May 15, 2015
Graduation is a time to celebrate the hard work that graduates have put in to earning their degree. For many, it also starts the clock ticking on when they have to repay their student loans.
For the past few years, some recent graduates with Federal student loans were able to avail themselves of a special repayment plan called Pay As You Earn, or PAYE. For those who meet eligibility guidelines based on income and total amount of debt, PAYE caps the maximum monthly payment amount at 10% of a graduate’s discretionary income, which is defined as the amount by which their income exceeds 150% of the Federal poverty guidelines[ for their state and family size. The Department of Education forgives any unpaid principal and interest on a graduate’s loan after 10 years of payments if the graduate is employed by the government or a qualifying public service organization, and after 20 years of payments for graduates employed in the private sector. This plan, in some situations can reduce a graduate’s monthly payment burden by more than half and because of the forgiveness of any unpaid principal and interest, it can even result in a lower total amount paid on the loan when compared with a 20-year repayment plan.
Older graduates with Federal student loans from before October 1, 2007 or those that have not taken out a Federal Direct student loan since October 1, 2011 are not eligible to take advantage of PAYE. To rectify this, last June, President Obama issued a Presidential Memorandum directing the Secretary of Education to issue new regulations to extend many of the core benefits of PAYE to as many borrowers as possible.
The Department of Education issued draft versions of the regulations implementing the Presidential Memorandum earlier this year. The new repayment plan created by these regulations, the Revised Pay As You Earn, or REPAYE, includes many of the same features as PAYE. In particular, it uses the same formula to calculate a graduate’s monthly payment, capping it at 10% of their discretionary income. Those in public sector or qualifying public interest jobs can also have any remaining balance on their loans forgiven after 10 years of payments. However, graduates employed in the private sector only receive forgiveness after 20 years of payments if the total amount of their loans were $57,500 or less at the time they entered PAYE. If they borrowed more than this, the Department of Education forgives any remaining balance on their loans after 25 years of payments.
Currently, graduates in the private sector must include the amount of any forgiveness under PAYE in their taxable income, but there have been multiple proposals to make this tax-free as well. Any graduate seeking to avail himself or herself of PAYE or REPAYE should keep this in mind. Additionally, parent Federal PLUS loans and parent Direct PLUS loans or Direct Consolidation loans that include parent loans are not eligible for either PAYE or the draft version of REPAYE.
The Presidential Memorandum set a goal of December 31, 2015 to implement this new repayment option. We will continue to monitor the rulemaking process and provide updates as these regulations develop and become effective.