REPAYE Is Here: New Income Based Repayment Plan Caps Payments at 10 Percent of Discretionary Income
On October 27th, the Department of Education revised the rules of the Pay As You Earn program (PAYE) in an effort to ease the burden of student loan payments on borrowers. The new rules established the Revised Pay As You Earn Plan (REPAYE), and it just became available to borrowers effective December 17th.
Here’s the deal:
REPAYE will allow 5 million more Direct Loan borrowers to cap monthly loan payments at 10 percent of their monthly discretionary income – no matter when they took out the loans. You don’t have to demonstrate a financial hardship to qualify, as you do with Income Based Repayment and PAYE.
Moreover, REPAYE also bumps up the Day of Jubilee for undergraduate borrowers: Balances from loans incurred for undergraduate education for those enrolled in REPAYE will be forgiven after 20 years. Loans for graduate school will be forgiven after 25 years.
The Department of Education was cognizant of the problem of negative amortization, which is what happens when payments are not sufficient to keep up with the interest rate. The REPAYE Plan includes provisions designed to help prevent possible negative amortization.
The plan represents a substantial expansion of the Pay As You Earn program.
REPAYE means millions of borrowers currently enrolled in the Income Based Repayment Program (IBR) whose debt payments are capped at 15 percent of discretionary income may now qualify to lower their payments by a third by enrolling in the 10 percent REPAYE Plan.
For this purpose, the Department of Education defines your discretionary income as your adjusted gross income (AGI) minus 150 percent of the poverty guideline for your family size in your state. If your income is low enough, or your family size is big enough, you can reduce your repayment rate to zero.
What Does REPAYE Mean for Borrowers?
A few observations about REPAYE that may affect your planning: Under IBR and PAYE, you had the option of excluding your spouse’s income. However, under the new plan, married applicants must include their spouse’s income when calculating their discretionary income. This is true even if you and your spouse file separate income tax returns.
This means you may not want to automatically run to the Department of Education to apply. If you are currently in IBR and paying 15 percent of your discretionary income excluding your spouse’s income and you enroll in REPAYE, your minimum payment will now be 10 percent of your combined discretionary income, rather than 15 percent of your own personal income.
This could substantially increase your payments, depending on your situation.
If you like the REPAYE terms, but you have FFELP loans, which don’t qualify directly for REPAYE, you can do a consolidation, effectively converting your FFELP loans to direct loans (DLs), which do qualify.
Private loans, loans in default, Parent PLUS loans and any consolidation loans that contain Parent PLUS loans are not eligible for REPAYE.
REPAYE does not cap your payment if your income goes up. So if you expect a big increase in income down the road, you may want to stick with PAYE or IBR, which will cap your payment at the 10-year standard payment.
Finally, you have to reapply every year.
How to Apply