The Revised Pay As You Earn Plan, nicknamed the REPAYE plan, is a bit of a mixed bag for married couples. For some, it is a considerable benefit, potentially saving hundreds of dollars each month. For others, it might seem like a good deal, but it could be a huge mistake.
Today we will discuss the pros and cons of REPAYE as it applies to married couples.
In the student loan world, there are two types of couples. The first type is mixed, where one spouse has federal student loans and the other does not. The second type is couples where both spouses have federal student loans.
The distinction between these two types of couples will often determine whether or not REPAYE is a suitable repayment plan choice.
REPAYE Advantages for Married Couples
It is also worth noting that there are a couple of advantages unique to the Revised Pay As You Earn Plan.
REPAYE Interest Subsidy – Because IDR payments are calculated based upon what a borrower owes rather than what a borrower can afford, your student loans may charge more interest than your monthly payment. The REPAYE Interest Subsidy is helpful because it reduces the growth of your student loan balance.
REPAYE Eligibility – REPAYE isn’t the only repayment plan that charges 10% of a borrower’s discretionary income. The Pay As You Earn (PAYE) plan and IBR for new borrowers also charge 10% of a borrower’s discretionary income. Unfortuantely, these plans are only open to newer borrowers. PAYE is only open to borrowers who took out their first student loan after October 1, 2007, and IBR for New Borrowers is only available to those who took out their first loan after July 1, 2014.
Most couples who opt for REPAYE are targeting one of these two advantages.
REPAYE when both spouses have student debt
If both spouses have large amounts of federal student debt, REPAYE can be a great deal.
Suppose that both of you have a combined discretionary income of $100,000. If you both enrolled in Income-Based Repayment (IBR), your student loan payments for the year would add up to $15,000 ($1250 per month). By switching to REPAYE, your student loan payments for a year drop down to $10,000 ($833 per month). This is because IBR requires 15% of your discretionary income, while REPAYE only requires 10%.
The calculation for each individual payment gets a little tricky.
To start, the total combined income is first calculated. Using this number, the total combined payment is determined. Who pays what is based upon your proportional loan balance. If you have equal loan balances, you will both have the same amount. If you have a balance twice as big as your spouse’s, your monthly payment will be twice as big. Regardless of who pays more towards their loans, the combined payments will always add up to 10% of your combined discretionary income.
If one of you enrolls in REPAYE and the other stays on the standard repayment plan, things get expensive quickly. Instead of paying 10% of your discretionary income as a couple, you will pay 10% of your discretionary income plus the standard payment. To minimize monthly spending, both partners should be on the REPAYE plan.
Important Note About Double Payments: Many couples fear that if they both sign up for an income-driven repayment plan that instead of each paying 10% of their discretionary income, they will pay 20%. This is not the case. The Code of Federal Regulations explains that couples will not have to make “double payments” because they are married.
REPAYE when only one spouse has federal student debt
This is a situation where REPAYE falls behind other repayment plans. Unlike IBR and PAYE, REPAYE almost always includes spousal income.
On plans like Income-Based Repayment (IBR) and Pay As You Earn (PAYE), people can opt to file their taxes separately to avoid having to count spousal income. On REPAYE, even if you file your taxes separately, the combined income is still used to determine the payments.
Because of this difference, the math for determining the best plan gets a little tricky. Couples need to look at the cost of filing separately and compare it to the added student loan expenses.
There are two options to choose from:
Option One: File your taxes separately and sign up for IBR. The benefit here is that your spouse’s income is not included in calculating your student loan payment. The downside is that your tax bill will be higher, and you will be paying 15% of your discretionary income instead of 10%.
Option Two: File your taxes together and sign up for REPAYE. The good news here is a lower tax bill and the monthly payment is 10% of your discretionary income. The downside is that it includes your spouse’s income for determining the payment.
The Department of Education’s Student Laon Simulator is a great resource for comparing plans and estimating how different tax strategies impact monthly payments.
The challenge for borrowers is to figure out which route saves more money in the long run. This requires some careful tax planning and an honest assessment of your respective projected earnings. It is tricky, but most couples can do it.
Once you know the plan you want, it is time to contact your loan servicer.
Working with your loan servicer
At the point where borrowers are weighing tax strategy before determining the best student loan plan, things have probably gotten a bit too complicated for the loan servicer’s customer service representative to offer much insight.
In most cases, REPAYE enrollment can be done using the Department of Education’s Website, and the process is automated. The task for borrowers is to make sure that there isn’t a calculation error. One handy tool is the Federal Loan Simulator. The Loan Simulator allows borrowers to use their actual loans to see calculations for various monthly payments.
When seeking help, borrowers should keep in mind that not all servicer representatives are at the same skill level. If there is an error, asking the customer service representative to explain why the loan simulator was giving a lower estimated payment will often help them identify a mistake on their end. This is one of those cases when hanging up and calling again may lead to better help.
REPAYE can be great for some married couples but an expensive mistake for others.
The key is to understand the different factors that determine your payments and to put together a long-term plan that works.
Remember, the best student loan plan isn’t necessarily the one that results in the lowest payment for the next month or the next year. It is the one that eliminates the debt in an efficient, workable approach.