One of the great things about federal student loans is that there are so many repayment options available once you graduate. But this can also make it difficult to know which one is right for you. Although you can switch plans, it is better to get it right the first time.
Among the income driven plans, for example, there is Income Based Repayment (IBR), Pay As You Earn (PAYE), and the Revised Pay As You Earn (REPAYE) Plan. All three calculate a payment based on your income, loan balance, and family size, with payment terms anywhere from 20 to 25 years and discharge of any unpaid balance at the end. But there the similarities end.
If you are looking at income based plans as your best option, you may be looking at the REPAYE program and wondering if it is right for you. If you are, you need to consider the following:
Did You Graduate Before 2012?
The PAYE Plan was created by President Obama to help current college students at the time repay their loans. But as time goes by, that plan becomes available to more and more people. To qualify, you must be a student (not parent), and:
- Not have any student loan balances as of October 1, 2007
- Have received disbursal on a federal student loan on or after October 1, 2011
- Have some sort of financial hardship that makes a 10-year fixed payment unaffordable
So essentially if you graduated before 2012, you do not qualify for PAYE, and cannot benefit from the lower payment cap of 10% of disposable income (IBR is 15%) and the shorter repayment plan (20 years instead of 25). As such, you are left with IBR and REPAYE. However, if you borrowed after July 1, 2014, then IBR has a 20 year repayment term too.
Are You Single?
If you are not married, do not see that happening in your immediate future, and do not qualify for PAYE, then you should consider REPAYE. This is because REPAYE requires you to include your spouse’s income in the payment calculations, where IBR and PAYE do not, as long as you file separate tax returns and only use your Adjusted Gross Income (AGI). So if you are single, that won’t matter.
On the other hand, if you are married, and your spouse has income, this can increase your monthly payment considerably under an income based plan if you are forced to include it. Thus not having this option can be a deal breaker if your spouse has significant income.
Did You Go to Graduate or Professional School?
PAYE (and IBR for new borrowers after July 1, 2014) has a repayment term on undergraduate and graduate loans of 20 years. However, REPAYE makes a distinction between the two. Repayment is 20 years for undergraduate and 25 years for graduate loans.
Thus, if you got your MBA, law, medical, or other post-graduate degree, then you do not get a shorter term of repayment for those loans (just the ones for college). You might be better off in IBR or PAYE.
Do You Expect Your Income to Increase Significantly Over the Next 20-25 Years?
Are you employed in your field or chosen profession? Do you foresee your income increasing significantly over the next 20 to 25 years? If so, then you need to give careful thought about whether you want to use REPAYE. Both IBR and PAYE cap your monthly payment at whatever it would be under a fixed, 10 year plan. Under REPAYE, there is no cap; it is always 10% of your disposable income.
Depending on your situation, that might not necessarily be a bad thing! You might want to pay off your loans sooner. But then again, as you make more money, you might want to put it elsewhere, like towards a house or retirement. Capping the payment allows you to make plans for better days and limit the amount of money you put towards your student loans in your budget.
Don’t Try to Do This Yourself
This is a very important decision, and you should not make it on your own. Even though this article gives you some good information to help you decide whether REPAYE is right for you, each situation is different, and you should consult with a student loan professional to help you make the right choice.
If you live in southern New Jersey and are looking for a more affordable repayment plan, please feel free to call my office at 856-432-4113 or contact me through this site to schedule an appointment in my Woodbury office to discuss your case.
If you would like more information about student loans, you can dowload my free book, I Graduated; Now What? A Guide to Dealing with Your Student Loans.