Today the Department of Education made the newest income-driven student loan repayment plan, the Revised Pay As You Earn (“REPAYE”) plan, available for borrowers to request through its online income-driven repayment plan application. Now all Direct Loan student borrowers (though not Parent Plus borrowers) will be able to cap their monthly payments at 10% of their discretionary income, regardless of when they borrowed. This is great news for the Direct loan borrowers who are ineligible for the 10% payment rate available to only recent borrowers under the Pay As You Earn (“PAYE”) and Income-Based Repayment (“IBR”) plans. The Department of Education estimates this will allow roughly 5 million more borrowers to reduce their payments to 10% of their income.
The expansion of eligibility for the 10% payment rate is a welcome change that will help more borrowers struggling with their student loan debt. However, it also adds further complexity to an already complicated set of repayment options for borrowers (and their advocates and advisors) to consider. It also continues to leave struggling Parent PLUS borrowers without an option for repaying such loans at the 10% payment rate; the best income-driven option for Parent PLUS borrowers remains to consolidate and repay at a capped 20% rate under the older Income Contingent Repayment (“ICR”) plan. Finally, borrowers must know about their income-driven options (and how to stay in them) to benefit from them—this means the servicers who are borrowers direct point of contact must understand and convey effectively these options and how to access and remain in the plans.
Below is background on REPAYE and a look at some key trade-offs and considerations for borrowers eligible for multiple income-driven repayment plans choosing a repayment plan. Information about REPAYE is also available on the Student Loan Borrower Assistance website and on the FSA website, and borrowers may log-in to use the repayment calculator at studentaid.gov. For practitioners looking for more details on REPAYE and other repayment plans, Chapter 3 of the online version of NCLC’s Student Loan treatise has been updated to address extensively the details of the new REPAYE plan alongside the other repayment plans.
REPAYE Background and Eligibility
On October 30, the Department of Education published its final rules establishing the REPAYE plan. These regulations implement President Obama’s June 2014 directive to extend to all Direct loan student borrowers the ability to cap their monthly payments at 10% of their “discretionary income,” defined as adjusted gross income above 150% of the applicable poverty guideline divided by twelve. Previously, this rate was only available through the amended IBR plan to persons who were new borrowers on or after July 1, 2014 and through the PAYE plan to persons who received student loan disbursements on or after October 1, 2011 and who were “new borrowers” as of October 1, 2007. In contrast, REPAYE is available to all Direct student loan borrowers regardless of their loan origination dates. Borrowers in REPAYE whose only eligible Direct loan debt is for undergraduate education will have any outstanding balance forgiven after 20 years of repayment, and borrowers with eligible Direct loan debt received for any graduate or professional education will have their balance forgiven after 25 years.
Notably, the regulations do not expand access to the 10% rate simply by omitting the eligibility restrictions applicable to the existing PAYE plan, but by creating a fourth new income-driven repayment plan. The previously established income-driven repayment plans have not been removed or scheduled to phase out.
Considerations for Borrowers Eligible to Choose Among REPAYE, PAYE, and IBR
The income-based application now includes four different income-driven repayment plans: REPAYE, PAYE, and IBR (which itself is effectively two plans, generally offering a 10% payment rate and 20 year repayment period for new borrowers since July 2014, and a 15% payment rate and 25 year repayment period for less recent borrowers), as well as the older and generally less favorable ICR plan. REPAYE, PAYE, and IBR each have slightly different terms and eligibility restrictions. Many borrowers will be eligible for multiple income-driven repayment plans and will thus have a choice to make.
For example, new Direct student loan borrowers since July 2014 who have a “partial financial hardship” (meaning the amount due on eligible loans under a 10-year standard repayment plan exceeds 10% of discretionary income) are eligible for the 10% rate under REPAYE, PAYE, and IBR. For these borrowers, PAYE and the IBR offer very similar terms, though PAYE is slightly more borrower-friendly for two reasons: (1) if a borrower no longer has a partial financial hardship, all outstanding interest is capitalized under IBR but the amount of interest capitalized is capped under PAYE; (2) borrowers in IBR who wish to change to another repayment plan must jump through a procedural hoop of spending at least one month in the standard repayment plan before switching to their desired plan, and borrowers in PAYE face no such switching hurdle.
There are more significant differences between PAYE and REPAYE, and the optimal plan for borrowers will be based on individual circumstances and concerns. The biggest drawback of REPAYE relative to PAYE is for borrowers with any Direct loans obtained for graduate or professional school—such borrowers face a 25-year repayment period under REPAYE, five years longer than the 20-year PAYE period. Another downside to REPAYE is that spousal income is generally included in calculating “discretionary income” and monthly payment amounts even for married borrowers who file their taxes separately (in PAYE and IBR spousal income is only included for joint tax filers), so married borrowers who file taxes separately may face higher monthly payments in REPAYE. Additionally, REPAYE does not cap monthly payments at the “standard” repayment amount, as under PAYE and IBR—so as borrowers’ income rises some may face higher monthly payments under REPAYE than PAYE. However, REPAYE has its own advantages. Most significantly, it offers more protections against snowballing interest: under REPAYE, borrowers whose payments are insufficient to cover the interest accrued during the month will only be charged for up to 50% of the unpaid interest, and interest is not capitalized if the borrower no longer has a partial financial hardship. Borrowers who would face negative amortization (i.e., those whose payments are not enough to pay off their monthly accrued interest) can thus save on interest under REPAYE.
Borrowers with older Direct loans may face a choice between REPAYE and the pre-July 2014 IBR formulation. Most will do better under REPAYE because their IBR payment would be higher (15% of discretionary income vs 10%) and, if they have only undergraduate loans, their IBR repayment period will be longer (25 years vs. 20). However, REPAYE’s barriers to excluding spousal income, along with REPAYE’s lack of a payment “cap” at the amount a borrower would pay under the standard repayment plan, may nonetheless make IBR a better option for some married borrowers—especially those with graduate school debt who face a 25-year repayment period under either plan.
Finally, given this complexity, borrowers may also “choose to not choose” by simply requesting to be placed “on the plan with the lowest monthly payment.” This is an essential option for borrowers who may not know which plans they are eligible for or which will offer the lowest payment. However, the automatic process for then placing the borrower into a plan will not take into account all of the considerations that may matter to borrowers, especially for married borrowers and over the long haul. Rather, the borrower will simply be placed in the first plan the borrower qualifies for in the following ordered list: (1) REPAYE (if the borrower qualifies for the 20 year repayment period), (2) PAYE, (3) REPAYE (if the borrower would have a 25 year repayment period), (4) IBR, (5) ICR.