Updated December 3, 2015
Trying to make ends meet while repaying your student loans? It’s ok — you don’t need to spend the next 20 years washing paper plates and eating Ramen noodles to make your student loan payments.
The U.S. Department of Education (DOE) is getting ready to introduce the new Revised Pay As You Earn (REPAYE) program. REPAYE is an update to the previous Pay As You Earn (PAYE) plan, both of which are designed to give you a little breathing room with your student loan payment. The REPAYE & PAYE programs do this by reducing the amount you pay, based on how much income you have at your disposal.
A Little History on REPAYE
Revised Pay-As-You-Earn REPAYE plan is a new revised version of what was originally Pay As You Earn. PAYE is already a plan offered by the Department of Education. The PAYE plan puts a cap on payments at 10 percent of your discretionary income. REPAYE, is the REvised plan that will allow an additional 5 million more borrowers to take advantage of the program.
An executive order by President Obama was issued requiring the DOE to have implementation plans shared with the public no later than this month. The DOE proposed these regulations on July 7th of 2015 and then updated the proposal with final regulations on October 27th of 2015.
The REPAYE program not only reduces monthly payments, but the program also promises to forgive student debt, when certain requirements are met.
Let’s take a look at how the REPAYE program works…
Eligibility For REPAYE
Who can qualify for the REPAYE program?
Regardless of how much money was borrowed to pay tuition, books and living expenses. all direct loans, Stafford Student Loans, and Graduate PLUS Student Loan borrowers are eligible. Consolidated student loans, that have been consolidated into Direct Loans can qualify for REPAYE as well. Parent PLUS loans or loans that have been consolidated to include Parent PLUS loans, are not eligible. Defaulted loans and Private loans are also ineligible.
How Much Are Monthly Payments?
REPAYE payments are set with a cap of 10% of discretionary income (adjusted gross income minus 150 percent of the state poverty guideline for your family size). It is possible with this program to qualify for monthly payments of $0, but there also is no ceiling set on how high your payments can go. In the original PAYE and IBR plans, there was a cap set on maximum payments. With this new plan if you income increases, your payments may as well.
If you have a spouse that has federal loan debt and is in a high income bracket, REPAYE may not be the best program for you. A potential drawback in REPAYE, is that it considers your spouse when applying for the program, even if you file your taxes separately.
When Is Remaining Student Loan Debt Forgiven?
Undergraduate degree loans that have had eligible payments made for 20 years, will be forgiven. Graduate degree loans and professional degree loans that have had 25 years of eligible payments made, will be forgiven.
Make sure that you account for loans that have been forgiven when planning out your taxes, the IRS considers forgiven student loans as taxable income. Don’t wait 20 years for that tax bill — plan for it.
Is Interest Forgiven?
If your monthly payment does not cover the monthly interest charges, any excess interest will be paid by the Department of Education for up to three years. After that time period, the DOE will cover 50 percent of unpaid interest. If you leave the REPAYE program, interest will capitalize.