As news about the Department of Education’s newest repayment plan, Revised Pay As You Earn (REPAYE), spreads, many existing IBR borrowers are justifiably excited. Most borrowers will be able to reduce their payments by a third. Not only does REPAYE create lower payments for many borrowers, but it is also eligible for Public Service Student Loan Forgiveness (PSLF).
A recent reader email points out that while the creation of REPAYE is a good thing, the transition from IBR to REPAYE does create a few questions, especially for those seeking Public Service Loan Forgiveness.
FIRST, thank you. Thank you a million times over for operating this website. I’ve been navigating the Student Loan waters for years (Law grad) and still find myself getting a headache over it.
I have 2 questions regarding the PSLF and the new REPAYE program.
1. If I switch from my traditional IBR (2009) to REPAYE, will that reset the “clock” on my PSLF? I have 2 years down and would hate to lose them.
2. After the 120th payment on the PSLF, the debt is forgiven and it’s not counted as income. Does going with the REPAYE option change this at all?
Thank you again for running the site. You rock.
The PSLF “Clock”
Borrowers working towards Public Service Loan Forgiveness all have the same target… 120 certified payments. Given that it takes at least 10 years to get to that 120th payment, most people choose to look at it as a countdown.
The problem with treating PSLF as a clock is that it shifts your focus from the number that really matters, the 120 payments. As long as you make the 120 certified payments, the payment plan or the time on the plan does not matter.
That all being said, changing to a brand new repayment plan won’t necessarily be a smooth or easy process. At present, the loan servicers are being trained on the new procedures for REPAYE. The smart move here is to expect some complications.
To get proactive with your plan switch and PSLF goals, be sure to discuss your goals and concerns with your loan servicer. Make it clear that the important thing from your perspective is that you don’t miss a month of certified payments.
REPAYE tax considerations for PSLF
Our reader email is correct in stating that Public Service Loan Forgiveness is not treated as income (unlike the 25-year loan forgiveness under IBR and the 20-year loan forgiveness under PAYE).
Because loans forgiven under PSLF are not taxed as income, adding an eligible repayment plan to PSLF should not change that. The key detail is why it was discharged… not the exact repayment plan. As long as the loan is discharged for public service, there should not be any tax implications.
Where things get interesting from a tax perspective is for married couples. Under IBR and PAYE, couples could file their taxes separately in order to have a spouses income not increase their student loan payment. (Note: this is not an issue for couples who both have federal student loans). REPAYE is different. Even if you file your taxes separately, spousal income is still factored into your monthly payment.
For the many borrowers on IBR, REPAYE is an opportunity to get lower payments while still qualifying for the same programs.
Regardless of what your plan is, it is always essential to talk things over with your loan servicers to make sure you don’t overlook anything. If you do switch plans with an eye towards PSLF, be sure to get your new REPAYE payments certified as soon as possible. It is the best way to verify that you are on the right track.