For those of you who have student loan debt you know that the process of paying it back can be a bit maddening. And I don’t necessarily mean the debt part of it, but the fact that you have to choose from the variety of plans out there. There are specific dos and don’t for refinancing. There seem to be new programs all of the time and you might not understand what you one you qualify for, etc. In this post I want to talk about the new student loan program called REPAYE (Revised Pay as You Earn), which is not to be confused with (PAYE) Pay As You Earn (see it already starts to get confusing).
Different Student Loan Plans
When most undergraduates and graduate students come out of school with student loan debts they basically have a couple of choices. The first is the Standard repayment plan. The standard repayment plan will basically have your loan paid off in 10 years. For many borrowers this makes the most sense because who wants their student loans hanging around, as Dave Ramsey would say, “so long you think it is a pet.” (Me….my student loans are almost 10 years old…I think I should name them).
I actually was on the Standard plan for about a year. However, the payment of over $1100 a month was just too taxing on us financially so I switched to another plan.
Now I am not going to go into the different rules and regulations for each. Let’s just say they are extensive. There are 7 different plans to choose from. I want to focus on the new REPAYE plan that was introduced by the Obama administration in December of 2015.
The REPAYE plan was part of an effort to expand the benefits of the PAYE plan introduced a year or two earlier.
Unfortunately, students have an increasing amount of student loan debt, particularly if they go to grad school (you can go for free). Thousands, if not hundreds of thousands (including myself and Mrs. ROB), obtained lots of student loan debt in obtaining advanced degrees (and yes I was stupid. I wish I could face punch myself and Mrs. ROB does too).
The question is with people who have crushing student loan debt is how do you pay those loans back without essentially going into bankruptcy or living in your mom’s basement?
Answer: PAYE (Pay As You Earn)
Pay As You Earn Plan
To its credit the Obama administration has done quite a bit to try to make student loan debt more affordable by introducing a number of new programs. They have also made it more confusing. Prior to PAYE there were a few different plans that were based upon your income. These plans were outside the STANDARD plan. In essence, these plans (Income Based Repayment, Income Contingent Repayment, Graduated Income Contingent….see how it gets confusing), allowed you to lower your payments and capped your payments at 15-20% of your income depending on the plan. And after 25 years or so if you had a balance left over it was forgiven by the government.
The problem with these plans is that they were confusing (e.g. what is the different between ICR, IBR, and GICR?). Moreover, 15 to 20% was still a lot for a number of borrowers who might be working as teachers, government workers, admins, or other entry level professionals.
Enter the Obama administration and PAYE. Pay as you earn was meant to solve some of this problem because it lowered your student loan payments to just 10% of your discretionary income. That discretionary income is important because it is income above the poverty level so that you know you can afford your payments. And PAYE earners loans are forgiven after 20 or 25 years depending on what types of loans they are.
Also, depending on how much your payment was the government would subsidize your interest payments on your Stafford Loans for three years, which would reduce the interest accumulation and make it more affordable payments down the road.
There are different federal student loan types, but the most common are what are called Stafford subsidized and unsubsidized. The primary difference between the two is that the interest on subsidized loans are actually paid by the government throughout your time in school. Unsubsidized loans the interest just accumulates. Many people have combinations of both.
Well with the new income guidelines, the reduced 10% payment rule, and the subsidy, this was going to make student loans more affordable right? Yes, for some.
The problem was that PAYE only actually was available for people who took NEW loans out after I think 2012. So if you had student loans before 2011 of any kind you weren’t eligible, leaving MILLIONS of borrowers out in the cold.
So hearing a lot of these complaints the Obama administration extended the benefits of the PAYE plan to all borrowers who had student loans prior to 2011, which is great for many.
The new REPAYE plan’s features include:
- Capping payments at 10% of discretionary income.
- Forgiving loans after 20-25 years if there is any balance left
- An interest subsidy on subsidized and UNsubsidized loans, which keeps the principle balance lower over time and allows you to pay back more principle.
So this new plan has some great advantages over other income based plans. The problem is knowing about it and applying for it. I will discuss in another post an update on Mrs. ROB’s student loans, but you have to be aware of what specifically you are signing up for.
Another problem is that even with this new program it is still confusing. There are just too many programs and if borrowers don’t take the time to look into each one or that they may even qualify it becomes a confusing mess.
Finally, let me end with this. I am not happy necessarily that we are on these plans. To me it says I was stupid in my past financial life and now I have to make up for this stupidity. These plans are based upon income, which means we don’t make enough money or took out too much in loans to be on a normal plan that would have gotten us out of debt slavery. So I don’t recommend doing it.
That said, however, if you are struggling with your student loans I think that REPAYE can be a great option. The Obama administration should be commended for trying to tackle the problem a bit.
Now if they would just make this just a choice of two options (standard or REPAYE) it would be much easier.
Caveat: All of this student loan repayment plans ONLY applies to government student loans. Private loans are NOT available from these programs. However, if you have private loans I would strongly suggest refinancing with companies like SOFI, Earnest or other organizations that have lower rates and offer better terms.