Struggling to make your student loan payments? What if you were able to pay in accordance to what you actually brought in every month?
Well, it’s possible to apply for a repayment program that adjusts your monthly payments based on your annual income and family size, which helps ensure that you can comfortably make your monthly federal student loan payments. These programs are called “pay as you earn” repayment plans.
PAYE vs REPAYE
There are two kinds of “pay as you earn” plans: Pay As You Earn (PAYE) and Revised Pay as You Earn (REPAYE). They both generally enable eligible Direct Subsidized and Unsubsidized Loan borrowers to cap their monthly student loan payments at 10% of their monthly discretionary income. REPAYE is a bit less restrictive than PAYE and requires no proof of financial distress.
For example, to qualify for PAYE, a borrower must show that he or she can’t afford to make the payments required on a standard 10-year repayment plan. REPAYE, on the other hand, does not have a requirement that borrowers must demonstrate financial distress to participate in the program.
In general, these pay as you earn repayment plans are available for federal student loans; they aren’t available for federal loans given to parents or for private loans. However, they may be available for Federal Perkins loans and some FFEL PLUS loans made to graduate or professional students, typically if those loans are consolidated.
From December 2015 to August 2016, about 570,000 borrowers enrolled in REPAYE, according the U.S. Department of Education . Here’s a closer look at how PAYE vs REPAYE differ.
How to Qualify for a Pay As You Earn Repayment Plan
Borrowers only qualify for PAYE if they can demonstrate financial need. That means the annual amount due on your eligible student loans, as calculated under a 10-year Standard Repayment plan , must exceed 10% of the difference between your adjusted gross income and 150% of the poverty line for a family of your size in your state.
You can determine if you qualify using this Pay As You Earn calculator from the U.S. Department of Education. Unfortunately, you’re only eligible for PAYE if you first borrowed your loans on or after October 1, 2007, and received a disbursement on or after October 1, 2011. (Fortunately, another repayment program—Income-Based Repayment, or IBR—is available for anyone who takes out a federal student loan. It caps your monthly payment at 10% to 15% of your income, depending on when you took out your loan.)
To qualify, your income needs to be recertified annually. If you fail to recertify your income, your monthly payment will no longer be based on your income. Instead, your monthly payment will scale to the amount you would pay under a 10-year Standard Repayment plan.
However, if you update your income information (and still qualify for PAYE), your monthly payments will be readjusted. The repayment period for PAYE is 20 years and one of the program’s benefits is, after 20 years, the remaining balance of your qualifying student loans can be forgiven. However, you may be taxed on the forgiven amount.
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Exploring Revised Pay As You Earn Repayment Plans
Anyone who has a federal student loan can qualify for REPAYE, unless you have used Parent PLUS loans. There are no application restrictions based on when you took out your federal student loan or how much money you borrowed. Under REPAYE, if you make qualified, on-time loan payments for 20 years (or 25 years for graduate school loans), your remaining debt can be forgiven. (Once again, you may be be taxed on the forgiven balance.)
With REPAYE, your loan payment is recalculated each year based on your income and your family size. If you’re married, then your and your spouse’s income and loan debt are factored into the calculation—so that may be something to factor in when considering REPAYE. If your income increases substantially, whether through marriage or another reason, so too could your REPAYE payments.
It’s important that you recertify your income each year otherwise you may be removed from the plan and placed on an alternative repayment plan. In this case, your payment would be the amount necessary to repay your loan in full by either 10 years from the date you began re-paying under the alternative repayment plan, or by the end of your 20 or 25-year REPAYE period—whichever option is earlier.
You always have the option to leave REPAYE and use another repayment plan. However, participation in REPAYE makes you eligible for the Public Service Loan Forgiveness (PSLF) program . Under the PSLF program, eligible government or non-profit employees may get their loans forgiven after 10 years of qualifying on-time payments (or 120 total payments). Plus, the forgiven balance isn’t taxed.
Don’t Forget to Recertify Your Income for PAYE & REPAYE
Both PAYE and REPAYE have stiff penalties for borrowers who fail to recertify their income each year. For instance, if you fail to recertify your income, any unpaid interest will be capitalized—that means added to the principal balance of your loans— thereby increasing the total dollar amount of your loans over time.
If you fail to recertify your family size each year, your loan servicer will assume a family size of one, regardless of how many actual family members you have. This could result in a higher monthly payment and possible loss of eligibility for the program based on income.
Possible Changes to the PAYE & REPAYE Programs
The Republican Congress and Trump administration have been discussing possible changes to the PAYE and REPAYE programs. For instance, President Trump’s 2019 budget proposes capping federal student loan repayment at 12.5% of the borrower’s discretionary income, which is slightly higher than the current rate.
The 2019 budget also proposes forgiving the balance on undergraduate federal student loans after 15 years, not 20 (and 30 years for graduate students) and proposes ending all PSLF programs. Which of these changes will become law is uncertain as of this writing, but it may be a good idea to factor in the possibilities when considering a student loan repayment program.
Refinancing Student Loans
PAYE and REPAYE can be great options for lowering your monthly loan payments. Forgiveness after 20 or 25 is a huge perk with these plans. However, these plans aren’t the only way to potentially lower your monthly payments. You can also refinance your student loans with a private lender, and potentially qualify for a lower interest rate.
With the REPAYE or PAYE program, you have access to federal loan protections, including forbearance, deferment, and the PSLF program—protections you forfeit if you choose to refinance with a private lender. Generally, you’re stuck with your interest rate you got when you were awarded your federal student loans.
Refinancing could get you a new loan with a new (hopefully lower) interest rate or loan terms. While you lose federal loan protections by refinancing, you could potentially pay less over the life of your loans if you’re eligible to save on your monthly payment or save on total student loan interest.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
SoFi does not render tax or legal advice. Individual circumstances are unique and we recommend that you consult with a qualified tax advisor for your specific needs.
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