What is REPAYE?
A new federal student loan program called, Revised Pay As You Earn (REPAYE) has been getting a lot of attention in the news. But it is difficult to separate all the new repayment plans between PAYE, IBR, ICR, and now REPAYE. Since REPAYE is the latest alphabet soup program to enter the student loan market, we will break it down.
What is REPAYE?
REPAYE is a revision of PAYE. According to Federal Student Aid, REPAYE will open spots for an additional five million federal direct student loan borrowers to take part in the PAYE plan, lowering their monthly payments.
REPAYE and PAYE are used interchangeably by many people, keep in mind they are not separate programs. Once again, REPAYE is a revision of PAYE. This is about to change again this month with the program being called revised PAYE.
So, what is PAYE?
PAYE (Pay As You Earn) is a student loan repayment plan that was introduced in December 2012. It was created and implanted as a way to help student borrowers lessen the burden of their student loan payments. When PAYE began, it offered many borrowers the lowest monthly payment amount of all repayment plans strictly based on income, family size and state of residency.
Under PAYE, your student loan repayment is 10 percent of your discretionary income. Here’s how to calculate your discretionary income:
Subtract 150 percent of the poverty level for your family size and state from your salary. The 2015 poverty guideline for a single person is $11,770 for all states besides Alaska and Hawaii. Again, that’s not counting interest, but you can see how much of a difference PAYE made for many student loan borrowers struggling to make their payments.
With PAYE, the less money you make, the lower the payment. If you encounter a financial hardship, like unemployment, and have little or no income, your payment will most likely be zero. Remember though, interest is still accruing.
The Reason for the New PAYE
Although PAYE helped a lot of student loan borrowers, only those who took out their first loan on or after July 1, 2014, were eligible. REPAYE allows any qualified borrowers, regardless of when they took out their loans, to participate.
Under PAYE, interest was still charged on the loan, even if your payment was zero. Let’s say you struggled to find a job after graduating and didn’t have an income. You have $25,000 in student loans with an average interest rate of six percent. Under PAYE, your monthly payment could be as low as $0 per month, but your total loan balance of $25,000 would increase to $27,100 over the course of a year because of interest. This still had borrowers worrying, and not happy with the program.
The REPAYE plan includes an interest subsidy for up to three years if your monthly payment isn’t able to keep up with the mounting interest. That means if your student loan payment doesn’t cover the interest, the Department of Education will pay the interest for three years to prevent it from adding too much to the overall cost of the loan. After that, the Department will pay for half the interest each month. Remember, that’s only if your payment doesn’t cover interest. Otherwise, you’ll still have to pay it. In hindsight, they probably should have considered this in the beginning of the student loan program, avoiding the student debt bubble we face as a country today.
REPAYE is reserved for borrowers with student loan debt of at least $10,000. As your income increases, so does your payment. Your spouse’s income also will be taken into account and you’ll need to provide income information each year.
The Pros and Cons
The most obvious benefit is you will have a payment you can afford. And after making regular, timely payments for 20 years, any student loan debt in the plan that remains can be forgiven.
However, forgiven student loan debt can be considered as income by the Internal Revenue Service and taxed. Plus, stretching payments out from the original 10-year term to 20 years will add to the total cost of the loan and cost you more money in the long run.
Even if you do qualify for REPAYE, look into other repayment options like Income-Based and Income-Contingent plans. Payments under other plans could be lower depending on your circumstances. There are a lot of student loan repayment options these days. Make sure to research all of them, and if you get stuck, call a loan counselor for help