What if I told you there’s a chance you could save $1,000 on your student loans with one phone call? For many individual borrowers out there on the Income Based Repayment program (IBR), that’s a realistic possibility. Here’s what I mean and who would qualify.
Are you making a low income relative to your debt?
The primary folks who should consider using a different program besides IBR are those with debt to income ratios above 2. That means you owe double what you’re making. Considering the loan servicers use prior year tax returns to establish your income, you could even expand that rule to a debt to last years’ income ratio above 2.
Why does it matter how much you owe relative to your income? The answer is that you probably have the option to switch to the Pay As You Earn program (PAYE) or the newer Revised Pay As You Earn program (REPAYE).
With either one of these programs, you can pay 10% of your discretionary income vs 15% on IBR. With PAYE, your loans are forgiven in 20 years. REPAYE has a forgiveness period of 25 years for graduate school loans, but you get a generous interest subsidy. I’ll explain how that works later. Either way, both programs are more generous that the IBR program.
No Prepayment Penalty with REPAYE
One reason why I’m ok with most everyone being on the REPAYE or PAYE programs instead of IBR is that there are no prepayment penalties on federal student loans. That means if you know you’re going to making a lot more money in the future and will have to pay it all back, then you could pay extra to accumulate less interest.
If you had the choice to be on a plan that required payments of $1000 a month or one that required payments of $2000 a month, which would you choose if you were allowed to pay extra? That’s why I like REPAYE and PAYE as options over IBR.
Who’s Eligible for What Programs?
PAYE has tighter eligibility requirements. You have to have no loans outstanding before October 2007 and have taken out at least one loan after October 2011. Only Direct loans qualify, which means they’re probably going to be loans taken out in 2010 or beyond.
REPAYE is open to anyone with Direct Federal loans. That means if you had loans all the way back in 1994, you’re still good as long as they’re under the Direct program now. In my consulting practice, I frequently run into folks who are eligible for REPAYE but not PAYE because of when they took out their first loan. After all, if you were a freshman in college in the fall of 2007 or before, then you very well might have taken out a small loan that ended up making you ineligible for the program.
Any loans that are on the older FFEL loan program are only eligible for IBR. However, you can make them eligible for REPAYE and possibly PAYE by consolidating your loans.
What Does Consolidation Mean?
Consolidation is different from refinancing, which is when you sign up for loans with a private lender in exchange for a lower interest rate. Consolidation is when you keep your loans with the government but you combine multiple loans into a new single loan. The interest rate is just the weighted average of whatever you put in.
Why would you consolidate beyond just making things more straightforward? The answer is to gain eligibility for programs like REPAYE, and occasionally PAYE and PSLF. Consolidation produces a Direct loan. That means you can use consolidation to replace an old FFEL loan that doesn’t qualify for much in the way of federal benefits or repayment options and turn it into a new loan that does qualify.
What’s the Consolidation Catch?
When you consolidate, you lose credit towards loan forgiveness because you’re making a new loan. You also cause any accrued interest to get added into your balance, producing interest on interest. That could still be ok, particularly if that accrued interest balance is low or you haven’t made very many payments.
Remember I Said REPAYE Came with an Interest Subsidy? Here’s how that works
So For Some Folks, You Could Literally Save $1,000 with One Phone Call
I love helping clients save money on student debt. That’s one reason I publish so much free content on my blog here. I’ve done consults on tens of millions in student debt for hundreds of clients, and I’d love to help you too. Hit me up at help@studentloanplanner.com to see how I could save you money.
Or if you feel like you got a good enough handle on your loans after reading this article, feel free to call your loan servicer directly. Unfortunately, I find that many of them make lots of mistakes and have a surface level understanding of how the loan programs actually work. That’s why I launched my business, because ultimately people need help planning a student loan strategy, not filling out paperwork.
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Mellissa says
August 5, 2017 at 6:54 pmInterest subsidies? What interest subsidies? I’ve been on REPAYE for 8mo now and the only relief from interest I see is when I make extra payments or more than the required due. Not to mention I do not see any credits for making any on time payments!
Travis says
August 7, 2017 at 2:55 pmDepends on how high your monthly payment is Melissa. If you’re covering the full interest with your required payments, then there would be no subsidy. They don’t publish it on your statements it’s just a lower accrued interest amount.
maria says
May 14, 2018 at 6:17 pmIf I paye more than my minimum monthly amount on REPAYE then the government doesn’t cover 50% of the interest? Should I not be paying my interest in full then to benefit from the subsidy?
Travis says
May 14, 2018 at 7:03 pmGreat question Maria. You actually get the subsidy even if you pay more than what you owe, provided that your calculated payment doesn’t cover the interest. So you should feel save to pay more than you have to if you eventual goal is paying it all off. At some point though, you should refinance and pick up a cash bonus at a place like this: https://www.studentloanplanner.com/refinance-student-loans/
Michael says
December 30, 2018 at 7:12 pm@Student Loan Planner Travis, I am thinking about refinancing my law school debt with the firm you suggested “Brazos” here in Texas. I am currently in the REPAYE, my income has went up significantly. My goal now is to pay back my student loan debt in 7 years, but sign for a 10 year note on proposed refinance, so i wont be too tied up monthly, but I plan on electing to pay up to $1k more per month over the required payment.
In May, it would be 3 years since I graduated. So the question is, does it make sense for me to refinance?
If the government is subsidizing my average 7%ish interest rate , why should I refinance. If I start overpaying on specific fed loans through navient, does my subsidy stop on the other loans that doesnt meet the interest on it? please help me understand
Travis Hornsby says
December 30, 2018 at 11:46 pmIf your total debt is reasonable compared to income and you’re in the private sector, then refinancing seems like an acceptable thing to do. Your subsidy is probably not all that big if you’ve been out about three years. In that case if you can get an attractive rate you might consider doing the whole thing. I would still check other places besides Brazos since shopping around is easy and doesn’t take very long.
Jim says
January 4, 2019 at 9:07 pmI am talking to a company Alumni Help Center. I owe $49,820 in federal student loans. The company is offering me this:
Pay $199 for 5 months (the Alumni company’s fee). Pay $96 per month for 12 months (student loan fee of $52 plus renewal fee of $44). Pay $52 for the remaining 240 payments.
Does this sound like s good plan. Can I just setup “revised pay as you earn” by myself?
Total loan payback would be $12,600 vs $82,483 now over life of the loan.
Travis Hornsby says
January 5, 2019 at 2:44 amJim this sounds like a scam