For more reasons than you could fit in an article, eliminating college debt is a struggle for a huge portion of Americans. Students who graduated in 2015 are the most indebted of any graduating class ever, with an average of over $35,000 of debt per graduate. Next year’s graduating class is projected to exceed that.
Thankfully, paying back that debt might be getting just a little easier for many Americans.
RePAYE, a new payment option for borrowers of federal student loans, looks to widen the scope of people benefitting from the government’s former Pay As You Earn (PAYE) plan. What will this mean for students struggling to pay off their loans? Read on to find out.
What is RePAYE?
RePAYE is not the first income-based repayment option offered by the federal government, but it will help more people than any plan before it. It’s an extension and addition to the Pay As You Earn (PAYE) plan, which was only available to those who who were new borrowers after October 2007, and who received their first loan after October 2011.
The RePAYE option is available for all federal student loans except Parent PLUS and Perkins loans. This includes direct subsidized and unsubsidized loans, direct PLUS loans made to students and direct consolidation loans. Even if the child is making payments on the Parent PLUS loans, they’re still not eligible for RePAYE or many other repayment options.
Those who are eligible and choose RePAYE will have their monthly payments set at 10% of their discretionary income. The government defines discretionary income as the difference between your income and 150% of the federal poverty guidelines for your family size.
Because the plan is based on income, RePAYE is probably not a program that high earners like engineers, doctors and lawyers will benefit from. For low earners with large payments, however, RePAYE could be a savior.
Will This Help Me?
If your student loans came from a private lender, don’t get excited yet. This program will only benefit students who have federal student loans. Those with private loans are only eligible for repayment options through their specific lender. However, if you want a lower payment on your private loan, you could look at refinancing. Compare your options at Credible.
The good news is that RePAYE will be able to help almost 5 million graduates who could not take part in the PAYE option that came before. Ideally this will allow them to make steady payments instead of defaulting or having to defer their loans.
Options like RePAYE may be great for students who can’t afford to make payments on the standard plan, but every proposal has a drawback. One of the downsides of RePAYE and other income-based options is that students will pay more in interest over the course of the loan.
For that reason, students should try to stick to the standard plan if they can afford it. The payments may be difficult to make initially, but keeping a modest standard of living after graduating college will make a significant difference, and those payments will only get easier with salary increases.
Those with unstable salaries can stick to the RePAYE plan and make extra payments when cash flow is better. This way, they’ll save money on interest over the course of their loan while not having to worry about keeping up with payments they simply can’t afford.
RePAYE and PSLF
For those eligible for the Public Service Loan Forgiveness Program, RePAYE is a great option. It allows graduates to make the smallest payments possible while waiting for their loans to be forgiven. Check to see if you’re eligible for the program here.
Unlike the standard repayment plan, RePAYE has a 20-year loan term. After 20 years, the remaining balance, if any, will be forgiven. It’s also important to remember that those who use RePAYE for 20 years will have to pay taxes on the amount forgiven. That could be a huge surprise, so plan accordingly.
RePAYE may not be a holistic solution to America’s student debt epidemic, but it’s a substantial improvement over the former PAYE plan. Overall, RePAYE is good news for millions across the country and a step in the right direction to address crippling student loan debt across the country.