August 6, 2017

REPAYE: How Revise Pay As You Earn Works

You're not alone if you hit a roadblock with keeping up with your student loans. There's a way you could lower your monthly payments with the REPAYE Program. Here's what you need to know.

Paying back what you owe for your college education is tough and can feel like forever. If you go with just the standard payment amount each month, 10 years could go by before you're done with it. If you borrowed near the national average of $37,000, that could mean big payments month after month.

When life happens or your income just isn't at the level you thought it would be, what do you if you can't afford those payments?

You have options. Among them are Income Based Repayment Plans. Up until recently, there were some tight restrictions on these plans. REPAYE stands for Revised Pay as You Earn program. It revised what was known as the original PAYE program.

REPAYE opened up the eligibility for repayment for up to 5 million more borrowers.

Qualifying for REPAYE

Before it was revised, PAYE required student loan borrowers to prove they had financial difficulty with annual discretionary income that fell below the amount of your student loans. And it was limited to only new borrowers, those who had no debt before a certain date. These requirements excluded many borrowers despite their inability to afford their loans.

There is no such requirement with REPAYE. Any graduate from any income level can qualify. These include borrowers with Direct, Stafford, and Graduate PLUS loans. In addition, borrowers with Direct Consolidated loans may qualify. The only loans excluded from the program are Parent PLUS loans.

The Maximum Payment

You apply for REPAYE when you can't afford your standard payment. If you are approved, you only pay 10% of your discretionary income. This means any money you make beyond 150% of the national poverty level.

If you aren't making any money at the time of application, you pay nothing. Keep in mind, though, there is no cap on your payment. The higher your income gets, the higher your payment becomes.

If you are married, your spouse's income figures into your REPAYE payment. This could increase the amount you owe each month.

Taking Advantage of Loan Forgiveness

One of the largest benefits of Income-Driven Repayment plans is the loan forgiveness that may occur. If your payments extend beyond 20-25 years, the amount left may be forgiven. REPAYE offers this as well. How long you must wait depends on your student status:

  • Undergrads: Loan balances are forgiven after 20 years
  • Graduate students: Loan balances are forgiven after 25 years

Interest Forgiveness May be Possible

Interest forgiveness is a subsidy provided by the government. It mostly applies to Federal Direct loans. The Department of Education (DOE) covers unpaid interest for the first three years. This benefit stops after three years on most Income-Driven Repayment Plans. Not on REPAYE, though.

The DOE continues to cover 50% of your unpaid interest. What does this mean to you? It means a lower loan balance and faster payoff.

If you don't cover your interest, it gets capitalized. In other words, added back onto the principal balance of your loan. This extends the length of time it takes to pay your loan off.

If you change plans, leaving REPAYE, the unpaid interest will capitalize, though.

Who Benefits from REPAYE?

Anyone who can't afford the standard loan payment may benefit from REPAYE. Any borrower eligible for Public Service Loan Forgiveness should consider REPAYE, though.

Under PSLF, your loan balance is forgiven after 10 years of payments. Why not make those payments as low as you can? With no income or date restrictions, millions of borrowers qualify. With lower payments, you pay less of your balance off. After 120 payments, your balance may be forgiven if you work in a qualifying public service position.

Even if you don't work in public service, you may benefit. If you don't qualify for PAYE because of income or date restrictions, REPAYE may be a good choice. If your income is low, you have low payments. Eventually, your balance gets forgiven. Even graduate students can have their balances forgiven after 25 years.

What's the Downside?

Could there be a downside with a program that lowers your payments? Unfortunately, there is. Your student loans accrue interest. You either pay it as you pay down your balance or it accumulates. If it accumulates, your loan servicer may add it to the principal balance. This extends how long it takes to pay off the loan. It also means more interest down the road. The longer you take to pay the loan off, the more interest you pay. If you take the full 20 years for undergrads before forgiveness, you could pay a lot more interest than you would on the standard plan.

Another disadvantage is your tax liability. Any loan balance that is forgiven after 20 or 25 years becomes a tax liability. You must claim it as income on your income taxes.

You Have Other Options

Despite the fact that REPAYE makes a repayment plan easily accessible, it isn't always the answer. We encourage you to consider all of your options. Here are some great guidelines to follow:

  • Can you afford the standard repayment plan? If so, continue with it. This plan offers the least amount of interest paid and the shortest payoff term. If you can't afford it, read on.
  • Are you eligible for Public Service Loan Forgiveness? If so, apply for an income-driven repayment plan, such as REPAYE. Ask your loan servicer about your options. Then compare the payments to see which one makes the most sense. If you aren't eligible for PSLF, read on.
  • You have a few options at this point. The income-driven repayment plans are always a choice. You can also opt for a graduated or extended repayment plan. We discuss these options below.

A graduated repayment plan increases your monthly payment every 2 years. It's a great program for those with a little income right out of college but who foresee their income increasing steadily. The plan does not take your income into consideration. It increases no matter what. If you are in a highly sought-after field with a future for high income, it may be a good choice.

The extended repayment plan stretches your term out. By default, this makes your payments lower. The advantage is your payments don't change. But, this isn't necessarily the best choice. It increases the amount of interest you pay for the life of the loan. It could be the most expensive option chosen, depending on the term you choose.

What's Next?

With all of these options staring you in the face, you may feel confused. Talk with your loan servicer. Ask them to give you all of your repayment options. This way, you can see in writing what you have available. Don't fall for the lowest payment, though. It may sound more affordable now, but look at the big picture. The less you pay, the more interest you may owe. It could mean a difference of thousands of dollars.

If you prefer to crunch the numbers yourself, use the repayment estimator provided by the DOE. This gives you better insight on what to expect. At the very least, you can have an educated conversation with your loan servicer.

If you do choose a repayment plan, such as REPAYE, make sure you reapply each year. Follow your loan servicer's instructions for recertifying. This means verifying your current income. If you neglect to do so, your payment reverts to a higher payment. If you are on the REPAYE, the DOE puts you on an alternative plan. This could mean capitalized interest and higher loan payments.

The Bottom Line

Consider all of your repayment options. What's right for your college roomie might not be right for you. Look at your income now and your plans for the future. Make sure you exhaust all loan forgiveness options first. Then you can choose the repayment option that is affordable now and costs the least over the life of the loan.

More from CreditDonkey:

Should I Consolidate Student Loans

How to Lower Student Loan Payments

Student Loan Forgiveness

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Average Student Loan Payment

The average student carries $37,172 in student loan debt, with a monthly payment of $351. Read on to learn about student loan debt facts and trends.

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