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New REPAYE Income Driven Repayment Proposal - How it Helps Families Manage Federal Student Loans

Updated: Mar 3, 2023

The new REPAYE income driven repayment proposal would be a huge help to lower and middle-income families with federal undergraduate loans


The Major Changes to REPAYE

The Biden administration and the Department of Education are proposing dramatic changes to the current REPAYE (Revised Pay as You Earn) repayments plan for federal undergraduate loans.

  1. The new law would reduce the borrower’s minimum monthly payment to 5% of discretionary income down from 10% for undergraduate federal loan borrowers. Discretionary income in this situation currently refers to the borrower’s annual income minus 150% of their state’s poverty level.

  2. Under the new guidelines, income allowance would increase from 150% of the poverty line to 225% of the poverty line. Should this new law go into effect, many lower and middle-income individuals/families will see a significant reduction in their monthly minimum payments.

  3. Married borrowers will be able to exclude spousal income from consideration by filing taxes separately under the new regulations, like ICR, IBR, and PAYE – the other income-based repayment plans (currently, you must count spousal income regardless of tax filing status).

  4. The other big change is that the student loan balance cannot accrue interest, even with $0 monthly payments or payments that do not cover the interest. In other words, the monthly payments may not cover the interest depending on the loan balance. If the payments do not cover the interest, no additional interest will accrue, leaving the total balance the same.

Below are some specific examples of how borrowers will be positively impacted:

 

Example 1: Scenario: Single (no kids) – $60,000/Yr. gross income – has federal undergraduate loans in the amount of $30,000 ($27,000 + $3,000 accrued interest).

OLD REPAYE – $60,000 – (150% of the poverty line of $14,580 = $21,870) = $31,830 (“discretionary income”)

  • Monthly payment is (10% of $31,830) / 12 = $265.25/Mo.

NEW REPAYE – $60,000 – (225% of the poverty line of $14,580 = $32,805) = $27,195 (“discretionary income”)

  • Monthly payment is (5% of $27,195) / 12 = $113.31/Mo.

NET MONTHLY SAVINGS – $152 (57% lower payment)

 

Example 2: Scenario: Recently married couple (no kids) – $80,000/Yr. ($40,000/Yr. each) combined gross income – only one spouse has federal undergraduate loans in the amount of $30,000 ($27,000 + $3,000 accrued interest).

OLD REPAYE – $80,000 – (150% of the poverty line of $19,720 = $29,580) = $50,420 (“discretionary income”) *irrelevant how you file taxes, must count both spouse’s incomes.

  • Monthly payment is (10% of $50,420) / 12 = $420.17/Mo.

NEW REPAYE – $40,000 – (225% of the poverty line of $14,580 = $32,805) = $7,195 (“discretionary income”) *must file taxes separately so that only the borrower’s income counts towards payment.

  • Monthly payment is (5% of $7,195) / 12 = $29.98/Mo.

NET MONTHLY SAVINGS – $390.19 (93% lower payment)

 

Example 3:

Scenario: Married couple (2 kids) – $100,000/Yr. ($50,000/Yr. each) combined gross income – both spouses have federal undergraduate loans in the amount of $60,000 ($27,000 + $3,000 accrued interest each).

OLD REPAYE – $100,000 – (150% of the poverty line of $30,000 = $45,000) = $55,000 (“discretionary income”) *tax filing status is irrelevant because both spouses have the same income and debt amount.

  • Monthly payment is (10% of $55,000) / 12 = $458.33/Mo. each ($916.67/Mo. combined)

NEW REPAYE – $100,000 – (225% of the poverty line of $30,000 = $67,500) = $32,500 (“discretionary income”) *tax filing status is irrelevant because both spouses have the same income and debt amount.

  • Monthly payment is (5% of $32,500) / 12 = $135.41/Mo. each ($270.83/Mo. combined)

NET MONTHLY SAVINGS – $645.84 (70% lower payment)

 

Example 4:

Scenario: Married Couple (2 kids) – $250,000/Yr. ($125,000/Yr. each) combined gross income – both spouses have federal undergraduate loans in the amount of $60,000 ($27,000 + $3,000 accrued interest each) and one is a doctor that also has $200,000 of grad school debt.

OLD REPAYE – $250,000 – (150% of the poverty line of $30,000 = $45,000) = $55,000 (“discretionary income”)

*tax filing status is irrelevant because both spouses have to include the income of the other spouse

  • Monthly payment is (10% of $195,000) / 12 = $1,625/Mo. each ($3,250/Mo. combined)

NEW REPAYE – $250,000 – (225% of the poverty line of $30,000 = $67,500) = $32,500 each (“discretionary income”)

*can file taxes separately so that the other spouse’s income does not count on the monthly payment- must divide allowance in half = $16,250 each

– Spouse 1 (undergrad debt only) – $92,500 (0.05) = $4,625/ 12 = $385.42/Mo. (loans forgiven after 20 years if balance remains)*

– Spouse 2 (undergrad and grad school debt) – $92,500 (0.10) = $9,250/ 12 = $770.83/Mo. (loans forgiven after 25 years if balance remains)* Grad school loan payments under REPAYE are still 10% of discretionary income

*income taxes must be paid on the balance of loans forgiven

  • Monthly payments are $385.42 + $770.83 = $1,156.25

NET MONTHLY SAVINGS – $2,093.75 (65% lower payment)

 

What About Graduate and Direct PLUS Loans?


Borrowers with only graduate school federal student loans will continue to pay 10 percent of their discretionary income under the new REPAYE plan, although these borrowers will still receive a modest reduction in their overall monthly payment due to the increased poverty limit exclusion.


Parent PLUS loans do NOT qualify for this program.


Borrowers with a combination of undergraduate and graduate federal student loans will have a minimum monthly payment based on the weighted average of between 5 percent and 10 percent of their discretionary income based on the ratio of their initial undergraduate and graduate federal student loan balances. So, an individual whose total federal student loan balance is comprised of 50% undergraduate student loans and 50% grad school loans would have a REPAYE payment of 7.5 percent of their discretionary income. For many doctors or others with a lot of grad school debt around $200,000+ balances, this number will be much closer to 10% like it has been previously due to the ratio.


Loan Forgiveness


This plan is particularly valuable for borrowers planning for PSLF (public service loan forgiveness), where loans are forgiven in 10 years, and there are no federal taxes due on the amount forgiven.


Those with solely undergrad loans that have a starting balance of $12,000 or less can receive student loan forgiveness after 10 years (instead of the previous 25 years). Individuals starting with $20,000 or more can get any remaining balance forgiven after just 20 years. Borrowers with initial balances between $12,000 and $20,000 get their debt forgiven somewhere between 10 and 20 years. So, someone with the mean of these parameters of $16,000 in undergrad debt would have their loans forgiven in about 15 years.


Those with solely undergrad loans that have a starting balance of $12,000 or less can receive student loan forgiveness after 10 years (instead of the previous 25 years). Individuals starting with $20,000 or more can get any remaining balance forgiven after just 20 years. Borrowers with initial balances between $12,000 and $20,000 get their debt forgiven somewhere between 10 and 20 years. So, someone with the mean of these parameters of $16,000 in undergrad debt would have their loans forgiven in about 15 years.


OTHER NOTES


$0 payments still count towards the loan forgiveness timeline (10-25 years depending).


There will be $0 monthly payments for any individual borrower earning less than $30,600/Yr. If you are a family of four, there will be $0 payments for combined incomes of less than $62,400.


Repercussive Effects


These new REPAYE changes could completely eliminate the need for other income-based repayment plans altogether (ICR, IBR, PAYE) for new borrowers, both for undergrad and grad school.


There are some concerns that these changes to student loan repayment could exacerbate the college cost problem. For example, if colleges see that students can essentially take out massive student loan balances with very minimal payments in the future, they may jack up prices even more.


The counterpoint to this: the major changes are to undergrad federal loans only, which are capped at $27,000 total over four years.


Author:

Financial Advisor & Student Loan Expert at The College Funding Coach President of Medical Advisors Group – Financial Advising for Veterinarians | Medical Advisor’s Group (doctorvise.com)

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