On Thursday, millions of Americans became eligible to take advantage of the government’s most generous student loan repayment plan.
The repayment program, known as Revised Pay as You Earn or REPAYE, caps borrowers’ monthly bills to 10 percent of their income and forgives the debt after 20 years of payment. Up until now, those terms were only available for people with especially low income relative to their debt and who took out their loans after 2007. But the Obama administration opened the program to anyone with what’s known as a Direct federal loan, regardless of their income or when they borrowed.
All income-driven plans are designed to prevent people from defaulting on their student loans, which can severely damage a person’s credit rating and make it much harder to buy a car or a house. Still, these plans are not for everyone. And before enrolling in the latest one, there are a few things to consider. Let’s start with the basics:
Eligible loans: All Direct federal loans, as long as they are not in default, are eligible for the new plan. As you might recall, the government decided in 2010 to only lend directly to borrowers, rather than backing loans originated by banks and other financial firms. At the time, the government had a small direct lending portfolio that has since tripled in size. If you have one of those old bank-based loans from the Federal Family Education Loan Program (FFEL) or a Perkins loans, you can consolidate that debt into a Direct loan to take advantage of REPAYE. Parent PLUS loans are not eligible for this program.
Monthly payments: The calculation is based on your discretionary income, or whatever you earn above 150 percent of the federal poverty line ($17,655 for a single person). If you make $30,000, for instance, your discretionary income would be $12,345. That means your monthly loan payments would initially be capped at $102.88. If your income is very low, you may not have to pay anything until your paycheck increases.
You have to update your financial information every year, so the more you make the more you will pay. Keep in mind that depending on how your paycheck changes over time, you may wind up paying more than you would under the 10-year standard repayment plan. Check out the Department of Education’s repayment estimator to get a sense of what you will be doling out.
Debt forgiveness: If after 20 years of making payments on your undergraduate loans, you’re still carrying a balance, the remaining money will be wiped away. Here’s the thing, the Internal Revenue Service will treat that sum as taxable income, unless Congress changes the current rules, according to the National Foundation for Credit Counseling. Let’s say you have a $10,000 balance forgiven. That money will be tacked onto your income, which could put you in a higher tax bracket and leave you susceptible to paying Uncle Sam more money.
Credit: The Institute for College Access & Success
Already in an income-driven plan: You can switch into REPAYE, even if you’re enrolled in one of the older income-driven plans (there are four others). Keep in mind, however, any unpaid interest will be added to your loan principal, causing interest to accrue on a higher loan balance, according to the Institute for College Access and Success. And if you consolidate you old bank-based loans to get into REPAYE, any previous payments you made while enrolled in income-based repayment will not count toward the period of time needed to qualify for forgiveness.
Graduate debt terms: Anyone who borrowed for graduate school will have to make payments for 25 years, five years longer than everyone else, to have their remaining balance forgiven. The stipulation is meant to lower the ultimate cost of forgiving the debt of grad students, who tend to borrow more.
Matrimony penalty: Married borrowers can no longer lower their payments by excluding their spouse’s income, unless they are separated or victims of domestic abuse.
Signing up: You’ve got two options here. You can apply online at www.studentloans.gov, where you may be able to electronically upload your tax return information. Or you can ask your student loan servicer, the middlemen that collect and apply your payments, for a paper application.
What to learn more about income-driven repayment? Check out these stories: