You need to find out if you have PAYE and REPAYE eligible student loans or you could be leaving thousands of dollars on the table. A lot of people out there are on the Income Based Repayment program (IBR). It’s an older program passed by Congress in 2007 that gave borrowers the ability to limit their student loan payments to 15 % of their discretionary income. Congress and President Obama decided that this program was such a good idea that they created Pay As You Earn in 2011 (PAYE) and Revised Pay As Your Earn in 2015 (REPAYE).
Both PAYE and REPAYE have great features, and both are typically much better for you if you owe a lot more than your salary in student debt. However, how can someone know if they’re eligible for these great programs?
What’s the Point of PAYE and REPAYE if I Have Student Loans?
You’ll only want to use PAYE or REPAYE if you owe a lot relative to your income or if you’re going for forgiveness at a not for profit employer as you’d want to pay as little as possible in that scenario. For folks who expect to owe more than 2 times their salary for the duration of their career, PAYE and REPAYE are lifesavers.
The reason these programs are really helpful for the deeply indebted is that PAYE has a forgiveness period of 20 years. It also has a required payment of 10% of your discretionary income instead of the 15% required by IBR. At the end of this 20 year period for PAYE, the government asks for taxes on the forgiven balance because the IRS treats debt cancellation as taxable income. Even though that kinda stinks, you should rejoice. After all, paying 40% of some large sum is way better than paying 100%.
REPAYE shares the 10% discretionary income requirement that PAYE has. However, it has a longer forgiveness period of 25 years for grad school loans. On the plus side, REPAYE covers half the interest you’re not paying with your monthly payment. For many borrowers who only expect to have low incomes temporarily, you can save thousands of dollars in interest by using this plan.
So both PAYE and REPAYE are great options. So why are so many people on the older and less beneficial IBR plan?
Do I Have PAYE and REPAYE Eligible Loans?
Unfortunately, these government programs aren’t open to everybody. Scam-like student loan companies will make these programs feel like an exclusive secret that you need to pay them $1,000 or more to obtain. Contrast that to my own fees that include actual strategy planning, and hopefully no one will ever confuse my business with theirs. In fact, anybody should be able to call their loan servicer and ask how to get on PAYE and REPAYE and not pay anybody a dime.
The reason I have a business is that I analyze clients’ loan balances and help them come up with a repayment strategy. All income driven repayment programs have different costs, benefits, and drawbacks. Add in other options like IBR, private refinancing, etc. and I’m beginning to understand why clients with tens of millions in student loans have been reaching out to me for help over the past few months.
So here’s the answer to who gets to benefit from these upgrades to the IBR program. PAYE is only available to borrowers who never took out a loan before October 2007 but took out at least one loan after 2011. That cuts out a lot of people.
REPAYE is open to anyone with Direct student loans. Most people who borrowed anything 2010 or after will have Direct loans. The problem is that any loans taken out before 2010 probably aren’t on the Direct loan program unless they’ve been consolidated into a Direct Consolidation loan. By doing a consolidation, even folks with ancient loans on the IBR plan can benefit from REPAYE.
What Are the Upsides and Downsides of Consolidation?
If you’ve been on the IBR plan for many years, you lose any credit towards loan forgiveness or PSLF if you consolidate. That’s the primary risk. A secondary concern is that any accrued interest you owe will add onto the principal balance. If your accrued interest in large, then you could owe interest on interest, which is never good.
Sometimes, consolidating loans to get access to PAYE, REPAYE, and PSLF still makes sense. If you have loans on the old FFEL loan program (most loans before 2010), then you’ll need to consolidate them to get access to any of the government’s best repayment options. Otherwise your stuck with IBR.
If you’re working in a not for profit employer long term and have loans above 1 times your salary, it almost surely will help you to consolidate old loans to make them PSLF eligible. If you work at a not for profit employer and have student loans at all, do yourself a favor and send in this form to check your eligibility. It’s free so you don’t have anything to lose.
What Happens if PAYE and REPAYE Go Away?
Here’s what I’m telling clients right now. PAYE and REPAYE are by no means a sure thing. Both are executive orders from the Obama administration, and the way things are going they could go away in a hurry. However, with everything Congress is trying to do with healthcare and tax reform, I don’t think that they will have the attention or energy to do much about these generous government programs until at least 2018.
If PAYE and REPAYE do in fact go away, Trump has already proposed a repayment plan that’s even more generous than the ones that already exist. He would accelerate forgiveness to 15 years and cap payments at 12.5% of income. I’ve run the numbers, and basically anyone who owes more than 2 times their salary would save a lot of money if this passed.
That said, I don’t think Congress would cooperate because Trump’s plan is an expansion of government spending, so we might just keep muddling along with these income driven repayment plans for the foreseeable future. If that happens, then nothing changes. Worst case, we could see a repeal of PAYE and REPAYE, with IBR as the sole remaining option.
What if All of this PAYE and REPAYE Stuff Confused the Heck Out of You? I Can Help
I help clients build a customized repayment strategy by studying their student loans during flat fee consultations. I’ve helped clients save millions of dollars by optimizing their use of the PAYE and REPAYE programs, refinancing their student loans, making sure they’re set up for PSLF correctly, and helping them save for the tax penalties associated with private sector loan forgiveness.
I’d love to help you save money too. Hit me up at travis@studentloanplanner.com for more details. I’ve saved the average client a projected tens of thousands of dollars over the life of their loans.
Refinance student loans and get a bonus in 2018
Hi – I note that you say “Worst case, we could see a repeal of PAYE and REPAYE, with IBR as the sole remaining option.” – is there anything particular that makes you confident that IBR has more staying power than other plans?
I’ll be frank, I’m about to graduate with a debt to income ratio of ~3:1 and I’m terrified of any sort of repeal for income driven plans. If IBR is the most likely to stick, that will certainly factor into my repayment plan choice. Thanks.
PAYE and REPAYE are executive orders from the Obama administration and IBR was spelled out by an act of Congress in 2007. That’s the reason I feel more confident IBR will be around no matter what. Just because there’s a chance REPAYE and PAYE go away would not influence my suggestion that folks use them. If you get kicked off of them it would be because you’re getting moved to the Trump plan or IBR or whatever exists. Use the best available rules that exist now and prepare for the possibility they will change. That’s how to maximize overall financial health especially w a debt to income ratio of 3
Oh yes, I’m no lawyer but I imagine an act of Congress is much more difficult to repeal than an EO! That makes tons of sense. Thanks for the response!
If I’m on REPAYE can I switch to PAYE without losing credit for the number of payments I’ve accumulated for PSLF while on REPAYE?
Yes you can both of them count for PSLF and you don’t start over when you switch
I have the same question as Cioci and it’s very important – and I don’t trust my loan servicer one bit. I specifically requested to be switched to the PAYE plan and they instead put me on the RePAYE plan which has the 25-year repayment requirement. Can you let me know what your basis is for saying that if I switch from REPAYE to PAYE that I won’t lose my years of credit? I started on IBR in 2011 and switched to REPAYE a year-and-a-half ago (I wanted to switch to PAYE). I don’t want to lose many years of credit. Thanks so much in advance for your advice.
Taking this courtesy of Cornell Law School from Federal income based repayment regulations: https://www.law.cornell.edu/cfr/text/34/685.209
It’s very clear that the payment plans count for one another presently. However, the House Democrats have suggested a bill that would lock everyone into the plan they’re currently on. So I would choose the best plan for you long term
(5)Loan forgiveness.
(i) A borrower who meets the requirements specified in paragraph (c)(5)(iii) of this section may qualify for loan forgiveness after 20 or 25 years, as determined in accordance with paragraph (c)(5)(ii) of this section.
(ii)
(A) A borrower whose loans being repaid under the REPAYE plan include only loans the borrower received as an undergraduate student or a consolidation loan that repaid only loans the borrower received as an undergraduate student may qualify for forgiveness after 20 years.
(B) A borrower whose loans being repaid under the REPAYE plan include a loan the borrower received as a graduate or professional student or a consolidation loan that repaid a loan received as a graduate or professional student may qualify for forgiveness after 25 years.
(iii) The Secretary cancels any remaining outstanding balance of principal and accrued interest on a borrower’s Direct Loans that are being repaid under the REPAYE plan after –
(A) The borrower has made the equivalent of 240 or 300, as applicable, qualifying monthly payments as defined in paragraph (c)(5)(iv) of this section; and
(B) Twenty or 25 years, as applicable, have elapsed, beginning on the date determined in accordance with paragraph (c)(5)(v) of this section.
(iv) For the purpose of paragraph (c)(5)(iii)(A) of this section, a qualifying monthly payment is –
(A) A monthly payment under the REPAYE plan, including a monthly payment amount of $0.00, as provided under paragraph (c)(2)(ii)(C) of this section;
(B) A monthly payment under the Pay As You Earn repayment plan described in paragraph (a) of this section, the income-contingent repayment plan described in paragraph (b) of this section, or the income-based repayment plan described in § 685.221, including a monthly payment amount of $0.00;