If you recently graduated from college on a federal student loan, you have several repayment options. The standard 10 year repayment plan simply takes the total amount you owe and amortizes it over a set period of time, regardless of the borrower’s actual income.
In most cases, the standard plan will minimize the total interest you pay and the length of your repayment. However, the relatively higher monthly payments may not be feasible. Depending on your income, you might be interested in one of several income-oriented repayment plans available to federal borrowers.
In this article, we’re going to look at the earnings-based repayment plans and specifically focus on the revised Pay-As-You-Earn (REPAYE) plan. We examine the advantages and disadvantages of REPAYE and check whether it is suitable for your particular student loan situation.
After reading this document, if you still need more guidance or information about the best ways to repay your student loan and minimize your overall costs, then you should check out Chipper. Chipper is an app that will help you determine the best repayment and loan options for you.
What are Income-Based Repayment Plans?
The Federal Office for Student Support currently offers four income-dependent repayment plans:
- Pay as you earn (PAYE)
- Revised compensation based on earnings (REPAYE)
- Income-based repayment (IBR)
- Income-related repayment (ICR)
In each of these plans, your monthly student loan payments are tied to your total disposable income. For borrowers on PAYE and REPAYE, the percentage is 10%. Your payments are also based on 10% of your disposable income when you receive the income-based repayment
(IBR) plan and you took out your loans on or after July 1, 2014.
For borrowers repaying older loans (taken out before July 1, 2014) through IBR, the percentage is 15%. And the percentage is 20% for borrowers who have the Income Based Repayment Plan (ICR). While payments from ICR are the highest of any income-oriented repayment plan, it is the only one of the four available to borrowers with Parent PLUS loans.
What is REPAYE?
REPAYE, or the revamped Pay-As-You-Earn program, is a relatively new program that was first introduced on December 27, 2015. It limits your monthly payment to 10% of your disposable income. The repayment period is 20 years if you only have undergraduate loans. But the term is 25 years when you repay college loans.
Unlike PAYE or some other income-oriented plans, REPAYE doesn’t have to qualify due to hardship. Almost all federal direct borrowers are eligible. The only exception is those who have Parent PLUS loans.
One of the biggest things that sets REPAYE apart from some other student loan repayment plans is the interest subsidy. With many income-oriented repayment plans (including REPAYE), your monthly payments are very low by design. One negative side effect is that your monthly payments may not be enough to cover the interest accrued.
So that the interest does not get out of hand, REPAYE offers an interest subsidy for the difference between your monthly payment and the monthly interest amount. For the first three years, REPAYE pays the entire difference for subsidized loans and half the difference for unsupported loans. After the first three years, it covers half the difference in all loans.
After the 20 or 25 year loan repayment period has expired, the loan balance still outstanding at REPAYE will be waived. Note, however, that you will most likely owe income tax on the waived amount. So be sure to plan this with your tax advisor.
How does the REPAYE interest subsidy actually work?
If your monthly student loan payment does not cover all of the interest on your loan, the student loan interest subsidy will go into effect. The state pays 100% of the interest accrued on subsidized loans for the first three years. After three years you will pay half (50%) of the accrued interest.
In the case of unsubsidized loans, the federal government pays 50% of the interest due.
Your interest will be activated (i.e. added to your loan balance) when you exit the RePAYE program. This can happen when your loans are waived or when you switch to a different loan repayment plan.
What does that mean in practice? Consider Dr. Doogooder. He is married and has three children. He makes $ 60,000 a year and has $ 100,000 in direct subsidized loans. Its interest rate is 4.25%.
At RePAYE, his monthly payment is $ 140.25 or $ 1,683 per year. Its annual interest is $ 4,250. This means that Dr. Doogo or accrue more interest than he pays each year. During the first three years of Dr. Doogooder will use the government for $ 2,567 on its loans.
After the first three years, the government pays $ 1,283.50 on its loans. The remaining interest will not be added to the main balance until Dr. Dogoor leaves the plan. Ordinarily, Dr. Dogo, or pay off his loans within ten years through Public Student Loan Forgiveness (PSLF).
But let’s say Dr. Dogooder does not qualify for PSLF and never increases its income. In 25 years, Dr. Doogooders loan granted. The total waived amount is $ 128,237 (since interest is capitalized when you exit the plan).
In practice, no “REPAYE credit” will be credited to your account. Your lender does all of this in the backend by simply not posting as much interest on your loan as it should be (which is kind of annoying since most people want to know the amount of the grant). If you want to know how much your interest subsidy is, you have to actually calculate the effective interest rate for the periods and compare it with the interest rate listed for the loans. This could be helpful to you.
REPAYE vs. PAYE: Key Differences
As you can imagine from their names, PAYE (Pay As You Earn) and REPAYE (Revised Pay As You Earn) have a lot of similarities. But there are a few critical differences between the two plans. These are:
Still not sure which student loan repayment plan is right for you? You can get started with Chipper for free for personal advice.
Benefits of REPAYE
Now let’s take a look at the pros and cons of the REPAYE program. First, here are some of the main benefits of REPAYE.
connected: How does the REPAYE student loan interest subsidy work?
Disadvantages of REPAYMENT
And now here are the main disadvantages of REPAYE:
So who is right for the Revised Pay As You Earn (REPAYE) plan? REPAYE is best for borrowers with above average debt and below average income. Engineers, lawyers, or other well-paid earners are generally better off sticking to the standard repayment schedule.
REPAYE is also great for single borrowers as they will not be penalized for having a higher-income spouse. However, if you’re married, PAYE might be a better fit.
Remember, if you are still not sure which loan repayment program is best for you, you can always download the Chipper app and get personalized suggestions and advice tailored to your situation!