Have you heard the news? The Department of Education introduced a new student loan repayment plan in December 2015. The new REPAYE (REvised Pay As You Earn) Plan is meant to make repayment easier for more student borrowers. But how does the new plan work? How do you know if it’s the right plan for you? We can help answer your burning questions with a rundown of all of your federal loan repayment options, followed by a quick 101 on the new REPAYE plan
REPAYMENT OPTIONS OVERVIEW
Standard Repayment Plan
When federal student loans enter repayment, most are placed under the “Standard Repayment Plan”. This plan is designed to allow you to pay off your loan in 10 years with the same fixed payment every month. If that payment stays affordable each month, this no-hassle plan will get rid of that loan quickly, and with the least amount of interest.
Income-Driven Repayment Plans
If the Standard payment starts to put a dent in your wallet, no need to stress – you could potentially set up lower payments based on your annual income and family size, under one of the “Income-Driven Repayment Plans”.
There are a lot of acronyms when it comes to Income-Driven Repayment Plans (IBR, IBR for New Borrowers, PAYE, REPAYE, and ICR). So to keep it simple, we can talk about them as a group. All “Income-Driven Repayment Plans” have some great features in common:
- Built-in forgiveness after 20-25 years
- Payments that count toward Public Service Loan Forgiveness (PSLF) requirements
- Minimum payments that adjust annually as your income or family size changes
- $0 minimum payments for some borrowers
With Income Driven Repayment Plans, you must submit an application every year to calculate your new minimum monthly payment. The Federal Student Aid Repayment Calculator can help estimate your monthly payment under these plans, or you can contact your loan servicer for more information.
NEW REPAYE PLAN
Let’s get to nitty gritty: the brand new “REPAYE” plan, or REvised Pay as You Earn. The big deal about REPAYE is that it will make Income Driven Plans available to more people by removing some restrictions, including:
- Cutoff date restrictions: Some older plans (PAYE and IBR for New Borrowers) had specific dates that limited access for some borrowers. REPAYE is available to all Direct Loan borrowers. So even if you’ve previously been unable to enroll in an Income Driven Plan, you may be eligible for the REPAYE plan!
- Partial Financial Hardship restrictions: Some older plans (PAYE, IBR, and IBR for New Borrowers) only apply to borrowers whose new payment is less than they what would pay under the Standard repayment plan. REPAYE, on the other hand, welcomes borrowers of any income level, even if the REPAYE payment would be higher than their Standard payment.
Major Benefit of REPAYE: Help With Interest
The biggest benefit of the REPAYE plan is a larger interest subsidy when a borrower’s monthly payment doesn’t cover the interest accruing on the loan (this is called “reverse or negative amortization”). Ask your loan servicer how much interest accrues on your loan(s) each month. If your minimum payment on an Income-Driven plan is lower than the interest amount, reverse amortization is causing your balance to keep growing – even though you’re making payments each month. REPAYE may be the most helpful option to minimize the effects of negative amortization.
**Remember, with Income Driven Plans, there’s a light at the end of the tunnel even if your balance won’t decrease with payments. Your monthly payments count toward your built-in forgiveness after 20-25 years, or your Public Service Loan Forgiveness Program (PSLF) forgiveness after 10 years.
When REPAYE may not be a good option
- Your loans are Parent PLUS. The only Income-Driven Plan available for Parent Plus loans is ICR, and it will require you to consolidate the Parent Plus loans first.
- Your loans are Grad PLUS. You may use REPAYE with Grad PLUS loans, but the forgiveness term will be 25 years, instead of the 20 year term associated with the PAYE or IBR for New Borrowers plans. But if you’re planning to qualify for Public Service Loan Forgiveness (PSLF) after 10 years, then the REPAYE plan may still be a strong choice for you.
- Your loans are FFEL. FFEL loans are not Direct Loans, and FFEL loans only work with the more expensive IBR plan. You could consolidate your FFEL loans into the Direct Loan program to make your loans eligible for REPAYE and Public Service Loan Forgiveness (PSLF). Not sure if you have FFEL loans? Check with your servicer or the National Student Loan Data System (NSLDS).
- You struggle to submit updates on time. REPAYE has strict annual requirements for updating your information, and missing the deadline will cause complications with both your payment amount and your progress toward forgiveness.
- You file taxes separately from your spouse. REPAYE is the only Income-Driven Plan that will include your spouse’s income and federal loans in the calculation, even if you file taxes separately. Other Income-Driven Plans exclude your spouse’s information if taxes are not filed jointly. But depending on the numbers, REPAYE might still be your best option. Learn more and compare payment estimates with the Federal Student Loan Repayment Calculator.
- Your income and family size don’t qualify you for a reduced payment. REPAYE allows you to join the program even if your calculated payment would be higher than the Standard plan payment. There is no cap on potential payments you may need to make under REPAYE. So you need to decide: do you prefer a fixed payment (Standard repayment plan), or a payment that increases along with your income (REPAYE)?
Even if REPAYE doesn’t sound like the right fit for you, it’s smart to be aware of all your options, including the other Income-Driven Plans, or other traditional plans (like Graduated or Extended). And don’t hesitate to call your loan servicer for a personalized review of the options that will help you achieve successful loan repayment. They’re here to help, too.
For more information: www.studentaid.ed.gov
To compare payment estimates: https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action
To apply for a repayment plan change or consolidation: www.studentloans.gov