only if a joint federal income tax is filed. If the student and spouse filed separate returns, the payment amount is based only on the student’s income. With REPAYE will now use the combined income of the student and spouse to set the monthly payment amount, regardless of if the tax return was filed as a joint or separate return. This change could significantly change the monthly payment amount.
REPAYE payments are not capped at the 10-year standard payment amount
With REPAYE, there is not a cap on the monthly payment amount as it is based solely on 10% of one’s discretionary income. So the higher the income, the higher the payment. With PAYE and IBR plans, the student’s payment will not exceed what it would have been under the 10-year Standard Repayment plan, no matter what the respective income is. Now with REPAYE, the loan will be paid off faster if the student’s income increases.
REPAYE provides a more generous interest benefit
If the student’s payment does not cover all of their interest, REPAYE will pay more of the remaining interest than the PAYE or other IBR plans. This helps the student’s loan balance from ballooning.
Should you switch to the REPAYE Plan?
The big question at this point comes on if you should apply for a new student loan repayment plan. Each plan will have their own respective pros and cons. If you are currently having difficulty paying your student loan, you should explore the REPAYE plan. These plans were designed to help provide relief and ensuring that student loan payments will never exceed a certain percentage of your income. Not making payments on your student loans can have major consequences that you will want to avoid at all cost.
If you are currently on an Income-based repayment plan, now may be the time to explore which option would be better suited to you. REPAYE can lower you payments and allow you the cash flow to remain on track for your other goals. If you have an old plan you could potentially reduce your payment up to 1/3 from 15% to 10%.
Call us today to find out more and we can provide a student loan consultation. Whether you are a high or low income earner, there are considerations that ought to be discussed to find out what is best for you and your financial situation.