The class of 2016 graduated with an average student loan debt of $37,172, and more than 44 Million borrowers over $1.4 Trillion (with a T) in federal student loan debt. If your debt load means you’re struggling to meet your monthly obligation, you may want to consider enrolling in RePAYE (Revised Pay as You Earn repayment plan). RePAYE is a Federal income-based repayment program designed to help lower income borrowers make their payments.
But RePAYE isn’t just any income based repayment plan. The plan actually subsidizes student loan interest for some participants. Here’s how the plan and the subsidy work.
Eligible loans: Direct Subsidized Loans, Direct Unsubsidized Loans, Direct GradPLUS loans, Direct Consolidation loans that don’t include a Parent Plus Loan.
Ineligible loans: Direct Parent PLUS loans, any loans in default, consolidation loans that include a Parent PLUS loan. Perkins loans (unless consolidated). Learn your options for Parent PLUS Loans here.
Payment Schedule: On the RePAYE plan, your monthly payment is 10% of your income over 150% of the poverty line. That means if you earn less than 150% of the poverty line, your payment is zero dollars.
The poverty line depends on where you live (Alaska and Hawaii have higher poverty lines than the lower 48), and your family size.
This chart shows your payment in the lower 48 states, based on your income and family size.
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Maximum Payment Time:
On RePAYE, you’ll make payments for 20 years for undergraduate loans or 25 years for graduate or professional school loans. You still qualify for Public Student Loan Forgiveness and Teacher Loan Forgiveness while on RePAYE.
Watch Out For The Tax Bomb:
If you pay for the full 20-25 years, you will receive student loan forgiveness, but you need to watch out for a tax bomb. The entire remaining balance that is forgiven counts as income. This means that you’ll potentially have a huge tax bomb the year of loan forgiveness. It's important to discuss this with your tax advisor.
Thankfully, RePAYE has some built in guardrails to keep this “tax bomb” from ruining your financial future. The guardrails come in the form of an interest subsidy.
RePAYE Student Loan Interest Subsidy
If your monthly student loan payment doesn’t cover all the interest that accrues on your loan, the student loan interest subsidy kicks in. The government will pay for 100% of accruing interest on subsidized loans for the first three years. After three years, they will pay for half of the accruing interest.
If you have unsubsidized loans, the federal government will pay 50% of the interest due.
Your interest is capitalized (ie added to the balance of your loan) when you leave the RePAYE program. This can be when your loans are forgiven or if you move to a different loan repayment plan.
What does this mean in practical terms? Consider Dr. Doogooder’s situation. He’s a married with three kids. He earns $60,000 per year, and he has $100,000 in direct subsidized loans. His interest rate is 4.25%.
On RePAYE his monthly payment is $140.25 (see chart above), or $1683 per year. His annual interest is $4250. This means that Dr. Doogooder’s loans accrue more interest than he pays each year. During Dr. Doogooder’s first three years, the government will apply $2,567 to his loans.
After the first three years, the government will pay $1283.5 towards his loans. The remaining interest won’t be added to the principal balance until Dr. Dogooder leaves the plan. Normally, Dr. Dogooder would pay off his loans through Public Student Loan Forgiveness (PSLF) in ten years.
But let’s assume Dr. Dogooder doesn’t qualify for PSLF and he never raises his income. In 25 years, Dr. Doogooders loan will be forgiven. The total amount forgiven will be $128,237 (since the interest capitalizes when you leave the plan). That amount is potentially taxable under current laws.
Should You Consider RePAYE?
RePAYE is a good potential student loan repayment program for some individuals, but it does have some drawbacks as well. For example, under RePAYE, you must always use your combined AGI if you're married – which could raise your monthly payment compared to other options.
On the positive side, RePAYE is a student loan repayment plan that is eligible for PSLF (Public Service Loan Forgiveness). If your loan is forgiven under this program, the loan forgiveness is currently considered tax free – which is a huge positive.
To decide if this program is for you, look at the Repayment Estimator provided by the Department of Education.
Have you looked into the details of RePAYE before?