(AP Photo/Butch Dill)

Repaying student loans has never been easy, but now, according to a nationally known expert on the subject, it is getting harder. This post by Mark Kantrowitz, explains why. Kantrowitz is president of MK Consulting Inc., a consulting firm focused on computer science, artificial intelligence, and statistical and policy analysis. He has worked as the publisher of the Edvisors, Fastweb and FinAid web sites, and was employed atJust Research, the MIT Artificial Intelligence Laboratory, Bitstream Inc. and the Planning Research Corporation.

Warning: It isn’t easy reading, but it is worth it to get some understanding of how difficult it is for those trying to pay back their loans.

By Mark Kantrowitz

The U.S. Department of Education just released yet another student loan repayment plan based on the borrower’s income, the Revised Pay-As-You-Earn Repayment Plan (REPAYER). The details of the new repayment plan are so complicated that it will be difficult for borrowers to calculate the monthly payment and compare it with the other three income-driven repayment plans.

When Congress added the Pay-As-You-Earn Repayment (PAYER) plan as an improved version of Income-Based Repayment (IBR), effective for new borrowers as of July 1, 2014, President Obama used his regulatory authority to make the PAYER plan available sooner by modifying the Income-Contingent Repayment (ICR) into PAYER. But, since only Congress can appropriate funding, the Obama administration was forced to limit eligibility to new borrowers since October 1, 2007 who have at least one loan first disbursed on or after October 1, 2011, based on savings elsewhere in the federal student loan program.

The goal of the REPAYER plan is to make the PAYER plan available to all borrowers, not just recent borrowers. But, rather than eliminate the eligibility restrictions on the PAYER plan, the Obama administration decided to create a brand new plan, again by using its regulatory authority to modify the ICR plan. Also, somehow the funding restrictions that forced limits on eligibility for the PAYER plan got discarded, as the new REPAYER plan will cost $15 billion over 10 years, according to the U.S. Department of Education.

If you’re not confused yet, just wait.

The REPAYER plan bases the monthly loan payment on 10 percent of the borrower’s discretionary income, as opposed to the amount owed, divided by 12. Discretionary income is defined as the amount by which the borrower’s adjusted gross income (AGI) exceeds 150 percent of the poverty line.

The remaining debt is forgiven after 20 years (240 payments) for borrowers who have only undergraduate loans. For borrowers who have one or more graduate loans, the remaining loan balance is forgiven after 25 years (300 payments). Borrowers who qualify for public service loan forgiveness will have the remaining debt forgiven after 10 years (120 payments). The 20- or 25-year forgiveness is taxable under current law, while the 10-year forgiveness is tax-free.

The REPAYER plan introduces a marriage penalty by basing income on a married couple’s combined AGI, even if they file separate federal income tax returns. The ICR, IBR and PAYER plans count only the borrower’s income if the couple files separate returns.

The marriage penalty counts each spouse’s income, even if it is below 150 percent of the poverty line. It also subtracts 150 percent of the poverty line once from the combined income, instead of twice, once from each spouse’s income. Given the current poverty line of $15,930 for a family of two, the marriage penalty increases annual loan payments by at least $2,389.50 for a married couple, or at least about $200 per month. Even though the percentage of discretionary income is lower, counting both incomes increases the debt burden for two-borrower families with combined annual income under about $50,000 and for all one-borrower families.

The REPAYER plan also removes the cap on the monthly loan payments, allowing monthly loan payments to increase without bound as the borrower’s income increases. Under the IBR and PAYER plans, the monthly payment is capped at the monthly payment under the standard 10-year repayment plan.

The Obama administration argues that removing the cap will prevent doctors from qualifying for significant amounts of loan forgiveness. Under the IBR plan, doctors could earn forgiveness during the internship and residency, when their annual income is significantly lower than their student loan debt, because most hospitals qualify for Public Service Loan Forgiveness. When their annual income increases, the cap would keep the maximum loan payment at the standard 10-year payment, preserving the loan forgiveness previously earned. Although the REPAYER plan increases the amount of forgiveness earned during the internship and residency, the Obama administration argues that the elimination of the cap on the monthly loan payments will reduce the total amount of forgiveness. However, nothing prevents a doctor from using the REPAYER plan during the internship and residency and then switching to IBR when the doctor’s annual income increases.

It is possible for a borrower to be negatively amortized under the REPAYER plan, since the monthly payments may be less than the new interest that accrues. During the first three years on REPAYER, the federal government will pay the unpaid interest on any subsidized Federal Stafford loans or the portion of a Federal a Direct a Consolidation loan that refinanced subsidized Federal Stafford loans. After the first three years for subsidized loans and at all times for unsubsidized loans, only half of the unpaid interest will capitalize. This is more of a marketing gimmick than real savings for borrowers, since the unpaid interest would have been canceled for borrowers who have the remaining debt forgiven.

So, how is a borrower to choose among the four income-driven repayment plans, ICR, IBR, PAYER and REPAYER? If the borrower’s total student loan debt is less than the borrower’s annual income, the borrower is unlikely to derive a financial benefit from any of the income-driven repayment plans. But if total debt exceeds annual income or the borrower is working in a public service job, it is worthwhile to consider the income-driven repayment plans. If the borrower qualifies for PAYER, he or she should use that plan, because it yields the greatest financial benefit. Otherwise, all borrowers are eligible for IBR and REPAYER. The borrower will need to calculate the monthly payments and total payments under these repayment plans to see which one saves the most money. No borrowers should use ICR, as the monthly payments are highest under this repayment plan.

Of course, it is best for a borrower to recalculate his or her monthly payment under each repayment plan annually, to determine the tradeoffs of switching repayment plans.