A couple of weeks ago, the U.S. Department of Education released final regulations governing its newest income-driven repayment plan, the “Revised Pay-As-You-Earn” plan, or “REPAYE.” Because of the nature of our student loan system, the new program is complicated, confusing, and in many ways contradictory to its original intent. It has some good features that will undoubtedly help many borrowers, but it also has some twists and caveats that will exclude others, or at the very least, make it a less desirable option than some had hoped.
So, can or should you switch to REPAYE? The answer, as is all-too-often the case, is “it depends.” I hope my analysis below is helpful, but please understand that this is not intended as legal advice, and this is not a substitute for getting a personalized recommendation from a qualified student loan expert.
Borrowers Presently on Income-Based Repayment (IBR)
At a basic level, REPAYE is designed to be a significantly cheaper repayment plan than IBR, with a payment formula of 10% of the borrower’s “discretionary income” as opposed to 15% for IBR. To put this in perspective, a single borrower with an Adjusted Gross Income (AGI) of $40,000.00 and a family size of one would have a monthly IBR payment of approximately $280, compared to a monthly REPAYE payment of around $190. That’s a 33% difference, and a big deal. But it’s more complicated than that.
First, REPAYE treats married borrowers differently than IBR (more on that below). REPAYE will consider spousal income in almost every circumstance, while IBR does not. This disparate treatment of married couples could effectively cancel out that 33% savings for some married borrowers.
Second, in order to switch from IBR to REPAYE, borrowers must first enter the 10-year Standard repayment plan for one month. If a borrower cannot afford that payment (which is likely to be unaffordable for most people on IBR), he or she must go into forbearance for that month. Either way, when a borrower leaves IBR, any outstanding interest will be capitalized (added to the principal balance). This, to me, is essentially an informal penalty for those who wish to switch from IBR to REPAYE. The U.S. Dept. of Education’s comments included with the final REPAYE regulations indicate that while advocates suggested eliminating this penalty for borrowers looking to switch from IBR to REPAYE, the Dept. of Education expressly declined to do so. So borrowers on IBR who are looking to switch from IBR to REPAYE should be aware that the change won’t be direct, and it may have serious interest consequences.
Borrowers Presently on Pay-As-You-Earn (PAYE)
REPAYE is essentially designed to make the Pay-As-You-Earn (PAYE) plan’s 10% formula accessible to more borrowers. Right now, the PAYE plan has very strict eligibility criteria based on loan disbursement dates that effectively lock out most borrowers presently in repayment. But the price of REPAYE’s expanded eligibility is that it subjects borrowers to a different set of restrictions, such as the marital problem and the interest capitalization issue described above, as well as unequal treatment of graduate student borrowers (described further below). For borrowers who are already lucky enough to be on the PAYE plan, there may be no reason to switch to REPAYE. To put it succinctly, borrowers who have access to PAYE get the best deal – the 10% formula of REPAYE, without all of the added restrictions imposed on borrowers by the new program.
Borrowers Who Are Married
As referenced above, REPAYE treats married borrowers differently than all of the other income-driven repayment plans. Under the other income driven repayment plans, loan servicers will only consider the borrower’s joint marital income if the couple files as “married filing jointly.” If the couple files as “married filing separately,” the servicer will only consider the borrower’s income. This can have a huge impact on couples where the spouse with a relatively larger federal student loan debt burden has a lower income than the other spouse. If these couples switch to REPAYE, some will see their monthly payments skyrocket because of the joint-income requirement, even with the lower repayment formula.
Graduate Student Loan Borrowers
Like married borrowers, REPAYE also treats graduate student loan borrowers differently than all of the other income-driven repayment plans. Under the other income driven repayment plans, there is one repayment term, no matter what academic program the underlying loans were used for: 25-years for ICR and IBR, and 20 years for “new” IBR and PAYE. Under REPAYE, however, the repayment term is 20 years for borrowers who only took out federal loans for their undergraduate education, and 25 years for borrowers who took out any federal loans for their graduate education. Thus graduate student loan borrowers who have access to an income-driven repayment plan with a 20-year repayment term, like PAYE, should be aware that switching to REPAYE will extend the repayment term.
Parent PLUS Borrowers
Parent PLUS borrowers are generally not eligible for income-driven plans. The exception is the ICR plan, which is only available to Parent PLUS borrowers who have consolidated their PLUS loans through the Direct consolidation program after 2006. ICR is the least-favorable income-driven repayment plan option. Like the remaining income-driven repayment plans, REPAYE leaves Parent PLUS borrowers out in the dust. During the negotiated rulemaking sessions for the REPAYE regulations, advocates asked the U.S. Dept. of Education to allow Parent PLUS borrowers to access the REPAYE program, but they expressly rejected this request, unfortunately.
Conclusions
Because nothing is ever made simple in the world of student loans, some borrowers may clearly benefit from switching to REPAYE. Some clearly will not, or don’t have a choice. For others, it may be a bit murkier. The bottom line is this: don’t make assumptions either way – do your research, and if necessary, consult with an expert.
