Yesterday, the U.S. Department of Education announced that it has released final regulations governing the newest income-driven repayment plan, called the Revised Pay-As-You-Earn (“REPAYE”) plan. This new income-driven plan may provide substantial relief to millions of federal student loan borrowers who are currently ineligible for the Pay-As-You-Earn plan due to that plan’s strict eligibility requirements.
The final regulations for the REPAYE plan essentially reflect the draft regulations that were released a few months ago. Here are the key details:
Eliminates Strict Eligibility Requirements
The Pay-As-You-Earn plan is currently limited to what the U.S. Department of Education refers to as “new borrowers.” This effectively locks out many student loan borrowers who have older student loans or have been in repayment for some time already. There are no such restrictions for the REPAYE program, which opens up the program to millions of borrowers. However, REPAYE is only available for Direct loan borrowers. If you have non-Direct federal student loans (or you’re not sure), don’t worry, this is usually correctible. Note that REPAYE is not an eligible repayment plan for Parent PLUS borrowers.
Monthly REPAYE Payments
Monthly payments under REPAYE are capped at 10% of a borrower’s discretionary income. This mirrors the current Pay-As-You-Earn plan, and is about 33% cheaper than the Income-Based Repayment (IBR) plan, which caps payments at 15% of a borrower’s discretionary income. So this potentially represents significant savings for people.
Repayment Term and Loan Forgiveness
REPAYE is different than other income-driven plans in terms of how it treats loan forgiveness. Under REPAYE, the repayment term is 20 years for borrowers who only took out federal student loans for their undergraduate education; any remaining balance is then forgiven. For borrowers who took out any federal student loans for a graduate program, however, the repayment/forgiveness term is 25 years. Like all of the income-driven plans, any forgiven amount may be taxable. REPAYE is an eligible plan for the Public Service Loan Forgiveness program, however (just like ICR, IBR, and PAYE), which allows for any remaining loan balance on qualifying federal student loans to be forgiven (tax-free) after 10 years of qualifying payments.
Different Treatment of Married Borrowers
REPAYE treats married borrowers differently than the other income-driven plans. Under the other plans, a borrower who is married and files taxes separately from his or her spouse will have a monthly payment based on the borrower’s income alone. This is a big deal for married couples where one spouse has significantly higher federal student loan debt than the other spouse, but much lower income. Under REPAYE, however, federal student loan servicers will consider your joint marital income, regardless of how you file your taxes. For some married borrowers who file separately, this may effectively cancel out any savings from the reduced-payment formula.
Continued Access to Existing Programs
Luckily, the final regulations make clear that borrowers currently in one of the other income-driven repayment plans are not required to switch to REPAYE. For some borrowers who are currently eligible for Pay-As-You-Earn, it might make more sense to remain in that plan (because, for example, that plan does not differentiate between undergraduate and graduate loans – that plan has a 20-year repayment term for everyone). For some borrowers currently on IBR, it might make sense to remain in that plan (because, for example, that plan considers only the borrower’s income if the borrower files taxes as married-filing-separately).
Caps on Interest
Under REPAYE, if your monthly payments do not cover all of the accrued interest for that month, the total amount of interest that accrues will be capped at 50% of the unpaid interest. This is not a perfect solution to negative amortization and does not eliminate it, but it will slow it down, so it’s something.
The REPAYE program is scheduled to debut on December 16. While I think it’s great that the program is going to be made available so soon, this gives federal student loan servicers less than two months to update their systems and application forms (and train their staff) to service this new repayment plan. I don’t think this is going to be a seamless process (but hey, I’m always up for happy surprises). It may make sense to not apply for REPAYE as soon as it becomes available. Just like downloading a new software update as soon as it comes out can reveal some undiscovered bugs and problems, the same might be true here, and it might make sense to wait a little while for any kinks to be worked out in the system. But this is ultimately a personal decision. Either way, I’ll be sure to blog about how things are going in December.
There are now effectively 11 different federal student loan repayment plans, including five income-driven plans. This stuff is complicated and confusing. Before proceeding with any significant changes to your student loan repayment approach, I recommend you talk to your loan servicer, and/or consult with a qualified student loan expert.