This is part one of a two-part series that explains everything a physician should know about the new federal student loan repayment program, REPAYE. Part one breaks down the details of the new program and applies to borrowers of all professions. Part two will follow next week.
Last month, the Department of Education made a new student loan repayment plan available to borrowers with federal student loans. The Revised Pay As You Earn Plan, better known as REPAYE, is a new income-driven repayment plan that expands on its predecessors Income-Based Repayment (IBR) and Pay As You Earn (PAYE) to further ease the burden of school debt. Similar to PAYE, REPAYE caps an individual's monthly payments at 10% of his or her discretionary income and offers loan forgiveness after several years of repayment.
While REPAYE borrows many elements from previous income-driven repayment plans, there are several factors that make it both different and beneficial for some borrowers more than others.
REPAYE is available to all borrowers with federal Direct student loans, regardless of income or loan application date. REPAYE does not cap payments at the 10-year standard amount.
In the past, income-driven repayment plans were only made available to borrowers for whom a 10-year Standard Repayment Plan would be too economically burdensome. To demonstrate this burden, an individual's payment under PAYE and IBR (10% or 15% of discretionary income, respectively) would have to be less than what the individual would pay under the 10-year standard. If a borrower's student debt burden is greater than his or her annual discretionary income, he or she will typically qualify for income-driven repayment.
PAYE is also limited to new borrowers who took out student loans as of October 2007. PAYE, which caps payments at 10% of monthly income and offers loan forgiveness after 20 years of repayment, is more generous than the older IBR plan, which caps payments at 15% and offers loan forgiveness after 25 years.
REPAYE is limited by neither income level nor application date - as long as the borrower has federal Direct student loans, he or she is eligible for the plan. Parent PLUS loans are not eligible for REPAYE.
REPAYE pushes the term to forgiveness for graduate student loans to 25 years.
Under REPAYE, students with loans from their undergraduate degrees may have their debt forgiven after 240 monthly payments, or 20 years of consecutive loan repayment. Students with graduate degrees, however, must have made 300 monthly payments, or 25 years, to be eligible for loan forgiveness. Previous income-driven repayment plans did not differentiate between undergraduate and graduate loans with regard to debt forgiveness.
Your spouse's income will count toward your discretionary income, which could increase your student loan monthly payment.
In the past, a spouse's income was not counted toward a borrower's discretionary income unless the couple filed jointly on their taxes. Because of this distinction, many borrowers would choose to file their taxes separately from their husband or wife so that their discretionary income, and thereby their monthly student loan payment, would be lower. Under REPAYE, a borrower's filing status is not taken into consideration - if the person is married, his or her spouse's income will be included in the total discretionary income, making student debt payments larger for any dual-earner families.
The government will pick up some of the unpaid interest that accrues on your loans.
Perhaps the most compelling aspect of the new REPAYE plan for borrowers is that the government will pick up some or all of the unpaid interest on both subsidized and unsubsidized Direct loans. Like PAYE, under REPAYE the government will cover any unpaid interest on subsidized federal loans for three years if a borrower's monthly payment does not cover all of the accruing interest on the loan. REPAYE, however, expands this government subsidy to include unsubsidized federal loans. Under the new plan, the government will pay 50% of any unpaid interest that accrues on unsubsidized federal loans, as well as for subsidized loans beyond the three year mark. In this regard, REPAYE is particularly attractive to low-income borrowers whose 10% monthly payment cap will not cover their entire interest payment.
Borrowers must apply to REPAYE every year to remain enrolled in the program. Although the addition of this program has by no means simplified the arsenal of federal repayment plans available to borrowers, REPAYE has its merits. Low-income borrowers, particularly those who did not previously qualify for PAYE, will find the new program and its interest subsidies to be incredibly valuable. High earners or those with high-earning spouses are not as strong of a fit for REPAYE as it would require them to make a larger monthly payment at 10% of their combined income.
Some borrowers may save more money by forgoing the federal route entirely and refinancing their student loans to a lower rate with a private lender like DRB. Part two of this series will address questions that medical professionals, specifically residents, should consider when choosing between a federal repayment program and private student debt refinancing. Stay tuned.
About DRB
DRB (Darien Rowayton Bank) is a leading bank, national marketplace lender, and the fastest lender in industry history to reach $1 billion in student loan refinancings. FDIC-insured and established in 2006, DRB has helped thousands of professionals with graduate and undergraduate degrees across the country to refinance and consolidate federal and private student loans, saving these borrowers thousands of dollars each.
For more information, visit https://student.drbank.com/.