Student Loan Update and What You Need to Know

Personal Finance

We didn’t think it was possible, but student loans just got more complicated.

Last week, the U.S. Department of Education announced the upcoming release of yet another income based repayment plan, REPAYE or Revised-Pay-As-You-Earn, which is expected to launch sometime in mid-December. The added flexibility of yet another student loan repayment option is not without its pitfalls, as the plan continues to muddy the waters for graduates attempting to navigate the complex world of student loans. All of this comes at an estimated cost of approximately $15 billion over the next 10 years, according to the U.S. Department of Education.

REPAYE expands on the Pas-As-You-Earn plan launched in 2012 by eliminating two key hurdles that prevented many borrowers from taking advantage of the plan. REPAYE borrowers are no longer required to meet certain debt-to-income ratios (high debt relative to income) and the program is now available to graduates regardless of when the loan was taken out (previously only available for those with loans taken out after 2007). The latest, in a series of now four, income based repayment plans is welcome news to nearly 5 million college graduates previously unable to participate in the PAYE plan due to those restrictions.

Under REPAYE monthly loan payments are now limited to 10% of the borrower’s discretionary income, in contrast to the amount owed, where discretionary income is defined as the net amount between Adjusted Gross Income (AGI) and 150% of the poverty line ($17,655). After 20 years and 240 on-time payments any remaining debt is forgiven for those with undergraduate loans, while those with graduate loans can have their loans forgiven after 25 years and 300 on-time payments. Lastly, those who qualify for public service loan forgiveness can have their loan forgiven after just 10 years and 120 on-time payments. Keep in mind that any forgiveness is currently taxable under the current law, with the exception of the 10-year loan forgiveness for public works.

Despite the increased flexibility there are some important limitations for those considering REPAYE. It only applies to loans borrowed through the Direct Loan program, so any borrowers with loans through FFEL will need to consolidate their loans first before taking advantage of REPAYE. Parents who have taken out PLUS loans also do not qualify for REPAYE.

It is also worth noting that a marriage penalty was introduced, as well as the elimination of a monthly loan cap on payments. The introduction of a marriage penalty eliminates a previous loophole and now bases “income” off a married couple’s combined AGI, even when they file their federal tax returns separately. The elimination of a monthly loan payment cap means that payments can increase without limitation which in contrast to the IBR and PAYER plans that capped payments under the 10-year repayment plan. This has interesting implications for doctors in residency as payments are no longer capped.

So with four income-driven repayment plans (ICR, IBR, PAYE, and REPAYE) now available to borrowers what is one supposed to do? How is one supposed to assess the myriad of options?

The first rule of thumb is a simple one. If your student loan debt is less than your annual income it is unlikely that any of the income-driven repayment plans will be beneficial for you. These plans are designed largely for those with a high debt-to-income ratio or for those with a job in public work. However, if you do find yourself with student loan debt that greatly outweighs your income, or if you are working in a public service job, it is worthwhile to look into your income-based repayment options.

Despite the complexity, the announcement of yet another student loan repayment plan is certainly great news for the approximately 5 million people that are now able to take advantage of income-based repayment options, however, the irony is that none of these plans get at the heart of the systemic issue. Student loan debt has gone up from $400 billion to a jaw-dropping $1.3 trillion in only a decade and no repayment plan will ever resolve that issue.

So if it isn’t too late, before you even get to the point of needing to repay student loans give some thought to what you want to be when you grow up and what the ROI might be on your degree. Answering these question will help begin to ensure that your degree is appropriately priced for the career you wish to have.

For additional resources on student loans check out these helpful websites: studentaid.gov, studentloans.gov, consumerfinance.gov.

About Matt Cosgriff, CFP(®)

Minneapolis Financial Planner | Intrapreneur | Young Professional | Millennial Guru | Tech Aficionado | Traveler | Food Lover | Minnesota Wild Fan | Movie Quoter | Follow on Twitter| LinkedIn

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