There is no better example of “if at first you don’t succeed try, try again” then our federal loan repayment program. Because by the end of this year there will be (wait for it…) yet another loan repayment option available to borrowers. If you’re keeping count (and really who can at this point) that makes nine options. Seriously that’s enough repayment plans to field a baseball team.
So who is this new player in loan repayment? It’s REPAYE, which we are told is not an acronym for “repayment” but for “revised Pay As You Earn (PAYE)” – one of the other plans. So REPAYE is a lot like PAYE with a few notable exceptions that Graduate students, in particular, will not be happy about.
REPAYE is another one of the “income driven repayment plans” meaning that like PAYE and IBR (Income Based Repayment) your actual loan payments are calculated based on a percentage of what is determined to be your discretionary income. And like PAYE again, for REPAYE that percentage is 10% of income.
But here’s where the differences start to affect Graduate students:
With both IBR and PAYE- there was a partial financial hardship qualifier for eligibility. Anyone at any income (hardship or not) can choose REPAYE. But with that loss of financial hardship provision a cap on the maximum you would ever have to pay per month was also lifted. With IBR and PAYE, that max you would pay was equivalent to what you would have paid if you were on the standard (10 year) plan. With REPAYE that cap no longer exists. Meaning if you are on the plan and have a significant income spike you could be paying more than on any other repayment option.
With any of the income driven plans there is the likelihood that your payments (based on income) could be calculated so low that you are not even covering the interest that is building on the loan (also called negative amortization). However at the end of 20 years with PAYE or 25 with IBR, the Department of Education as lender would forgive the balance of the loan and all that accumulated interest. With REPAYE, by virtue of having loans at the Graduate level you are automatically pushed to a 25 year repayment schedule (no 20 year option). Why is that significant? Well in addition to making 5 more years of payments on your loans, you also have five more years of the potential negative interest building. So why is that an issue if the Department of Ed is going to forgive the full balance any way in year 25? Because right now the way that the current tax law is written that forgiveness in year 25 is a taxable occurrence….meaning that you have to declare the entire amount of the forgiven loan balance as “income” on your taxes? Income that technically you never saw… “phantom income”. And the result could be a pretty significant tax liability at a point in your life (25 years from now) when you may have a lot of other financial priorities (mortgage, car payment, kids in college). So by pushing Graduate students to a mandatory 25 year repayment on REPAYE- you, the borrower, pays more in loan payments and you will most likely also pay more in taxes.
There are some other hidden nuances in REPAYE as well that change the loan repayment landscape. One is the “closing” of the marriage loop hold. In IBR and PAYE if you are married and file your taxes separately (not jointly), then only your income would be used to calculate the income driven repayment amount. However in REPAYE that provision is gone and now regardless of whether you file taxes as married jointly or married separately both you and your spouse’s income would be used to calculate your monthly loan repayment?
I remain an optimist that at some point in the future… one “perfect” loan repayment plan will be developed … that will allow borrowers to pay off their student loan obligation but in a way that they understand what they are paying, when they are paying it and why they are paying it. Until then…