A Los Angeles printmaker says her financial savvy skills as a teenager of the Great Recession influenced her decision to pick a traditional plan over an income-driven plan for repaying her student loans.
“I’m doing my monthly payments without doing something like PAYE or REPAYE — it’s just a consistent $111 a month,” says Madison Zenzel who graduated with a Bachelor of Fine Arts from Virginia Commonwealth University last year with around $11,000 in federal student loans.
Pay As You Earn, or PAYE, and Revised Pay As You Earn, called REPAYE, are two income-driven repayment plans for federal student loan borrowers that cap monthly payments to 10 percent of that borrower’s discretionary income. These plans are also linked to loan forgiveness with a couple of caveats.
The standard 10-year plan divides the amount owed over 120 monthly payments.
Zenzel says she was offered zero dollars a month under REPAYE, but decided against enrolling in the plan, selecting the standard plan instead.
“One of my biggest concerns with REPAYE was I could reap the benefits now, but later I might be in a really terrible position by having to pay a lot at once,” says the 21-year-old , who will pay off her loans in about nine years.
Here’s what borrowers need to know about REPAYE.
[Read more about expanded Pay As You Earn eligibility.]
PAYE and REPAYE have some differences. The Department of Education introduced REPAYE in December 2015 to expand pay as you earn to all federal student loan borrowers.
REPAYE closes the gap in income-driven plans, the department says.
Unlike REPAYE, PAYE is limited to borrowers who took out loans after October 2007, and PAYE is tied to partial financial hardship.
Borrowers qualify for PAYE if they have a partial financial hardship — defined as when the annual amount they would owe under a standard 10-year repayment plan is more than 10 percent of the difference between their income and 150 percent of the poverty line.
Under both PAYE and REPAYE, the government pays the interest for up to three years.
[Learn how to avoid turning into a scarystudent loan statistic.]
The standard 10-year plan pays the loan faster with less interest. Borrowers with a high income-to-debt ratio are usually served better with the standard plan, says Jan Miller, president of Miller Student Loan Consulting, who advises borrowers on debt strategies.
“There are circumstances where it’s best to hunker down and pay the loan off,” Miller says.
Brendan McGrail, a publicist at the Hermitage Club, chose a standard 10-year plan over an income-based plan, and says REPAYE is a “good marketing product.”
“If I had extended my loans out with the 25 years, I would have had much lower payments, but for 15 extra years.” McGrail says, who owes $40,000 in student loans from earning two graduate degrees.
The 40-year-old publicist says it was better for him to pick the 10-year plan since the monthly payments stay at a fixed amount while income rises over time.
Student loan experts say REPAYE doesn’t make sense for borrowers if the monthly payment is only slightly lower than the standard monthly payment. Under those circumstances, it’s increasing the life of the loan and adding interest.
| Plan | First monthly payment | Last monthly payment | Total amount paid | Projected loan forgiveness | Repayment period |
| Standard | $371.23 | $371.23 | $44,547.49 | $0.00 | 120 |
| REPAYE | $227.00 | $478.00 | $48,658.00 | $0.00 | 147 |
The table above on a “Standard 10-Year Plan Versus REPAYE,” is based on the estimated repayment of a college graduate, earning $45,000 a year with $35,000 in student loans at 5 percent interest.
There are financial pitfalls with the pay as you earn plans. Both REPAYE and PAYE offer loan forgiveness, but the forgiven amount is considered taxable income after 20 or 25 years of payments. If a borrower has $100,000 in debt after 25 years, for example, then that amount is taxed as income.
“There’s a psychological factor in seeing your balance grow,” Miller says. “It could also result a in tax bomb.”
Another caveat: Stretching out payments over a greater number of years increases the cost of the loan — particularly if the borrower doesn’t qualify for loan forgiveness, say Stephen Dash, CEO and founder of Credible, a student loan resource website.
[Discover more methods ofstudent loan forgiveness.]
REPAYE or PAYE may benefit borrowers with a high debt-to-income ratio. Student loan experts say that the loan forgiveness under these plans in some cases may offset accrued interest for borrowers with a high debt load.
“This could reduce your future obligations if your income does not rise to pay off the loans in full,” says Kevin Wallace, a wealth advisor at Janney Montgomery Scott, a Philadelphia-based financial services firm.
Borrowers with a high debt-to-income ratio may benefit from the forgiveness option, provided they save for the taxable portion when the debt is forgiven, Miller says.
“It’s not the right decision for everyone, it depends on income-debt ratio and cost of living,” he says, and that borrowers should save for a big tax bill when the debt is forgiven.
Trying to fund your education? Get tips and more in the U.S. News Paying for College center.
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Think Twice Before You Lower Federal Loan Repayments originally appeared on usnews.com
