Student Loan Repayment Plan – Part 6, RePAYE

We have covered PAYE and IBR and now we turn to Revised Pay As Your Earn or RePAYE 

1. Percentage of discretionary income owed over the course of the year: 10% of your discretionary income.  (If you don’t remember how to calculate discretionary income, check out the original post on IDR plans).  There is no cap on RePAYE, so even if 10% of your discretionary income is over the 10-year standard repayment plan, you will not be kicked out of the program.

2. Eligible loans

Any Direct Loan made to an eligible borrower is eligible for the RePAYE 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 loans or 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

 

Any borrower with eligible federal student loans can make payments under this plan.

4. Forgiveness opportunities

Much like under PAYE and IBR, there is an opportunity to have your balance forgiven, regardless of your employment.  This differs by the purpose of the loans.  If you took out loans for undergraduate study only, the balance will be forgiven in 20 years.  If you took out loans for graduate or professional school, the balance will be forgiven in 25 years.

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

5. How the plan handles spousal income

Regardless of whether you file separately or jointly, RePAYE considers you and your spouse’s income jointly.   This makes RePAYE distinct from IBR and PAYE where filing separately allows your servicer to look at you and your spouse’s income separately.

6. Interest benefits

RePAYE has a more substantial interest subsidy if you end up with a low enough payment that you do not pay off the interest that accrues ever month.  For subsidized loans, the government will pay the full amount of unpaid accruing interest for the first 3 years and 50% of the difference after that.  For unsubsidized loans, the government will pay 50% of the difference throughout the process.  By comparison, the IBR and PAYE programs do not have an interest benefit for unsubsidized loans.

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 Plan – Part 5, IBR

We began our deep dive into income-driven plans with PAYE.  Now we turn to Income Based Repayment or IBR.   Most notably, IBR is split into two different categories — IBR for new borrowers (those who had no federal loan balance when they took out loans after July 1, 2014) and IBR for everybody else — what I call IBR for old borrowers.

1. Percentage of discretionary income owed over the course of the year:

New borrowers: 10%

Old borrowers: 15%

(If you don’t remember how to calculate discretionary income, check out the original post on IDR plans)

2. Eligible loans

Any Direct Loan or FFEL made to an eligible borrower is eligible for the IBR 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 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

New Borrower: you’re considered a new borrower if you had no outstanding federal loan balance when you received a Direct Loan on or after July 1, 2014.

Old Borrower: Anybody else who has eligible loans, regardless of when you took them out.

4. Forgiveness opportunities

Much like under PAYE, there is an opportunity to have your balance forgiven, regardless of your employment.  This differs by the type of borrower.

New Borrower: 20 years

Old Borrower: 25 years

If you are eligible for Public Service Loan Forgiveness (for which IBR is a qualified plan), 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 IBR 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.

Changes to PSLF in the Omnibus Spending Bill

In late March 2018, Congress passed H.R. 1625, the Consolidated Appropriations Act, 2018 otherwise known as the omnibus spending bill.  Contained deep in the thousand-page document was a provision that could potentially change how Public Service Loan Forgiveness is handled.  If you want to follow along with me, the relevant text of the spending bill is available here by searching for “Sec. 315”.

Before we get into the weeds on what Congress actually did, you need to remember that to qualify for the elusive Public Service Loan Forgiveness a borrower must make 120 on-time payments on qualifying loans under a qualifying plan.

Only income-driven plans and the 10-year standard repayment plan qualify.  (Of course, if you made 10 years worth of payments on the 10-year standard plan, you would have no loans left to forgive).

This limitation left many borrowers unknowingly out of luck.  They made low monthly payments on, for instance, the graduated extended plan and didn’t realize they were not making qualifying payments towards their 120 for forgiveness.  In one high-profile case, a teacher made 120 payments under a graduated plan only to learn she was not eligible for forgiveness.

Some members of congress have been interested in changing this obvious loophole — after all, what’s the point in excluding graduated repayment plans rather than income-based plan? The payments can be similar.  If anything, borrowers on graduated plans can often end up paying back more.

Now the omnibus bill does something about it.  The loan provides $350 million

for borrowers of loans . . . who would qualify for loan cancellation . . . except some, or all, of the 120 required payments . . . do not qualify for purposes of the program because they were monthly payments made in accordance with graduated or extended repayment plans

Congress does put in some caveats.  I’ll translate each of these into English as we go:

Provided that the monthly payment made 12 months before the borrower applied for loan cancellation as described in the matter preceding this proviso and the most recent monthly payment made by the borrower at the time of such application were each not less than the monthly amount that would be calculated under, and for which the borrower would otherwise qualify for, clause (i) or (iv) of section 455(m)(1)(A) regarding income-based or income-contingent repayment plans, with exception for a borrower who would have otherwise been eligible under this section but demonstrates an unusual fluctuation of income over the past 5 years

In English: For the 12 months before an application for PSLF, the borrowers monthly payment must be at least as much as he or she would have paid under an eligible income-driven plan.  This is supposed to stop people with higher incomes from utilizing PSLF without making at least 1 years worth of payments at the amount required by an IDR plan

Provided further, That the total loan volume, including outstanding principal, fees, capitalized interest, or accrued interest, at application that is eligible for such loan cancellation by such borrowers shall not exceed $500,000,000:

The max cancellation under this program is $500,000 (there’s a comma rather than a decimal, nominally making the limit $500 million.  But this may be changed as a ministerial error during the codification process)

Provided further, That the Secretary shall develop and make available a simple method for borrowers to apply for loan cancellation under this section within 60 days of enactment of this Act

There should be an application process available within 60 days.  Once I find out about it I will post an update.

Provided further, That the Secretary shall provide loan cancellation under this section to eligible borrowers on a first-come, first-serve basis, based on the date of application and subject to both the limitation on total loan volume at application for such loan cancellation specified in the second proviso and the availability of appropriations under this section:

This one at least is straight forward and important.  The money is first-come-first-serve.  

Provided further, That no borrower may, for the same service, receive a reduction of loan obligations under both this section and section 428J, 428K, 428L, or 460 of such Act

These citations refer to loan forgiveness for teachers, loan forgiveness for service in areas of national need, loan repayment for civil legal assistance attorneys and a separate loan cancellation for teachers program, respectively.  So, no double dipping.

All things considered, this is great news for borrowers who were near the end of the process when they realized they’d made the wrong payment under the wrong plan.  Unfortunately because the money is first-come-first-served, there will need to be a more permanent solution before borrowers who are years away from PSLF-eligibility can be assured that their years on graduated plans will count.

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.

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.

Student Loan Repayment Plans – Part 3, Introduction to Income-Driven Plans

Parts 1 and 2 covered balance-driven repayment plans.  These are the backbone of the repayment options, and should be familiar to anybody who has figured out the repayments of another type of loan like a mortgage.
In recent years, the Federal Government has expanded the options of so-called income-driven repayment plans.  (We can’t call it the more normal-sounding income-based repayment plan, because income-based repayment plan is a specific repayment plan.  Income-driven repayment is the umbrella term to cover all the income-driven options.)
There are technically six types of income-driven repayment plans
  • Income-based repayment (IBR) (old borrowers)
  • Income-based repayment (IBR) (new borrowers)
  • Pay as you earn (PAYE)
  • Revised pay as you earn (REPAYE)
  • Income-contingent repayment (ICR)
  • Income-sensitive repayment (ISR)

However, ICR and ISR are rarely used for most borrowers, and everybody who is eligible for IBR for new borrowers can benefit from the PAYE or REPAYE plan.

So, how do these plans work? Well, the main idea is that these repayment plans make borrowers pay some percentage of their discretionary income each month towards their loans, regardless of how much money they owe.  So long as you meet certain requirements, the amount you pay on $50,000 worth of debt is the same as what you would pay on $250,000.

How do you calculate discretionary income? Your discretionary income is the amount of money you have left after subtracting 150% of the poverty guideline for your household size.  The poverty guidelines for 2018 are:

  • $12,140 (1 person household)
  • $16,460 (2 person household)
  • $20,780 (3 person household)
  • $25,100 (4 person household)
  • $29,420 (5 person household)

Which makes 150% of these guidelines:

  • $18,210 (1 person household)
  • $24,690 (2 person household)
  • $31,170 (3 person household)
  • $37,650 (4 person household)
  • $44,130 (5 person household)

So, let’s say you are on a payment plan that requires you to pay 10% of your discretionary income towards  your loans.  If you make $50,000 per year and are single, your discretionary income is $50,000 – $18,210, or $31,790.  10% of that is $3,179.  If you have to pay $3,179 over the course of the year, that makes your monthly payment $265 ($3,179 divided by 12 is $265).  So, no matter how much you owe, your monthly payment under a 10% income-driven repayment plan will be $265.

Okay, now that we have that building block in place, we will spend the next few parts taking a deeper dive and comparing the income-driven repayment plans.

These plans can differ in numerous ways:

1. Percentage of discretionary income owed
2. Eligible loans
3. Eligible borrowers
4. Forgiveness opportunities
5. How the plan handles spousal income
6. Interest benefits
 
We will take a look at each one of the plans in turn.

Student Loan Repayment Plans – Part 2, Graduated Balance-Driven Plans

Graduated Balance-Driven Plans

If you recall from Part 1, repayment options on federal loans are split into two categories: income-driven plans and balance-driven plans.  Balance-driven plans are the type where your monthly payment depends on how much you owe.  In Part 1, we talked about one kind of balance-driven plans — standard fixed plans where you pay the same amount for the term of the repayment plan.  For instance, you make the same payment every month for 10 years.  At the end of 10 years your loan is paid off.  Today we’ll talk about the other kind of balance-driven repayment plan, graduated plans. 

Under graduated plans, the amount you pay begins lower than under a standard plan, but increases every two years until it ends up higher than under the standard plan.  In the end you pay off the loan over the same number of years, but in the beginning you have lower payments.  Because the payments start off so low, you will end up paying more over the life of the loan than under a standard repayment plan. 
 
As with standard, fixed plans, there are 10-year and 25-year graduated plans for most federal loans.  For consolidated loans, the term depends on the amount you’ve taken out.  For consolidated borrowers whose loans entered repayment on or after July 1, 2006 the term of the graduated plans are as follows, 
  • If you owe less than $7,500, you may repay on a graduated 10-year plan
  • If you owe between $7,500 and $10,000, you may repay on a graduated 12-year plan
  • If you owe between $10,000 and $20,000, you may repay on a graduated 15-year plan
  • If you owe between $20,000 and $40,000, you may repay on a graduated 20-year plan
  • If you owe between $40,000 and $60,000, you may repay on a graduated 25-year plan
  • If you owe more than $60,000, you may repay on a graduated 30-year plan.
 
So, how much will your repayment be under a graduated plan?  We can’t know for sure until you apply through your servicer.  The formulas for calculating the graduated plans are not publicly available.  You can use the federal repayment estimator to get an estimate.  There is no guarantee that your servicer will match these numbers, however.  (Fun fact: I once e-mailed somebody who had done a lot of student loan calculator work, and he said that the formulas were not public but that he used the “Newton Raphson Method” to make his own estimates.  Personally I don’t think you should need to know advance combinatorics to determine your anticipated loan repayment, but that’s just me) 
 
According to the repayment estimator, if you have $100,000 in eligible student loan debt at 6% interest, a graduated 10-year plan will start at $635/month.  You will pay $635/month for the first two years, but every two years will increase until in the end you pay $1905/month.  You will pay $142,000 over the life of the loan under this plan.  
 
By comparison, a standard fixed 10-year plan would cost $1,110/month and you would pay $133,000 over the life of the loan. 
 
If you did an extended graduated plan, you would start at $500/month and get up to $970 at the end of the 25-year term.  In the end you would pay $210,000 to repay the same $100,000 student loan debt under this plan.  By comparison, a standard fixed 25-year plan would cost $644/month and cost $193,000 over the life of the loan. 
 
Graduated plans can be costly.  However, if you make too much to benefit from income-driven repayment plans, or if your loans do not qualify for an income-driven repayment plan, the extended graduated plan will start you at the lowest amount possible.