Regardless of when you took out your loan or how much you earn, there’s a new program that lets you cap your federal direct student loan payments at 10 percent of your discretionary income.
Borrowers with federal student loan debt could previously take advantage of income-based repayment plans like Income-Based Repayment (IBR) and Pay As You Earn (PAYE), which limit your monthly payments so that you’re never paying more than you can afford.
But PAYE — which caps payments at 10 percent of income — is only open to student loan debtors who you have no loans prior to October 1, 2007, and at least one loan on or after October 1, 2011.
While IBR is open to borrowers with older loans, those with loans taken out before July 1, 2014 pay 15 percent of their discretionary income, and must meet debt-to-income requirements.
In December 2015, a new income-driven repayment plan — the Revised Pay As You Earn plan (REPAYE) — opened its doors to undergraduate and graduate federal student loan borrowers regardless of when they took out their loans, or what they earn.
If you have federal loan debt, REPAYE will allow you to cap your monthly payments at about 10 percent of your discretionary income.
That’s great news for those borrowers in IBR who are paying 15 percent of their discretionary income, and want to take advantage of the opportunity to make lower monthly payments (borrowers in IBR plans who took out their loans after July 1, 2104 pay 10 percent of their discretionary income).
Similar to the other plans, REPAYE will forgive any debt remaining for undergraduate students and graduate students after 20 years and 25 years respectively, so you don’t have your debt following you around for the rest of your life.
But REPAYE has several limitations compared to other plans like IBR and PAYE.
Under REPAYE, both spouses’ income and federal student loan debt is considered when determining the monthly payment. So, for example, if you have federal student loan debt, and your spouse is a high income earner, REPAYE might not result in the lowest monthly payment for you.
Secondly, while the IBR and PAYE plans guarantee that your payments will never climb past what they would be on the 10-year Standard Repayment Plan, there’s no such cap under the REPAYE plan.
Third, borrowers on the PAYE plan (and borrowers with loans taken out before July 1, 2014 on the IBR plan) have their debt forgiven after 20 years. While the REPAYE plan forgives undergraduate debt after 20 years of payments, it takes 25 years of payments before graduate school debt is forgiven.
Another drawback of all the plans is that, in the long run, they could end up costing you more. Because income-based repayment plans typically require you to make small payments over a longer period of time, the total amount of interest you end up paying can be higher compared to the 10-year standard repayment plan.
Additionally, while the Obama administration estimates that 5 million more borrowers will qualify under REPAYE, the plan is restricted to students who have borrowed through the federal direct loan program. Parent PLUS borrowers, for example, are not eligible.
Despite its limitations, The Institute for College Access & Success (TICAS) says REPAYE will “help more struggling borrowers better manage their payments,” calling it a “strong starting point for streamlining the multiple existing income-driven plans into one improved plan.”
To help you understand the nitty gritty details of REPAYE, we’ve put together a guide that will quickly get you up to speed. Our guide includes a breakdown of how REPAYE stacks up against standard repayment plans if you’ve consolidated your loans (hint: it stacks up very well).
Check out the REPAYE guide here.
Ariha Setalvad is a Credible News staff reporter.