Figuring out how to navigate your student loan debt is like trying to figure out what to eat for lunch when you’re already hangry. (anger induced by hunger).
There are so many different options, that it leaves you (or at least, me) feeling like sticking my head under a rug and sobbing. (I get dramatic when I’m hungry). And to make matters worse, each student loan option is needlessly complicated. Its like trying to order a basic meal (a #1– a plain hamburger with fries and a Diet Coke) and then having your waiter assault you with sundry of questions. Well do you want special sauce with that? Do you want onions? What about grilled onions? Lettuce? Tomato? What about trying something crazy on it, like pineapple? Jalapeno? And before you know it, you’ve collapsed on the ground, too hungry to make any decisions. In each of the federal student loan forgiveness options, you have to follow the rules with precision in order to have your loans forgiven. So, first, you have to know what those rules are before you can make a decision. But the rules can be hard to understand. And your hungry. And understanding things when your hungry is hard. So, in our student loans simplified series, we are breaking down each of the federal student loan repayment options in bite sized pieces to help you understand and make the best decision for you.
Revised Pay as You Earn or REPAYE is one of the most popular student loan forgiveness programs for federal student loans. The idea is that you pay a percentage of your discretionary income every month for 20-25 years and then whatever balance remains of your student loans is forgiven the 20th or 25th year. The catch? You are taxed on whatever balance is forgiven as if you earned that amount as income the year your loans are forgiven.
Let’s break it down.
Here is everything you need to know about REPAYE.
You can qualify for REPAYE if you have Direct, Graduate Plus, or Stafford student loans.
- In other words, Parent PLUS loans or consolidated loans that include Parent PLUS loans do NOT qualify for REPAYE. It is very important that you are aware what kind of loans you have. It would be awful to think that you qualify for student loan forgiveness, make the payments for 25 years, and end up not having your balance forgiven in the end.
You will pay 10% of your discretionary income for 20-25 years.
- Discretionary income is calculated by your Adjusted Gross Income (you can calculate your AGI here) minus 150% of the state poverty guideline and family size.
- If you are married, your spouse’s income and federal student loan debt will be considered in the calculation for what your monthly payment will be.
- Undergraduate loans are forgiven after 20 years, graduate loans are forgiven after 25 years.
You have to reapply and qualify for REPAYE each year.
Once you sign up for REPAYE, you will be required to provide your income, employment, and family size every year. You will fill out paperwork verifying your income and employment. As long as your income does not pass a certain threshold for the 20-25 years you are on the program, you will only pay 10% of your discretionary income.
You don’t have to stick with REPAYE even if you’ve already signed up for it.
Some people (usually professionals like doctors, dentists, and lawyers) will sign up for REPAYE for the first few years they are out of school and not earning as much as they will later down the road (i.e. a doctor who is in residency). This is actually our student loan repayment plan. We’re paying everything we can on REPAYE (and enjoying the short term interest subsidy) and then we are refinancing our student loans for a cheaper interest rate (we are in the process of this at the moment!). This approach literally saves us THOUSANDS of dollars as opposed to just sticking to REPAYE and then getting hit with a big tax bill the year that our loans would have been forgiven.
There are interest subsidies that differ for subsidized v. unsubsidized federal student loans
- If you have subsidized loans (ONLY undergraduate students), the government will subsidize your interest payments 100% the first three years that you are in repayment. For the remaining years, they’ll cover 50%. That means that if your interest rate is 7%, the government will pay ALL of that compounding interest for the first three years. The remaining years they will pay 3.5%.
- If you have unsubsidized loans (graduate students), the government will subsidize interest payments by 50%. Keep in mind that the more money you make, the larger your 10% payment will be each month, which will cover more of your interest, making the interest subsidy less generous.
You might end up having to pay your student loans off under a standard repayment plan.
If you do not provide proof of income, employment, or family size OR if your income passes a certain threshold, then your payment might end up being what it would have been under the standard 10 year repayment plan instead of the generous 10% of your discretionary income. This could end up being a very expensive option, as the principal balance of your loan will have ballooned depending on how many years you have been in repayment.
Are you signed up for REPAYE? Do you plan to stick it out or ultimately refinance? We’d love to hear from you!