In my previous post Public Service Loan Forgiveness (PSLF) Revisited, I mentioned that you can combine several income-driven repayment plans with PSLF. Currently there are 3 income-driven plans:
- Income-Based Repayment Plan (IBR) - payment limited to 15% of discretionary income, forgiveness after 25 years. For new borrowers after 7/1/2014, payments are limited to 10% of discretionary income, forgiveness after 20 years, essentially identical to the PAYE plan.
- Pay As You Earn Repayment Plan (PAYE) - payment limited to 10% of discretionary income, forgiveness after 20 years. (New borrowers only).
- Income-Contingent Repayment Plan (ICR) - payment limited to the lesser of 20% of discretionary income or payment under a 12 year fixed repayment plan, forgiveness after 25 years.
It's easy to see why PAYE is usually the best option out of the three. As we near December, You may have heard about something called REPAYE or the Revised Pay as Your Earn plan which was finalized by the US Department of Education this Tuesday. So what is REPAYE and should you care? More after the jump.
What is PAYE?
In order to understand REPAYE, we must first review the Pay As You Earn Repayment Plan (PAYE):
- To qualify for PAYE, you must be a new borrower as of 10/1/2007 AND have received a Direct Loan disbursement on or after 10/1/2011. You must also have a partial financial hardship (PFH) meaning your debt is disproportionately high compared to your current income.
- Limits payments to 10% of your discretionary income, but never more than the 10-year Standard Repayment Plan amount.
- Loan forgiveness after 20 years (10-years if you are eligible for PSLF).
WHAT IS REPAYE?
The Revised Pay as You Earn Plan (REPAYE) is President Obama's expansion of the PAYE plan to an estimated 5 million more borrowers. However it is not as simple as that. During the deliberations on REPAYE, an additional goal was to discourage high debt/high income borrowers like doctors and lawyers from taking advantage of PAYE's generous terms. Let's look at some key differences.
- You can qualify for REPAYE no matter when you first borrowed your federal loans. REPAYE will become available to borrowers starting this December.
- Partial financial hardship (PFH) no longer required.
- Limits payments to 10% of your discretionary income with NO CAP.
- Spousal income is taken into consideration in calculating payments no matter how you file your taxes. Under PAYE, only your income is considered if you chose to file your taxes separately from your spouse.
- New interest subsidy - if the payment under REPAYE does not cover the accruing interest on your student debt, your total loan balance will grow despite payments made ("negative amortization"), you will only be responsible for 50% of the interest accrued.
- Loan forgiveness after 20 years for undergraduate loans, 25 years if you have graduate loans.
Overall, the changes implemented in the REPAYE plan has taken away many of the features that made it attractive to high debt/high future-income medical graduates. Let me illustrate with an example:
- Debt of $50,000 subsidized and $100,000 unsubsidized Direct Loans at 6.8% interest rate.
- Single tax filing status residing in the lower 48 states.
- Adjusted Gross Income (AGI) of $50,000 in residency, $250,000 as an attending. This would be your expected payments under the currently available plans. Note that your PAYE payment will start at $270/month but cannot rise more than $1,726 no matter how much your income increases.
Given the same assumptions, if you are on the REPAYE plan, your payments will start at the same $270/month but when your income rises to $250,000, your calculated payment will rise to 10% of $250,000-$17,655 (150% poverty level) = $24,234.50/year or $2,019.55/month. What if you made $350,000? Your calculated payment would be $2,769.54/month.
The new REPAYE plan expands the generous benefits of PAYE to more borrowers. However, if you are expecting a large pay increase in the near future, look long and hard and do some math before you jump in.