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A New Student Loan REPAYE-ment Plan

You would be forgiven if you missed the news about a new Federal Student Loan repayment plan that went into effect mid-December last year.  After all, for some that time is finals week, others it’s Christmas break, there is shopping and family gatherings and all sorts of other things begging for our attention.  Hopefully, nearly a month and a half into 2016, you are back into the normal groove and feeling receptive toward some newish and potentially helpful student loan news.

December 17th 2015 was the date that a new repayment plan went into effect for federal student loan borrowers.  The new plan is called REPAYE, and can be considered a close relative to the existing PAYE income driven payment plan.  Each plan share similarities, but also have major differences which should be taken into consideration when trying to decide between the two.
Pay as You Earn vs. Revised Pay as You Earn
Let’s begin with the similarities.  They are both income driven plans, meaning, your income and household size are used to determine how much you will have to pay each month.  Income is evaluated on a yearly basis to determine if a new payment amount should be used.

They can be used to repay Direct Subsidized & Unsubsidized, Direct PLUS loans made to students, and Direct Consolidation Loans that do not contain PLUS loans to parents.  If you’re not sure what type of loans you have, visit www.NSLDS.ed.gov, select the “Financial Aid Review”, and login to review what types of loans you have.

If the loans are not repaid in the maximum repayment periods, a borrower may be held liable for the tax consequences of unpaid debt due to loan forgiveness, but both repayment plans are eligible for use when working towards the 10 year Public Service Loan Forgiveness (PSLF) plan.

Now let’s explore the differences between the two.
Firstly, the REPAYE plan does not require a financial hardship.  Anyone can apply and take advantage of the benefits.  Borrowers also do not have to be “new borrowers”, a classification based on the date the first Direct loans were received.  It doesn’t matter when your loans were received, you are eligible for the REPAYE plan.

Undergraduate and Graduate borrowers also get different maximum repayment periods.  Undergraduate, like with the PAYE plan, can take as long as 20 years to repay the loans.  Graduate borrowers however, get an additional 5 years, bringing the maximum repayment period up to 25 years.  As mentioned before, failure to pay off the loans in the maximum repayment periods will result in loan “forgiveness”, and taxation on the forgiven amount.

In the REPAYE plan, the “amount of your payment is 10% of your discretionary income” (see below for an explanation of discretionary income).  This is different from the PAYE plan, where the “maximum amount of your payment is 10% of your discretionary income”.  You may have noticed the lack of the word “maximum” in the REPAYE plan description.  Good on you, because that’s one of the key differences between these two plans.  Under the older PAYE plan your payments are capped, and you would never have a payment larger than the amount of a payment for the 10 year Standard Repayment Plan, no matter how much your income increased.  Under the REPAYE plan, there is no such cap.  Meaning, if your income increases significantly over the life of the loan (20-25 years), your payments will continue to grow.  The upside to that is, as you approach the end of the repayment period, you will likely have less debt to be forgiven than under the PAYE plan, and therefore a smaller tax liability.

Another difference, and arguably a disadvantage for married borrowers, is that REPAYE considers spousal income regardless if taxes are filed jointly or separately.  Since spousal income is always taken into consideration, this could increase a borrowers overall discretionary income, increasing the monthly payment amount.

And there you have it, a brief breakdown of the new REPAYE Federal Student Loan Repayment Plan, and how it differs from its cousin the PAYE plan.  I would encourage you to continue reading below for a quick breakdown on how discretionary income is calculated.  For more information about Income Driven Plans, please visit:
https://studentaid.ed.gov/sa/repay-loans/understand/plans

https://studentaid.ed.gov/sa/sites/default/files/income-driven-repayment-q-and-a.pdf
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What is discretionary income you ask?  It’s your Adjusted Gross Income (AGI – Found on your 1040 tax form) minus, 1.5 times the Federal Poverty Level for your Household size.

Household Size Poverty Level
1 $11,880
2 $16,020
3 $20,160
4 $24,300

Source: https://aspe.hhs.gov/poverty-guidelines

So, if your AGI is $18,000, and you are a single person without dependents (household size of 1), your discretionary income formula looks like this:
18,000 – 1.5*(11,880) = 18,000 – 17,820 = $180 discretionary income
Which makes for a very small monthly payment because, 10% of $180 is $18, and your monthly payment is $18/12 = $1.50.  Yes, one dollar and fifty cents is your estimated monthly payment, under the REPAYE plan with $18,000 annual AGI and a household size of one.
Something to consider about a payment this small is that interest will continue to accumulate as you go through the life of the loan, meaning the balance owed will increase significantly over what was originally borrowed.  If the loan can’t be repaid within the maximum allotted time, the tax liability due to loan forgiveness could be substantial.