Got Student Loans? How the REPAYE Program Could Help You

Got Student Loans? How the REPAYE Program Could Help You

Hoping to find some extra money in your stocking this holiday season?

If you’re one of the 40 million Americans with outstanding student loan debt, your wish just may come true.

President Obama recently unveiled the REPAYE plan, an expansion of the Pay As You Earn program, and grads can beginning enrolling—and thus reducing their monthly loan bills—in mid-December.

How? REPAYE caps payments at 10% of your monthly discretionary income, which is determined as adjusted gross income minus 150% of the federal poverty level.

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Here's a closer look at how the new repayment plan works.

REPAYE Perks ...

More borrowers qualify. The new plan extends to 5 million more people who've taken out loans for college or grad school. (You were only eligible for PAYE if you got a loan after Oct. 1, 2007, and received a disbursement on or after Oct. 1, 2011.) REPAYE is open to all federal student loan borrowers.

Interest subsidy available. For borrowers whose income-driven payments can't keep up with accruing interest, the new plan offers a new interest subsidy benefit: The difference between your monthly payment and the accruing interest on your loans will be paid for you for up to three years.

Loan forgiveness. REPAYE will forgive any remaining debt after 20 years for those who borrowed only for undergraduate study and 25 years for those who borrowed for graduate study, based on payment history. But there's a catch: in most cases, you'll have to pay taxes on the amount forgiven.

REPAYE Drawbacks ...

Potentially higher payments. The original plan allowed borrowers to make payments of 10% of discretionary income or the standard repayment plan amount (which spreads equal payments of your loan over 10 years). REPAYE makes 10% of discretionary income mandatory. So if your income rises as you’re repaying the loan, 10% of your income could end up being higher than your standard repayment amount would be.

Changes to Public Service Loan Forgiveness. PSLF forgives the federal student loan balances of borrowers employed by the government or a qualifying nonprofit organization after they've made 120 payments. Now those folks will be able to make their payments by enrolling in REPAYE.

Income determination change. REPAYE will use joint adjusted gross income to determine the repayment amounts of married borrowers—even if they file taxes separately. So while filing individually has helped some borrowers lower their payments in the past, that strategy won’t work anymore.

To find out whether REPAYE is right for you, consider working with a financial planner or student loan advisor. And for some repayment inspiration, read about how three people are paying down epic student loans on modest salaries.

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