REPAYE – The Next Federal Repayment Plan

Michael Lux Blog, News, Student Loans 7 Comments

Editors Note: This article contains a brief summary of REPAYE.  Be sure to check out our in-depth look at REPAYE for a breakdown on how it works.

Last year, President Obama made plans to revise the PAYE Repayment Plan to include more borrowers.  Under his executive order, the Secretary of Education is to make the revised PAYE available to borrowers by the end of this year.

Currently, most students who borrowed federal loans prior to 2007 are not eligible for the PAYE repayment plan. Instead, the best income driven repayment plan available is the Income Based Repayment Plan (IBR).  Where PAYE requires borrowers to pay 10% of their discretionary income towards student loans, IBR requires 15%.  Forgiveness under PAYE is triggered after 20 years of on time payments, under IBR it takes 25 years.

The new PAYE, called Revised Pay As You Earn or REPAYE for short, is going through the rule making process and will likely be open for public comment later this year.

REPAYE Highlights

  • Payments under REPAYE will be capped at 10% of the borrowers discretionary income, regardless of the year they first took out student loans.  For many borrowers this would mean their monthly payment would drop by about a third.
  • Forgiveness under REPAYE will occur after 20 years for borrowers who only borrowed undergraduate loans.  Those who took out only graduate loans, or who took out both undergrad and graduate loans, will have to wait 25 years for forgiveness to kick in.
  • Loans forgiven under REPAYE, whether it is 20 or 25 years, will continue to be taxed.
  • If the borrowers monthly payment under REPAYE is less than the monthly interest, the excess interest will be reduced by 50%.  This should help people worried about negative amortization.
  • Payments made under REPAYE will count towards the 120 payments required for Public Service Student Loan Forgiveness.
  • Married persons on REPAYE will have their spouses income count towards their monthly payment, regardless of whether or not the filed their taxes jointly or separately.  This is a change from PAYE and IBR where separate filers income is not included.

The Big Picture on REPAYE

Expanding PAYE will help a number of borrowers get lower payments, and possibly get their student loans forgiven sooner.

From the borrower perspective, the big downside is the change in spouse income calculations.  In the past, couples could choose to file their taxes separately in order to count their incomes separately.  The tradeoff meant higher taxes in April, but lower student loan payments year round.  Under the REPAYE, this would not be an option.  When this portion of the rule is up for public comment, expect to see some opposition.  By keeping the rule in its current form, there is a real financial incentive for divorce, which would seem to be bad policy.

The bottom line here is that many borrowers can expect lower payments under REPAYE, but due to the marriage changes, it is not all good news for borrowers.