Income-Driven Student Loan Repayment (Part 4 – The End!)

Let's PAYE and REPAYE these bitches.
student loan repayment 4

Here we are, Part 4 of January 2017’s best four-part series on income-driven student loan repayment.  As you recall if you read this in order, Part 1 and Part 2 explain rules and qualifications applicable to all income-driven plans. Part 3 discussed income-based repayment (IBR) and income-contingent repayment (ICR). So what’s left?

The two newest plans available are:

1) Pay As You Earn (PAYE)

2) Revised Pay As You Earn (REPAYE).

This time the acronyms are sorta words, which is nice.

 


Pay As You Earn (PAYE):

This one is almost a carbon copy of IBR for New Borrowers, including the fact that you have to be a new borrower. Or at least new according to the strange student loan definition of “new”. Pull up Part 2 and look at them side-by-side if you don’t believe me.

Partial Financial Hardship:

You’re gonna need it to qualify for PAYE. You’ll have to prove it again if you leave and come back. Just like IBR. Check Part 2 if you don’t know what PFH is.

Annual/Monthly Payments:

Just like in IBR for New Borrowers, you’ll pay 10% of your discretionary income. And just like in IBR for new and old, your monthly payments will never exceed what they would have been on a standard 10-year repayment plan. In case you didn’t catch Part 3, here is how you would calculate your PAYE payment:

Same example where you have $45,000 annual income and $27,180 discretionary income.

10% of $27,180 = $2,718. That’s what you’ll pay over the course of a year.

$4,077 / 12 = $226.50. That’s what you’ll pay every month.

If you’re lucky enough that you would have paid less in a standard 10-year plan, you’ll pay that lesser payment instead.

Interest Forgiveness:

You also get the same subsidized loan perk during your first three years of repayment. During that period, any monthly accrued interest not covered by your monthly payment on those loans is eliminated.

Loan Forgiveness:

Just like in IBR for new borrowers. After 20 years of full and on-time payments, your remaining balance is forgiven. Also like in IBR, you get to pay tax on the forgiven amount!

Ya Better Be New:

“New borrower” has a different definition for PAYE. 1) You have to have had no outstanding balance as of October 1, 2007. 2) You also must have gotten a new Direct loan (or Direct consolidation loan) on or after October 1, 2011. BUT if that consolidation loan included any loans from before October 1, 2007, it’s not eligible.

Interest Capitalization:

Gets triggered when you leave the plan (voluntarily or not) or if you’re determined to no longer have a partial financial hardship. The DIFFERENCE is that capitalization can only push your principal up to 110% of what is was when you entered repayment (same limit imposed on capitalization in ICR if you recall).

Recertification Requirement:

Just like IBR. You have to recertify every year by sending you income documentation to your student loan servicer. If you’re married and file a joint federal tax return, be sure to submit their income documentation as well. Fail and you are kicked out and placed on the standard 10-year repayment plan. Plus, that nasty interest capitalizes.

Leaving the Plan:

You can switch directly from PAYE to a different income-driven plan. In IBR you have to make one payment on the standard 10-year plan for no reason before starting your newly chosen plan.

In sum, PAYE is a better IBR for new borrowers. I don’t even really know why IBR for new borrowers remained an option after PAYE basically made it obsolete.

 


student loans 4

Ah, too be this oblivious about the rising cost of education doing laps around the inflation rate…

Revised Pay As You Earn (REPAYE):

I was actually kind of excited when this one launched last January. REPAYE is available to anyone with Direct Loans not in default.

Partial Financial Hardship:

Irrelevant! Just show up with Direct Loans, make sure they’re not defaulted, and this is your damn loan repayment rodeo.

Annual/Monthly Payments:

Simple answer – like PAYE but without the cap. You’ll pay 10% of your discretionary income, but if that means you’ll pay more per month than you would with a standard 10-year plan, so be it. The good news is that means you’ll probably pay it off so fast you’ll actually save money.

Interest Forgiveness:

This is one of the coolest parts of REPAYE. Like in IBR and PAYE, you get the three years of remaining subsidized loan interest forgiven. After three years, you still get half of the difference between accrued interest and your payment forgiven. Even better, your unsubsidized loans get half of the difference between accrued interest and your payment forgiven from day one of repayment.

Loan Forgiveness:

Depends on whether you have any loans from grad school. If you have only undergrad loans, then all is forgiven after 20 years of full and on-time payments. If you have any grad school debt, then you have to go 25 years to get any of it forgiven. Of course you’ll pay tax on the forgiven amount.

Where My New Borrowers At:

Doesn’t matter. REPAYE is for everyone.

Interest Capitalization:

Gets triggered when you leave the plan (voluntarily or not), and anytime you’re on a forbearance or deferment and it expires.

Recertification Requirement:

As per always you must recertify your income and family size annually. But look out married people, your life is now harder. Even if you file separate tax returns, you still have to provide your spouse’s income info unless you’re 1) separated; or 2) “unable to reasonably access your spouse’s income information”.

If you don’t recertify in time, you go on standard 10-year repayment. That is, unless you’re less than 10 years away from having your loan forgiven under those 20 or 25-year windows. In that case your payment will jump to whatever it would take to get you paid off in full by the end of that 20 or 25 years. So if you owe $12,000 and are one year away from forgiveness, make sure you recertify or your payments will jump to $1,000 per month.

Leaving the Plan:

Just like PAYE and ICR, leave when you want. No waiting period to go to new plan either.

If you decide to come back to REPAYE, it gets weird. You’ll have to provide income info for the entire period you were on another plan so the man can determine if you were making lower monthly payments than you would on REPAYE during the time you were gone. If you would have paid more, the difference between the two is divided by the number of remaining months before you reach the 20 or 25-year forgiveness date and added to all of your payments until you reach that date.

Confusing? I think they intentionally made it that way to scare you into sticking with REPAYE once you start.

If you’re not a new borrower, REPAYE and IBR have their relative advantages but neither seems to be unquestionably better than the other. I decided to switch to REPAYE since it seems to match better with Public Service Loan Forgiveness (PSLF). In fact, PSLF would be worth discussing on its own in the future, provided that Trump or Congress don’t get rid of it to pay for a big wall in the desert or something equally ridiculous.

Well, switching was mostly good. It made all my interest capitalize. That was complete bullshit. So maybe it was a stupid move after all.

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