Revised Pay As You Earn (REPAYE) Guide

Revised Pay As You Earn (REPAYE) Guide

Revised Pay As You Earn (REPAYE) is one of the many income-driven repayment plan options offered by the U.S. Department of Education to help manage student loan payments.1 While REPAYE is useful in keeping payments low and maximizing federal student loan forgiveness, there are some aspects to the program we should discuss because they could get people into serious trouble.

Here’s what you should know about this program — the good, the bad, and the ugly.

 

  • REPAYE Plan Background
  • REPAYE Eligibility
  • What are REPAYE payments like?
  • Pros to REPAYE
  • Cons to REPAYE
  • Last Thoughts on REPAYE
Revised Pay As You Earn (REPAYE)

Revised Pay As You Earn (REPAYE) Guide

One thing you’ll learn about our government is that they don’t like updating or removing older repayment plans that won’t work anymore. Instead, they continually add new ones which confuses borrowers.

As the cost of college started to increase beyond the ability for most parents to pay, so did student debt —and with that, the student’s ability to make payments on that debt. This problem gave way for the creation of the Graduated repayment plan, then eventually income-driven repayment plans like Income Contingent Repayment (ICR) and Income-Based Repayment (IBR).

However, the addition of those repayment plans acted more like a bandage rather than fixing the outlying problem: college costs are out of control. Because of that, monthly payments on income-driven repayment plans like IBR are still unaffordable. That’s when the U.S. Department of Education added the Pay As You Earn (PAYE) repayment option. However, PAYE came with rigorous eligibility requirements and very few borrowers actually benefited from this repayment option.

The U.S. Department of Education’s response? They introduced a new and expanded version of PAYE, called Revised Pay As You Earn or “REPAYE”. REPAYE eliminated the “new borrower” loan disbursement provision that made PAYE so inaccessible to borrowers. But the plan also came with many new regulations that make REPAYE very unique from PAYE, IBR, and even ICR.

REPAYE Eligibility

Today, any student borrower with federal Direct Loans, which includes Direct Stafford loans, Direct Consolidation loans, and Direct Graduate PLUS loans are eligible to choose REPAYE as a repayment option. That makes the program very accessible to many borrowers.

Unfortunately, older student loans like Federal Family Education Loans (FFEL) don’t qualify. However, FFEL loans can get consolidated into a Direct Consolidation Loan, which does qualify.

Also, REPAYE is not available to parents with Direct Parent PLUS loans. The only income-driven repayment option available for Parent PLUS loans is the Income Contingent Repayment (ICR) plan.

Eligible Loans: Direct Loans (Subsidized and Unsubsidized), Direct Graduate PLUS loans, Direct Consolidation loans.

REPAYE Repayment & Term

Revised Pay As You Earn (REPAYE) is genuinely an advantageous repayment plan for many seeking to maximize loan forgiveness or simply lower payments. The program caps your payments at 10 percent of your “discretionary income,” which I’ll explain below.

Depending on your student loans, REPAYE has two possible repayment terms.

  1. Undergraduate Loans: Loans taken out for undergraduate studies have a repayment term of 20 years, with any remaining balance forgiven at that time.
  2. Graduate/Professional Loans: Loans taken out for graduate or professional studies have a repayment term of 25 years, with any remaining balance forgiven at that time.

It’s important to note that any forgiveness achieved through completing the term of REPAYE (20-25 years) is taxed as income in the year it was received. If forgiveness is likely, you should evaluate what that tax liability might look like. 

Planning today for that tax bill will help you avoid negative consequences associated with owing the IRS money.

Pros to REPAYE

Revised Pay As You Earn (REPAYE) is genuinely an advantageous repayment plan for many seeking to maximize loan forgiveness or simply lower payments. But like I mentioned earlier, it does take some planning and analytics for things to work out the way you hope.

Here are a few pros to choosing REPAYE:

  1. 10% AGI payments. To calculate your monthly payment, REPAYE uses 10% of your “discretionary income.” The discretionary income formula takes your Adjusted Gross Income and subtracts one-and-a-half times the poverty line. You can find the 2020 Poverty Guidelines in the U.S. Department of Health & Human Services’ website.2
  1. 50% Unpaid-Interest Subsidy. REPAYE comes with a very robust interest subsidy which is great news considering that subsidized Stafford loans for medical students no longer exist. 

Here’s how the interest subsidy works. Half of the interest that you don’t pay with the 10% payment is waived and does not accrue interest. That’s a huge perk of the program and residents currently on PAYE should crunch some numbers to see how much they benefit before switching to REPAYE. This perk can effectively reduce your interest rate.

Here’s an example:
Loan: $200,000 at 6.8%

REPAYE payment as a resident making $50,000: $260/month

Annual interest accrued: $13,600

Annual interest paid: $3,240

Annual interest unpaid: $10,360

Amount forgiven: $5,180

Effective interest rate: 4.2% 

  1. Ability to earn forgiveness outside of PSLF. All income-driven repayment plans come with a long-term loan forgiveness provision, which is taxable.

Attending a private college or university and medical school can make this interest subsidy beneficial for a really long time. Of course, like Income-Based Repayment (IBR) and Pay As You Earn (PAYE), the unpaid interest you have on any subsidized student loans is still completely covered for 3 years.

Cons to REPAYE

While REPAYE offers some excellent benefits, especially for single people, there are some substantial downsides that we should consider. While REPAYE may work well for us today, it might not in near future.

Let’s take a look at some of these downside for pitfalls to avoid:

  • Marriage penalty. REPAYE closed the Married, Filing Separately (MFS) loophole available in other income driven repayment (IDR) plans like IBR or PAYE. With other IDR plans, you could file separately from your spouse if their income didn’t add any value to your repayment strategy.  Filing separately allows your monthly payment to be calculated solely on your income, thereby lowering your monthly payment. This was extremely helpful to doctors with higher earning spouses who didn’t have student debt, especially lower-earning residents. In short, if you’re on REPAYE while married, it doesn’t matter how you file your taxes; your spouse’s income will be added regardless.
  • Elimination of Payment Cap. All other income-driven repayment plans like IBR and PAYE have a ceiling as to how high your monthly payments can go. Your monthly payments would never be higher than that of Standard repayment. REPAYE doesn’t have that payment cap. Your monthly payments will be 10% of your discretionary income; the more discretionary income you have, the higher your monthly payments will be. 
  • Negative amortization. Interest accrual under REPAYE can be a bit unnerving. It’s not uncommon for monthly payments to be lower than the interest accrued each month, which causes what’s called, “negative amortization. Negative amortization occurs when your monthly payment doesn’t cover the interest accrued. This will create an “outstanding interest” balance that will continue to grow until the interest is capitalized (added to your balance).

Do you see how the Outstanding Interest and Total Outstanding (balance) columns continue to rise, despite paying $1,339 a month? 

If you plan on earning forgiveness through PSLF, I can see how this might not concern you. Just keep in mind that PSLF has a very high rejection rate (90.9%). 

In the March 2020 PSLF Report  provided by the U.S. Department of Education, 188,396 PSLF applications were submitted in 2020. 171,321 of those PSLF applications were rejected. 

  • A potential tax liability. With forgiveness through PSLF, it doesn’t matter how high your loan balance gets. The forgiven amount is a hundred percent tax-free. However, the same cannot be said for forgiveness through an income-driven repayment plan like REPAYE. Loans forgiven through that method will be taxed as income in the year that they’re forgiven. Having a growing student loan balance (due to negative amortization) will only increase that looming tax bill. 

Example:
Forgiven amount: $150,000
Tax bracket: 30%
Tax liability: $45,000
Who you owe the money to: IRS

A lot of borrowers might expect to see this bill right around the time they prepare to send their first child off to college. Not a good time.

My last thoughts

Today, it might appear as if you can switch repayment plans as needed. But the same might not be true in just a few years. You might find that your income reaches a threshold where you are no longer eligible to switch back to an Income-Based Repayment (IBR) plan.

Don’t forget; borrowers must be able to demonstrate financial need in order to switch to IBR. While that’s not hard for a recent graduate, what happens in a few years when their income multiplies?

On IBR, your monthly payments would never exceed that of payments on the 10-year Standard repayment plan. Unfortunately, there’s no such cap with Revised Pay As You Earn (REPAYE).

On REPAYE, payments are solely tied to 10 percent of your discretionary income, which means the higher your income, the larger your monthly payments become. In addition, as smaller, individual loan tranches get paid off (if you’ve never consolidated), discretionary income frees up causing monthly payments to increase. 

As a result, your monthly payment schedule could rapidly accelerate, dramatically reducing or even eliminating any potential to benefit from forgiveness. 

Join the webinar

There comes the point in everyone’s student loan journey where they have to question the effectiveness of their student loan payoff strategy. Obviously, there’s a lot on the line. 

Perhaps you’ve been making payments for some time now but not seeing your balance go down as fast as you’d like —or worse, your balance is actually increasing. 

Register for one of my upcoming Student Loan Destroyer webinars. I’ll provide you a crash course in student loan management and review a real life case study. I’ll also share how you can have me look at your student loans and answer all your questions. 

 

Upcoming webinars

Sources:

1) U.S. Department of Education, — https://studentaid.gov/manage-loans/repayment/plans/income-driven

2) U.S. Department of Health & Human Services, 2020 Poverty Guidelines —https://aspe.hhs.gov/2020-poverty-guidelines

3) U.S. Department of Education, Public Service Loan Forgiveness Data — https://studentaid.gov/data-center/student/loan-forgiveness/pslf-data

Income-Based Repayment (IBR) Guide

Income-Based Repayment (IBR) is one of the most widely available and use income-driven repayment plan options offered by the U.S. Department of Education. It is designed for borrowers with higher federal student loan balances, as compared to their income. 

Here’s what you should understand about IBR, and when you might lose the option to switch back to it:

  • IBR Background
  • IBR Plan Eligibility
  • IBR Repayment & Term
  • Pros to Income-Based Repayment (IBR)
  • Cons to Income-Based Repayment (IBR)
  • My last thoughts on IBR
  • Upcoming student loan webinars
Income-Based Repayment (IBR) Guide

Income-Based Repayment (IBR) Guide

As the cost of college started to soar, monthly payments became less affordable using the Income Contingent Repayment (ICR) repayment plan. 

With ICR, borrowers would pay the lesser of two options:

  • 20% of their discretionary income, for a maximum of 25 years before earning forgiveness; or
  • they would pay on a repayment plan with a fixed payment over 12 years, adjusted according to income.

In 2007, the federal government introduced the more generous Income-Based Repayment (IBR) plan. In 2010, Congress passed The Health Care and Education Reconciliation Act of 2010, which adjusted repayment plan terms for borrowers making the terms of IBR more generous to new borrowers after 2014. 

So there are currently a couple versions of IBR.

IBR Plan Eligibility

Income-Based Repayment (IBR) was designed to help students with higher federal student loan balances relative to their income and family size. To be eligible for IBR, you have to demonstrate financial need. It’s available to student borrowers (not parents) with either Direct or Federal Family Education Loans (FFEL). The fact that you need to qualify for IBR is a blind spot for busy professionals. REPAYE ends up being the repayment plan of choice due to the lower monthly payments and the ability to earn forgiveness. However, REPAYE payments can end up higher than those on a 10-year Standard plan as your income increases due to no payment cap. To qualify for Income-Based Repayment (IBR), your monthly payment must be less than what you would pay under the 10-year Standard Repayment plan. Eligible Loans: Direct Loans (Subsidized and Unsubsidized), Direct Graduate PLUS loans, Direct Consolidation loans.

IBR Repayment & Term

 Income-Based Repayment (IBR) is an income-driven repayment option that calculates your monthly payment by using a percentage of your “discretionary income,” whereas balanced-based programs (like 10-year Standard) calculate your payments based on your student loan balance and interest rate.


Your discretionary income is calculated by taking your Adjusted Gross Income (AGI) and subtracting 150 percent of the annual poverty line for your family size and state. This means that your monthly payments are custom-tailored to your specific needs: income, cost of living, and family size.2

Like ICR, the repayment period for IBR is up to 25 years. If the loans are not paid off within 25 years, any balance remaining is forgiven —although, as with all income-driven repayment plans, the amount forgiven is treated as taxable income.


There’s secretly two versions of IBR and payments can vary dramatically based on which one you have.

  • IBR version #1. For borrowers who were disbursed their first loans before July 1, 2014, Income-Based Repayment (IBR) caps monthly payments at 15% of your discretionary income. These borrowers will also be eligible for forgiveness after 25 years of repayment.
  • IBR version #2. For new borrowers —meaning you cannot have been disbursed any federal student loans —on or after July 1, 2014, Income-Based Repayment (IBR) caps monthly payments at 10% of your discretionary income. These borrowers will also be eligible for forgiveness after 20 years of repayment.

As you can see, the IBR became much more favorable after The Health Care and Education Reconciliation Act of 2010, but only applies to newer borrowers.

Income-driven repayment plans like IBR require an “income verification” process where you’ll be required to submit documentation to prove your income. If you forget or avoid these requests from your loan servicer, your payments will ratchet up to match payments on the Standard repayment plan.

That could double your amount due for that month. So stay on top of emails from your loan servicing company.

IBR Pros

 There are many upsides to Income-Based Repayment (IBR). From affordable monthly payments to the ability to earn forgiveness, it’s easy to see why it’s become a staple repayment option.

Here are just a few remarkable benefits to the program:

  • Affordable monthly payments. IBR uses a percentage of your income to determine your monthly payment. This makes monthly payments more manageable to early-career professionals.
  • Ability to earn forgiveness. While earning forgiveness through an income-driven repayment plan like IBR is taxed as income, not having to pay a six-figure student loan balance takes the cake. With IBR, you earn forgiveness in 20 to 25 years.
  • IBR is easier to understand. Out of all your income-driven repayment options, IBR is the most straightforward. You’ll never find yourself in a sticky situation.
  • PSLF friendly. If you have the right kind of loans and the right employer, you can earn forgiveness through PSLF while on IBR. It might be the more desirable repayment option for pursuers of PSLF, if you’re married.
  • Marriage-friendly. With IBR, you can rest assured that you can invite Uncle Sam to the wedding without much consequence. You can control your monthly payments depending on how you file your taxes (Married Filing Separate or Married Filing Jointly).

IBR Cons

 There are pros and cons to every repayment plan. Income-Based Repayment (IBR) is no different. Here are some hurdles I’ve seen people have with the program.

  • IBR is a long-term strategy. Because monthly payments are typically lower, you’ll be paying back these loans for a lot longer. That means the Net Cost of your student loans could be substantially higher than if you were aiming to pay it off —unless you’re shooting for forgiveness.
  • A potential tax liability. Forgiveness through income-driven plans like IBR is treated as taxable income, unless you’re earning forgiveness through PSLF which is tax-free.

    Example:
    Forgiven amount: $150,000
    Tax bracket: 30%
    Tax liability: $45,000
    Who you owe the money to: IRS
  • Negative amortization. Your balance can go up despite making on-time monthly payments. Some people’s payment doesn’t cover the interest that accrues each month. This creates an “Outstanding Interest” balance that will periodically get added to your balance.

Final thoughts

Income-Based Repayment (IBR) is a very friendly repayment option. It ties your monthly payments to a percentage of your income, and for many that make those payments more manageable.

However, switching to IBR isn’t a guarantee; you do need to qualify. If you’re on a repayment plan like REPAYE, and your income explodes, you could be blocked from switching back as you’ll no longer have financial need.

If that happens, you could find that your payments may become unaffordable and your only other repayment option would be the 10-year Standard plan, ultimately erasing any hope for forgiveness.

Unfortunately, there is no “one size fits all” or a “set it and forget it” repayment option. Major life events such as marriage, divorce, children, change of employer, or changes in income will affect your repayment strategy, requiring you to re-evaluate your student loan payoff strategy

Join the webinar

 There comes the point in everyone’s student loan journey where they have to question the effectiveness of their student loan payoff strategy. Obviously, there’s a lot on the line.

Perhaps you’ve been making payments for some time now but not seeing your balance go down as fast as you’d like —or worse, your balance is actually increasing.

Register for one of my upcoming Student Loan Destroyer webinars. I’ll provide you a crash course in student loan management and review a real-life case study. I’ll also share how you can have me look at your student loans and answer all your questions.

 

Upcoming Webinars

Sources:

1) U.S. Department of Education, — https://studentaid.gov/manage-loans/repayment/plans/income-driven

2) U.S. Department of Health & Human Services, 2020 Poverty Guidelines —https://aspe.hhs.gov/2020-poverty-guidelines

3) U.S. Department of Education, Public Service Loan Forgiveness Data — https://studentaid.gov/data-center/student/loan-forgiveness/pslf-data

Pay As You Earn (PAYE) Guide

Pay As You Earn (PAYE)

Pay As You Earn (PAYE) is one of the several income-driven repayment options for federal student loan borrowers. PAYE offers low monthly payments, capping payments at just 10% of your discretionary income.1

For residents and attending physicians trying to earn forgiveness through Public Service Loan Forgiveness (PSLF), you’ll be happy to learn that PAYE is a qualifying repayment plan option. 

Just keep in mind that the PSLF rejection rate is still absurdly high at 91% as of Q1 2020, according to the Department of Education.2 

The Public Service Loan Forgiveness is a troubled program with approximately 99% of all PSLF applicants having been rejected. New York’s attorney general’s office states, “FedLoan’s alleged failures are “a significant contributor to the shockingly high rate of rejection, adding “FedLoan has failed miserably.”3

 If you’re a doctor pursuing PSLF, have an analysis of your student loans run annually.

Pay As You Earn (PAYE) Guide for Physicians

Pay As You Earn (PAYE) was enacted by the Obama administration through the Health Care and Education Reconciliation Act of 2010, and signed into law by President Barack Obama on December 21, 2021.

As the cost of college continued to increase, so did the average student loan balance and monthly payments. Pay As You Earn (PAYE) was President Obama’s follow through on his promise to provide student loan borrowers with relief on their student loan payments.

At the time, the version of Income-Based Repayment (IBR) capped student loan repayments at 15% of borrowers’ discretionary income. PAYE offered a monthly payment cap of 10% of discretionary income, effectively lowering monthly payments for eligible borrowers by a third

While that might not seem like a big difference for those in residency, it’s a huge difference when you become an attending.

PAYE Plan Eligibility

Pay As You Earn (PAYE) is a very desirable repayment plan option. It allows a physician to keep their monthly payments lower while in residency and fellowship, allowing them to maximize loan forgiveness through PSLF. All that without running into potential problems inherent with Revised Pay As You Earn (REPAYE), such as the marriage penalty.

Unfortunately, there are substantial restrictions on being able to select this repayment plan. You must meet these three criteria:

  1. Your first set of federal student loans must have been disbursed on or after October 1, 2011. If your loans were disbursed to you before this date, PAYE is not available to you.
  2. You must have Direct Loans (Direct Subsidized, Direct Unsubsidized, Direct Grad PLUS, or Direct Consolidation Loans). These are also the loans that qualify for PSLF.
  3. You must demonstrate partial financial hardship. Your monthly payments on PAYE must be less than that of Standard repayment.

If you're loosely spending money while your partner is doing everything they can to save a buck, there's bound to be friction in your relationship.

PAYE Repayment & Term

Pay As You Earn (PAYE) is an income-driven repayment plan that uses a percentage of your “discretionary income” to calculate your monthly payment. In contrast, balanced-based programs (like 10-year Standard) calculate your payments based on your student loan balance and interest rate.

Discretionary income is calculated by taking your Adjusted Gross Income (AGI) and subtracting 150 percent of the annual poverty line for your family size and state. This means that your monthly payments are custom-tailored to your specific needs: income, cost of living, and family size.

PAYE Formula: (AGI – (Poverty Line x 150%) x 10%) / 12

Note: You can visit the Office of the Assistant Secretary for Planning and Evaluation (ASPE) for the U.S. Federal Poverty Guidelines.4

If your monthly payment is less than $5, by the formula, your monthly payment will be zero dollars. If your monthly payment is greater or equal to $5 but less than $10, your monthly payment will be set to $10. Thus your monthly payment will be zero if your AGI is less than 150 percent of the poverty line.

Zero-dollar monthly payments while on PAYE still counts toward Public Service Loan Forgiveness (PSLF), provided you meet all the other PSLF criteria.

If you’re not working in the public interest sector, you can also earn forgiveness with PAYE the long way. The repayment period for PAYE is up to 20 years. If your loans are not paid off within 20 years, any balance remaining will be forgiven —although, as with all income-driven repayment plans, the amount forgiven is treated as taxable income.

Final thoughts

Pay As You Earn (PAYE) is an effective repayment plan for residents and attending physicians. It’s versatile in that it has the potential to lower monthly payments, the ability to earn forgiveness through PSLF, and doesn’t come with a marriage penalty.

The only downside is that it’s not available to most borrowers. Remember, you can never have been disbursed a federal student loan before October 1, 2011. That eliminates many people.

If you have access to PAYE, there’s a good chance you also have the version of Income-Based Repayment (IBR) that causes higher monthly student loan payments, capping monthly payments at 15% of discretionary income.

If you’re a newer borrower and your first federal student loans were issued on or after July 1, 2014, there’s a good chance that you have the latest version of IBR. This version of IBR caps your monthly payments at 10% of your discretionary income, just like PAYE.

Join the webinar

Unfortunately, loan servicers like Navient, Great Lakes, and FedLoan Servicing (PHEAA) don’t provide borrowers with enough information to make educated decisions.. 

If you want to learn more about how to create your student loan strategy, I invite you to join an upcoming webinar. You’ll receive a crash course in student loan management and review a real-life case study. Or you can skip the webinar and schedule a call.

Lastly, I would appreciate it if you answered this five-question survey about your med school loans. It helps my team understand how to help today’s residents and attendings.

 

Upcoming Webinars

Sources:

1) U.S. Department of Education, — https://studentaid.gov/manage-loans/repayment/plans/income-driven

2) U.S. Department of Education, Public Service Loan Forgiveness Data — https://studentaid.gov/data-center/student/loan-forgiveness/pslf-data

3) Market Watch, Andrew Keshner – https://www.marketwatch.com/story/ny-attorney-general-sues-loan-servicer-says-it-failed-miserably-to-process-student-debt-forgiveness-applications-2019-10-03

4) U.S. Department of Health & Human Services, 2020 Poverty Guidelines —https://aspe.hhs.gov/2020-poverty-guidelines

Neither Hornor, Townsend, & Kent, LLC (HTK) nor any of its affiliates offer lending or repayment advice. The views expressed are those of the presenting party and may not express those of HTK or its affiliates. The information presented is for educational purposes only and is derived from sources assumed to be reliable. It is not to be relied upon as tax, legal, or financial advice, nor used for the purpose of avoiding any tax obligations. Please contact a qualified professional regarding your individual circumstances.