Revised Pay-As-You-Earn Repayment (REPAYE)
Revised pay-as-you-earn repayment (REPAYE) is an updated version of the pay-as-you-earn repayment (PAYE) income-driven repayment plan. It eliminates the eligibility restrictions in the PAYE repayment plan. As with the PAYE plan, loan payments are based on 10 percent of discretionary income. But, loan payments are not capped at standard repayment and there is a marriage penalty. Also, the repayment term is 300 payments (25 years) instead of 240 payments (20 years) if the borrower has any graduate student loans.
Generally, borrowers whose debt at graduation exceeds two-thirds of their annual income will have a reduced monthly payment under REPAYE.
REPAYE is available only for loans in the Direct Loan program.
Yet Another Income-Driven Repayment Plan
The Pay-As-You-Earn Repayment Plan (PAYE) limited eligibility because of the need to remain cost neutral. Ineligible borrowers complained, so President Obama once again used his regulatory authority to create the Revised Pay-As-You-Earn Repayment Plan (REPAYE) with no eligibility restrictions by modifying the regulations for the income-contingent repayment plan (ICR).
The REPAYE plan reduces costs by adopting a longer repayment term for borrowers with graduate student loans, abandoning the standard repayment cap on loan payments and introducing a marriage penalty.
The U.S. Department of Education has aggressively steered borrowers into the REPAYE plan because it is less expensive for the federal government than PAYE. But, if it is less expensive for the federal government, it is more expensive for borrowers.
Borrowers must evaluate the advantages and disadvantages of the income-driven repayment plans when deciding which repayment plan is best for them. The decision depends on the borrower’s specific circumstances.
- If a borrower is eligible for PAYE, that repayment plan will always have the lowest cost.
- If the borrower is not eligible for PAYE, either the REPAYE or income-based repayment (IBR) will have the lowest loan payments, depending on whether the borrower is married, has graduate student loans and/or expects their income to increase.
For example, if a borrower is married, their higher combined income under REPAYE may outweigh the higher percentage of income and loss of tax breaks for joint filers under IBR. The only way to tell which option is better is to calculate the impact on loan payments and income tax liability under both repayment plans.
Ultimately, the U.S. Department of Education abandoned all pretense of the new repayment plan being cost neutral. It was predicted to cost $15 billion over 10 years. But, Congress was unable to use the Congressional Review Act to overturn the regulations, since that would require a veto-proof two-thirds majority.
The REPAYE plan became available starting on December 17, 2015.
Key Characteristics of Revised Pay-As-You-Earn Repayment
Revised pay-as-you-earn repayment requires the borrower to pay 10% of discretionary income, instead of 15%.
REPAYE does not cap the monthly payment when the borrower’s income increases.
The minimum monthly payment is $10.00 under REPAYE, unless the calculated payment is less than $5.00, in which case the monthly payment is zero. This is the same as for income-based repayment. For example, if the borrower’s income is less than 150% of the poverty line, the monthly loan payment will be zero.
The remaining debt is forgiven after 20 years of payments (240 payments) for borrowers with only undergraduate student loans and after 25 years of payments (300 payments) for borrowers with one or more graduate student loans under REPAYE. The forgiveness is taxable under current law.
Public Service Loan Forgiveness (PSLF) cancels the remaining debt after 10 years of payments (120 payments). The forgiveness under PSLF is tax-free under current law.
Unlike the other income-driven repayment plans, REPAYE has a marriage penalty. The loan payments under REPAYE for a married borrower are based on the combined income of the borrower and spouse, even if they file income tax returns as married filing separately.
The only exceptions are if the borrower is separated from his or her spouse or if the borrower is unable to reasonably access information about the income of his or her spouse.
Treatment of Accrued but Unpaid Interest
Borrowers can be negatively amortized under REPAYE, since the payments can be less than the new interest that accrues. This may lead to accrued but unpaid interest.
The federal government pays 100% of the accrued but unpaid interest on subsidized loans and 50% of the accrued but unpaid interest on unsubsidized loans during the first three years under REPAYE. After the first three years, the federal government pays 50% of the accrued but unpaid interest on subsidized and unsubsidized loans under REPAYE.
Accrued but unpaid interest is capitalized under REPAYE only upon loan status changes, such as when the borrower switches to a different repayment plan.
Example of Loan Payments under REPAYE
Consider a borrower who owes $30,000 in undergraduate federal student loans with a 5% interest rate and has an AGI of $25,000 per year. The monthly payment under standard 10-year repayment is $318.20.
The 2019 poverty line in the continental U.S. for a family of one is $12,490. The borrower’s discretionary income is $25,000 – 150% x $12,490 = – $6,265. When discretionary income is negative, it is treated as though it were zero. Thus, the monthly payment is zero under REPAYE at this income level.
The 2019 poverty line in the continental U.S. for a family of four is $25,750, greater than the AGI. Since discretionary income is zero, the monthly loan payment will be zero.
A revised pay-as-you-earn repayment calculator can be used to determine personalized estimates of the monthly payments and total payments under REPAYE.