If you have federal student loans, you should prepare for payments to resume at the end of August 2023. Recent changes to available Income-Driven Repayment plans may seem like a way to lower your monthly student loan bill, but adjusting your repayment strategy could actually cost you thousands of dollars.
Recent changes to the Revised Pay As You Earn (REPAYE) plan for federal student loan borrowers, set to take effect in 2024, will remove your ability to use the Pay As You Earn (PAYE) plan. If you’re a federal student loan borrower who qualifies, applying for PAYE immediately might be smart. Let’s dive into why.
Understanding Pay As You Earn (PAYE)
PAYE is a federal student loan repayment plan signed into law on December 21, 2012, as a way to reduce monthly payments. Under PAYE, monthly federal student loan payments are 10% of your discretionary income. Payments adjust each year and are capped at the amount that would otherwise be due under a 10-year standard repayment plan. Any remaining student loan balance is forgiven after 20 years of monthly payments.
Not all federal student loan borrowers qualify for PAYE, which has led to it being underutilized. Only Direct Loan Program loans are eligible for PAYE, except Direct PLUS Loans made to parents and Direct Consolidation Loans that repaid a Parent PLUS Loan. Though FFEL Program loans and Perkins Loans aren’t eligible for PAYE, they can become eligible through loan consolidation.
Borrowers with eligible loans can qualify for PAYE only if they borrowed their first federal student loan after October 1, 2007, and borrowed a Direct Loan or a Direct Consolidation Loan after October 1, 2011. Most people who qualify for PAYE would have borrowed for college for the first time no earlier than the 2008-09 academic year and were still in school during the 2011-12 academic year or later.
Revised Pay As You Earn (REPAYE), the Next Step in PAYE
Revised Pay As You Earn (REPAYE) is a federal student loan repayment plan that was launched on December 17, 2015. Like the Pay As You Earn (PAYE) plan, it sets monthly federal student loan payments at 10% of your discretionary income. Though the same loans qualify for REPAYE as with PAYE, there is no limitation to eligibility based on the dates those loans originated.
There are, however, some major differences from PAYE. Payments due under REPAYE are not capped at the amount that would otherwise be under a 10-year standard repayment plan. Also, the program provides that loans are forgiven after 20 years of payment if they were all borrowed for undergraduate study, or after 25 years of repayment if any portion of the loans was for graduate study.
The most significant difference between PAYE and REPAYE is how discretionary income is calculated. Whereas PAYE only includes your spouse’s income if you file a joint federal income tax return, REPAYE only omits spousal income in limited circumstances.
In spite of these differences, REPAYE swiftly overshadowed PAYE as the strategy of choice for many older borrowers who had been previously paying their loans under ICR or IBR, which resulted in higher monthly bills.
The 2023 REPAYE Revisions and Their Impact
The upcoming changes to REPAYE proposed in early 2023 are substantial. They will protect income up to 225% of the federal poverty guidelines, reducing monthly payments for millions of people. Monthly payments for those with undergraduate loans earning above the income protection threshold will decrease from 10% to 5% of discretionary income, effectively halving their payments. Though graduate school loans will still require payments at 10% of discretionary income, the total payment will be set at a percentage that reflects the proportion of undergraduate and graduate school loans.
The 2023 revisions will reduce interest accrual, preventing balances from increasing despite regular monthly payments. Additionally, loan forgiveness timelines are set to shorten, with forgiveness occurring in as little as 10 years for borrowers who originally took out $12,500 or less in federal student loans.
There are also new circumstances under which loan deferments and forbearances can still be counted toward student loan forgiveness, and it’s becoming easier for borrowers who have defaulted on their loans to be enrolled in an income-driven repayment plan.
Overall, the 2023 revisions to REPAYE promise to lower the impact of student debt for millions of borrowers.
Why PAYE May Be a Better Option
The upcoming changes to REPAYE might make PAYE less appealing, particularly given the reduced monthly payments.
However, moving to PAYE could be a recipe for disaster for borrowers with significant graduate school loans. Choosing REPAYE over PAYE means extending repayment by five years while also giving up the monthly payment cap offered by PAYE.
Borrowers won’t be eligible for PAYE unless they’re already enrolled before the new regulations take effect. Doing so before the cut-off date could be your last chance to lock in the benefits of this plan.
Review Your Options Carefully (and Quickly)
The changes to REPAYE present new opportunities for student loan borrowers, but the program isn’t right for every borrower. These potential pitfalls highlight the importance of understanding all your options and making informed decisions.
If you qualify for PAYE and aren’t currently enrolled, this might be your last chance to benefit from this potentially advantageous plan. Reach out for a Planning Session where we can review your student loans and ensure you’re on the best repayment plan for your needs.