Revised Pay As You Earn (REPAYE) Guide

Revised Pay As You Earn (REPAYE) Guide

Revised Pay As You Earn (REPAYE) is an Income-Driven Repayment (IDR) plan that can potentially keep monthly payments low, helping borrowers maximize student loan forgiveness programs.

Revised Pay As You Earn (REPAYE) is an Income-Driven Repayment (IDR) plan that can potentially keep monthly payments low, helping borrowers maximize student loan forgiveness programs.

We thought that it would be prudent to share how the Revised Pay As You Earn (or “REPAYE” for short) works since the majority of doctors and lawyers we see are on this plan.

Here’s everything you need to know about REPAYE:

REPAYE Background

As the cost of college started to rise, repaying student loan payments became unaffordable. This problem gave birth to the original Pay As You Earn (PAYE) repayment plan. Borrowers finally had a way to keep payments down, while also being eligible for forgiveness through an Income-Driven Repayment (IDR) plan.

Unfortunately, Pay As You Earn (PAYE) had very strict eligibility requirements, and very few people could use the program.

REPAYE Eligibility

Today, anyone with Federal Direct loans, Direct Consolidation loans, Graduate PLUS loans are eligible to choose a REPAYE repayment plan. That makes the program very accessible to a lot of borrowers.

Unfortunately, older student loans like Federal Family Education Loans (FFEL) don’t qualify. However, those older student loans can be consolidated into a Direct Consolidation loan that does qualify.

Eligible Loans: Direct Loans (Subsidized and Unsubsidized), Direct Graduate PLUS loans, Direct Consolidation loans.

What are REPAYE payments like?

Depending on your student loans, REPAYE has two possible repayment terms.

  1. Undergraduate Loans: Loans taken out for undergraduate studies have a repayment term of 20 years with any remaining balance forgiven at that time.
  2. Graduate/Professional Loans: Student loans taken out for graduate or professional studies have a repayment term of 25 years with any remaining balance forgiven at that time.

Revised Pay As You Earn (REPAYE) is truly an advantageous repayment plan for many seeking to maximize loan forgiveness or simply lower payments. It offers a very low monthly payment relative to your student loan balance, which is also its downside. The program caps your payments at 10 percent of your “discretionary income”.

The higher your income, they  higher your monthly payment. Unfortunately, this means that your payments can be higher than payments on the Standard repayment plan.

Downside of REPAYE

Under any repayment plan, your interest will continue to accrue during your payment period. When you make a payment, it will be split to pay a portion of your principal balance and your ongoing interest accrual.

However, interest accrual under REPAYE can be a bit unnerving.

It’s not uncommon for monthly payments to lower than the interest accrued each month. “Negative amortization” occurs when your monthly payment doesn’t cover the interest accrued.

This will start creating an “outstanding interest” balance that will continue to grow until the interest is capitalized (added to your balance).

Do you see how the Outstanding Interest and Total Outstanding (balance) columns continue to rise, despite paying $1,339 a month? This isn’t necessarily bad if you’ll be earning forgiveness through Public Service Loan Forgiveness (PSLF). But in other situations, it can be problematic.

Negative Amortization is certainly a financial strategy we explore to keep a client’s payment as low as possible, while maximizing forgiveness. With PSLF, it doesn’t matter how high your loan balance gets. The forgiven amount is 100 percent tax-free.

The same cannot be said for long-term forgiveness. Loans forgiven through that method will be taxed as income in the year they’re forgiven and having a growing student loan balance will increase that looming tax bill. For lawyers and doctors, that could be a $60k to $80K tax bill, so plan appropriately.

Because there’s no guarantee anyone will actually earn forgiveness, we recommend seeking professional consult. In 2017, there were 30,000 Public Service Loan Forgiveness (PSLF) applicants. Only 96 were originally approved.

REPAYE Interest Subsidy

If your monthly payment doesn’t cover the interest accrual each month, an interest subsidy will kick in. It works like a interest forgiveness program except you benefit from it immediately.

On the REPAYE plan, the government will pay all of the interest on your subsidized loans for up to three years. After that, they’ll pay for half. With unsubsidized loans, the govern will pay half.

For example, if you’re a pediatrician and your subsidized loans accrue $1,000 of interest a month but your payment only covers $500 of the interest, the government will pay the $500 remaining interest for the first three years. After the three years, they’ll pay half, or $250 of the $500 shortfall.

REPAYE Marriage Penalty

Under other income-driven repayment plans like IBR, ICR, and PAYE, married borrowers can manage their student loan payments by how they file their taxes. If their spouse’s income would spike their student loan payments, they can file their taxes separately from their spouse (Married Filing Separately or “MFS”).

This would allow the borrower to base payments on their income alone.

This is a big deal for married couples where one spouse has significantly more federal student loan debt than the other, but lower income.

Regardless of how you file your taxes (jointly or separately), REPAYE will always calculate your monthly payment by using your joint Adjusted Gross Income (AGI). In other words, filing separately from spouse doesn’t work.

Borrowers will be shocked to find that their lack of financial planning has lead their monthly payment to almost triple what they were paying when they were single.

Planning Elminates The Needs For Keeping Your Fingers Crossed

The Revised Pay As You Earn (REPAYE) is an amazing program. But it’s not a “one size fits all” repayment plan. Without careful planning, attention to detail, and oversight, borrowers can find themselves in serious trouble.

Today, you can switch from repayment plans as you need. But the same might not be true in just a few years.  You might find that your income reaches a threshold where you are no longer eligible to switch to an Income-Based Repayment (IBR) plan.

Don’t forget, need to qualify for IBR in order to switch to it. That means you must be able to demonstrate financial hardship. While that’s not hard for many lawyers and doctors leaving law or medical school, what happens down the line when you no longer have a

Normally, on IBR your payments would ratchet up to match the Standard repayment plan. But there’s not such a cap on REPAYE. Your payments are tied to 10 percent of your discretionary income which means the higher your income, the larger your monthly payments become.

Of course, this dramatically reduces — perhaps even eliminates —any potential to benefit from forgiveness. Your payments start to accelerate at a rate where you pay off your loan. This is what we help your clients prevent.

Ask A Financial Advisor

Revised Pay As You Earn (REPAYE) can get unnerving for many borrowers. Most borrowers have a lot riding on discharging their loans in time.

We know you have questions and urge you to ask them in the comments below. And if you would like us to run a deep analysis of your student loans, you can request that by clicking the button below.

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