On Oct. 27, 2015, the Department of Education issued a regulation establishing a new income-driven repayment plan, the Revised Pay As You Earn (REPAYE) Plan. This new income-driven repayment plan will become available in mid-December, 2015. The REPAYE is an extension of the current Pay AS Your Earn (PAYE) program. The development of this new Income Driven Method is part of the commitment of the Obama Administration to help protect college borrowers and prevent student loan default. This has been a key priority of the Obama administration and has been part of his executive order signed last year.
Just as student debt has been increasing every year, more students decide to consolidate their student loans after college graduation. The Revised Pay As Your Earn (REPAYE) will expand regulations to allow five million more Direct loan borrowers. It will cap their monthly student loan payment amount at 10 percent of their annual income allocated each month.
The biggest change that REPAYE improves is the inclusion of a larger timeframe of borrowers who have federal student loans. PAYE has loan origination timeframe limitations. Under the PAYE method, participating students cannot have a federal loan debt balance prior to October 1, 2007 and need to have recent loans after October 1, 2011. REPAYE is not dependent on these specific dates for a borrower to be eligible to use this method. This is a major advantage.
REPAYE caps the monthly student loan payment amount to 10 percent of their annual adjusted income allocated on a monthly basis. For borrower who did not qualify for PAYE due to the debt timing this is a significant advantage. As default rates continue to rise, the new REPAYE method can help borrowers stay current with their repayments and reduce the financial stress on their budget.
Similar to PAYE, the REPAYE method is an eligible repayment method for Public Service Loan Forgiveness (PSLF) programs. Under the PSLF programs, a person’s federal student loan balance can be forgiven after 120 qualifying payments. PSLF has specific qualifications so please check with your federal loan servicer to see if your employer will qualify. Currently, there is not a cap on the maximum loan amount that can be forgiven. There is some discussion on Capitol Hill to limit this amount.
REPAYE Negative Issues
As with any of the Income Driven Student Loan Repayments (IDR), a person’s income tax is an important part of the decision process. Under the previous methods of Income Contingent Repayment (ICR), Income Based Repayment (IBR) and Pay As You Earn (PAYE), borrowers were allowed to file married and separate to lower their payment as much as possible. With the Revised Pay As You Earn (REPAYE), this option does not exist. If you file married and separate, this will not be an advantage since the spouse will be included in the income calculation. If you are divorced or separated, you will need to file as single or head of household to properly reflect your income and lower your payment. You should seek proper tax advice before making your decision.
The type of debt will have an impact on the other loan forgiveness advantages. After making 20 years of on time payments, the undergraduate federal student loan balance will be forgiven. If the federal loan money was borrowed for graduate school, the loan forgiveness has the same criteria but is forgiven after 25 years. The REPAYE is a great option to help people keep their loans current especially if their disposable income is low.
As with any of the IDR methods, negative amortization needs to be part of the decisions. Negative amortization is an increase in the principal balance of a loan and happens when the payments fail to cover the interest due. The end result is that the remaining amount of interest owed is added back to the loan’s principal. What does this mean to the borrower? The borrower ends up owing more money! Under REPAYE, if your payment does not cover all the accrued interest for the month, the interest accrual will be capped at 50% of the unpaid interest. This does not eliminate the negative amortization but it is at least an improvement.
The negative amortization can affect other personal financial goals or financing. Since major purchases like a car or home review your debt to income ratios, an increase in your debt could make this ratio unfavorable and limit your financing options.
As with all your finances, look at all the options available. Your life and financial circumstance will determine the plan that is most beneficial for you and your family. The hardest part of picking a loan repayment plan is that we do not have crystal balls and we do not know what will happen in the next 10, 20 or 25 years. Understanding your options as your life changes is important. Staying current should be a priority.