Five million student loan borrowers have yet another way to pay back their loans.
In December 2015, the U.S. Department of Education launched the newest income-driven student loan repayment plan called Revised Pay As You Earn, or REPAYE. It’s an extension of the existing Pay As You Earn (PAYE) plan, which maxes out monthly loan payments at 10% of your income; to be eligible for that program, you must meet some specific requirements.
REPAYE, on the other hand, is available to all grads with federal direct loans. Consider it if your income may drop in the future or you can’t count on a steady paycheck. And if you first took out loans before October 2007 — which excludes you from using the PAYE plan — then REPAYE opens a door for you as well.
Here’s what you need to know about REPAYE and how to opt in if it’s a good fit for you.
1. Grads of all income levels can participate
The government already offers three other plans that tie loan payments to income. They include:
You can’t sign up for the most generous plans, IBR and PAYE, unless you demonstrate that the 10-year standard repayment plan is unaffordable for you. REPAYE removes that requirement, so no matter how much you make, your payments will never be more than 10% of your income based on your family size.
“It removes a barrier to entry,” says Lauren Asher, president of the Institute for College Access and Success (TICAS), a nonprofit. “You don’t have to wait until your debt-to-income ratio hits a certain point to qualify.”
Like the other plans, though, only direct loans qualify for REPAYE. You can consolidate other types, like Perkins or Federal Family Education Loans, into a direct consolidation loan to make them eligible. Be sure to weigh the pros and cons of consolidation before you take that step.
2. Your eligibility doesn’t depend on the year you borrowed
Other income-driven plans base your eligibility, or how much you pay, on the year you borrowed. REPAYE removes these obstacles. There’s no time requirement to participate, and everyone receives the same benefit. Here’s how it’s different from the other plans:
All PAYE participants pay a maximum of 10% of their incomes and receive forgiveness after 20 years of payments. But you can’t sign up if you had any outstanding loan debt before Oct. 1, 2007.
With IBR, your monthly payments are capped at 15% of your income and your remaining balance is forgiven after 25 years if you took out your first loan before July 1, 2014. New borrowers as of July 1, 2014, receive a 10% cap and forgiveness after 20 years.
REPAYE is a good option for anyone who couldn’t sign up for PAYE and would have only qualified for the less-generous 15% cap on payments on IBR. REPAYE gives those borrowers the opportunity to limit their loan bills to 10% of their incomes.
3. Your loans will be forgiven after 25 years if you have any grad school debt
REPAYE treats forgiveness differently for undergraduate and graduate student borrowers.
The other plans offer the same forgiveness timeline regardless of the course of study you borrowed loans for: All borrowers on PAYE get forgiveness after 20 years, for instance, whether the loans are from undergrad, grad school or a mix.
Under REPAYE, if you took out any loans for grad school, all your loans will be forgiven after 25 years. If you only have undergrad loans, those will be forgiven after 20 years.
Keep in mind that borrowers who work in a public service job can have the remainder of their loans canceled after just 10 years through Public Service Loan Forgiveness. Perkins loans also offer loan cancellation programs.
4. The government will pay more of the accrued interest on your loans
Many grads’ payments on income-driven plans are so low that they only chip away at the interest that’s accruing, not the original loan balance. Your payments can be zero if you have no income, which means your balance doesn’t decrease while you’re in repayment.
Interest accumulates fast that way, so the government offers a subsidy to borrowers on IBR and PAYE. For three years it will cover unpaid interest that accrues each month, but only for subsidized loans.
REPAYE improves upon the current system. The government offers the same subsidy the first three years in repayment, plus it will cover half the accruing interest after that, on both subsidized and unsubsidized loans. You can look up your federal loans in the National Student Loan Data System if you’re not sure whether your loans are subsidized.
“Your balance will grow more slowly under REPAYE than it would under all the other plans,” says Diane Cheng, senior research analyst at TICAS. “If you end up getting forgiveness, you will have a smaller balance forgiven.”
Current IRS rules require you to pay taxes on the forgiven loan amount, so that keeps your balance from growing so large the taxes would be untenable.
5. Sign up on studentloans.gov (and remember to renew every year)
Participation in REPAYE doesn’t happen automatically. Here’s how to sign up:
- Log in to studentloans.gov with your Federal Student Aid ID. Create an FSA ID if you don’t have one yet.
- Click on “Complete Income-Driven Repayment Plan Request.” Look through a preview of the form in advance so you know what documents to have ready.
- Choose “REPAYE” in the “Income-Driven Repayment Plan” column on the form.
- Enter your family size and income information.
- Submit the form online or, if you’d rather fill out a paper version, do so and mail it to your loan servicer.
Like the other income-driven plans, you must recertify your income every year, even after you’ve signed up once. You’ll fill out the same form on studentloans.gov with your updated information, and your payments will be recalculated if your earnings are different. But your bill will always be 10% of your income. Knowing you’ll never fall behind is worth that extra work each year.
Other repayment options
If you want to save on the total cost of your loan and you have strong credit as well as a steady income, consider student loan refinancing. When you refinance with a private lender, your current loan is replaced with a new loan at a lower interest rate and a new term; the shorter the term, the more you’ll save.
Refinancing is a good choice for borrowers with private loans or those with federal student loans who don’t plan to use an income-driven repayment plan, federal loan forgiveness programs or other protections. Consider all options and compare offers before refinancing.