The federal government dramatically expanded its income-based loan repayment program today, giving every single American with federal student loans an option to cap their payments at 10% of their disposable income.
Starting Dec. 16, they will be eligible for an alternative repayment plan called Revised Pay As You Earn (or REPAYE), the U.S. Department of Education announced today. (Some borrowers who took out federal loans prior to 2010 may have to take an additional step and consolidate all of their student loans into one to be eligible for the new program.)
Federal officials said they expected that the new plan would provide more flexible student loan repayment options to more than 6 million Americans, especially to those who borrowed before Oct. 1, 2007.
While the new plan will be available to anyone who took out federal student loans for undergraduate or graduate study, it is not open to parents who have taken out federal parent Plus loans.
The new plan will:
- Lower payments. REPAYE adjusts borrowers’ payments to 10% of their disposable income, which is calculated as the difference between their Adjusted Gross Income and 150% of the poverty line. For a single person this year, that would mean total payments would not exceed 10% of whatever they earn above $17,655. So a single person earning, say, $25,000 a year would likely have their monthly federal student loan bills capped at about $61 a month, no matter how much he or she owed. The Department of Education's online Repayment Estimator lets you explore your options based on your loans and income.
- Enable forgiveness. Borrowers who sign up for REPAYE and work in a government or nonprofit job for 10 years (and make 120 on-time payments) can have the rest of their loan forgiven. REPAYE will also forgive the remaining balance on loans for other workers who only have debt for undergraduate study, after 20 years of payments. Those who are using the program to repay graduate debt will have their debts forgiven after they have made 25 years' worth of payments.
This new plan will bring the total number of repayment plans available to federal borrowers to eight. Four of those plans are so-called Income-Driven Repayment plans developed by the Obama Administration that adjust monthly bills to borrowers’ incomes. Unfortunately, many of these plans have similar-sounding names and slightly different rules that have caused a great deal of confusion.
There are two different Income-Based Repayment plans, for example. One IBR, available to those who borrowed before July 1, 2014, caps payments at 15% of disposable income. Another IBR is for more recent borrowers and caps payments at 10% of income.
The only flexible plan available to parent borrowers is the Income-Contingent Repayment option, which caps payments at 20% of disposable income.
Until now, the most flexible income-based repayment plan, called Pay As You Earn, was available only to borrowers with unusually high debt burdens who had started taking out federal student loans after Oct. 1, 2007.
The addition of this eighth plan is actually a step toward streamlining and simplifying repayment options, says Pauline Abernathy, vice president of the The Institute for College Access and Success.
“REPAYE is an improvement, and it is simpler, because it is available to all federal student loan borrowers regardless of when they borrowed or how much they owe,” she said.
TICAS officials said they hoped the advantages and simplicity of the new plan would encourage more borrowers to use it. As of 2014, a recent GAO report found, only 19% of those with student loans were enrolled in an income-driven repayment plan.
But Abernathy said that people who are eligible for more than one repayment plan should spend a few minutes reading through the details, because there are still small differences that might make one or another of the plans slightly more advantageous to certain kinds of borrowers. For example: Those with graduate loans and low incomes might be better off with PAYE. Under that plan, any remaining debt is forgiven after 20 years of payments. REPAYE forgives debts of undergraduates after 20 years but requires those with any graduate loans to make 25 years of payments before qualifying for forgiveness. TICAS and the National Association of Federal Student Aid Administrators have created checklists comparing the details of the plans currently available.
The income-driven plans also provide flexibility, allowing borrowers to pay as little as 10% of their disposable income and reduce their loans more quickly by making higher payments whenever they like.
For more advice on saving and paying for college, as well as college ratings and tools for finding the best college for you, visit the new Money College Planner.
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