Prosper Act, Part 2: Repayment Plans

As we discussed in Part 1, the Prosper Act is the biggest potential change to federal student loans in years.  The Prosper Act would create the Federal ONE loan program to replace the current Direct Loan program.  The Federal ONE program would drastically change the repayment plans available.

Currently Direct federal loans have a variety of repayment plans available — fixed and graduated balance-driven plans as well as a variety of income-driven plans like IBR, PAYE and REPAYE.

Under the Federal ONE program, there would be only 3 plans available:

  • The standard 10-year fixed repayment plan
  • One income-driven repayment plan
  • A fixed-rate repayment plan with an extended time after consolidation.

The Standard 10-year fixed repayment plan should be familiar to any federal borrower and is the backbone of the current repayment process.  Its terms are not changed under the Prosper Act.

However, the new income-driven plan has several substantial changes:

  • Borrowers would have to pay 15% of their discretionary income, an increase for many borrowers who qualify for current IDR plans that ask for 10% of their discretionary income.
  • The new minimum is $25/month, though this can be temporarily reduced to $5 under certain circumstances
  • There would be no forgiveness after 20 or 25 years, as currently exists under the IDR plans.  Instead, the balance would only be forgiven once the borrower had paid enough to cover the principal and interest the borrower would have paid if they’d entered the 10-year standard repayment plan
  • There is currently no public service loan forgiveness written into the plan

The extended fixed-rate repayment for consolidated loans allows for longer repayment terms under the following schedule.

< $7,500: 10 years
$7,500-$10,000: 12 years
$10,000-$20,000: 15 years
$20,000-$40,000: 20 years
$40,000-$60,000: 25 years
$60,000: 30 years

The decrease in options will certainly simplify the repayment landscape for Federal ONE loans. Notably it will not simplify the options for current Direct Loan borrowers who, as the bill is currently written, will be grandfathered into the Direct Loan plans. However, the more limited options remove affordable alternatives that decrease the cohort default rate.

Student Loan Repayment Plans – Part 4, PAYE

Repayment Options, Pt. 4: Pay as You Earn Income-Driven Plan

Now that you know all about income-driven plans and how to calculate discretionary income, we begin the deep dive into each of the available plans.  We begin with the PAYE plan — Pay As You Earn 

1. Percentage of discretionary income owed
Under the PAYE plan, 10% of your discretionary income is owed.  However, if 10% of your discretionary income is greater than what you would have paid under the 10-year Standard Repayment Plan, you are ineligible for PAYE plan.  This means you must show partial financial hardship to enroll in PAYE

2. Eligible loans

Any Direct Loan made to an eligible borrower is eligible for the PAYE Program except for: (1) a defaulted loan, (2) a Direct PLUS Loan or Federal PLUS Loan made to a parent borrower, (3) or a Direct Consolidation Loan or Federal Consolidation Loan that repaid a Direct PLUS Loan or Federal PLUS Loan made to a parent borrower.
Perkins and FFEL loans are eligible if consolidated into a Direct Loan.  However, take care not to consolidate a Parent loan along with them.  Consolidating a Parent loan taints the entire consolidation and makes it ineligible.
3. Eligible borrowers
To qualify for the PAYE Plan you must also be a new borrower as of Oct. 1, 2007, and must have received a disbursement of a Direct Loan on or after Oct. 1, 2011.  In other words, to be a new borrower you had to have no outstanding Direct Loan or FFEL Program loan balance as of October 1, 2007.

4. Forgiveness opportunities
Regardless of your employment, after 20 years on the PAYE plan, your remaining balance will be forgiven.  Usually this means 20 years of payments but, according to Studentaid.ed.gov, “periods of economic hardship deferment, periods of repayment under certain other repayment plans, and periods when your required payment is zero will count toward your total repayment period.”

If you are eligible for Public Service Loan Forgiveness (which PAYE is a qualified plan for), your loans could be forgiven after 120 payments or 10 years.

5. How the plan handles spousal income

If you and your spouse file taxes as married filing separately, your servicer will only count your income when calculating your monthly payment.  If you are married filing jointly, both of you and your spouses income will be used in calculating monthly payments. 

6. Interest benefits

If you have as Direct Subsidized loan or a consolidated loan with a subsidized portion, you may be eligible for some interest benefits for the first three years you are enrolled in the PAYE program.  In particular, if your monthly payments do not cover the accrued interest, the Department of Education will waive the remaining interest, meaning the interest will not accumulate.
Disclaimer: This blog post is not legal advice and does not create an attorney-client relationship between the reader and Maurer Law LLC.  Seek legal advice if you have particular questions about your student loans.