When you were looking at repayment plans for your student loans, you probably considered RePAYE, an income-driven repayment plan.
RePAYE is a great option for borrowers with high debt loads compared to their income because of the interest subsidies, payments based on your income, and qualification for forgiveness programs.
Here are the basics of RePAYE:
Only Direct Subsidized Loans, Direct Unsubsidized Loans, Direct GradPLUS Loans, Direct Consolidation Loans that don’t include a Parent Plus Loan are eligible. Also, your loans can’t be in default.
Your monthly payment is limited to 10% of the portion of your income that exceeds 150% of the poverty line. There’s no cap on how high your payment can go like there is on PAYE. The good news is if you make less than 150% of the poverty line, your payment is $0 until your next annual update. Whoohoo!
Your tax filing status doesn’t matter:
Even if you file separately from your spouse, their income will be included when calculating your payment.
Here’s what your payment could look like on RePAYE based on your adjusted gross income and household size:
Alaska and Hawaii have higher poverty lines not shown here. Updated April 2021.
You’ll still qualify for forgiveness programs like Public Service Loan Forgiveness and Teacher Loan Forgiveness. You can also have your loans forgiven after making payments for 20 years for undergraduate loans or 25 years for graduate or professional loans, but you’ll be hit with a tax bill on the amount that’s forgiven.
The best perk to RePAYE is the interest subsidy, which means the government will pay some (or all) of accrued interest. Here’s how it works:
Amanda has $100,000 in federal student loans and is signing up for RePAYE. Her salary is $40,000 which makes her monthly payment $182.58. She owes $50,000 in Direct Subsidized Loans and $50,000 in Direct Unsubsidized Loans. Both loans have a 6% interest rate.
Amanda will pay $2,190.96 in a year towards her loans, but because of that pesky interest - she hasn’t actually made a dent on her loans and the balance grew to $103,915.55.
Here’s where the government steps in to help out in the form of an interest subsidy. How much is paid depends on how long you’ve been in RePAYE and the type of loans you have.
Uncle Sam will pay 100% of the accruing interest for the first three years, afterward, they pay 50%.
Uncle Sam will pay 50% of the accruing interest.
Amanda will receive $2,936.67 in interest subsidies ($1,957.78 from the subsidized loans and $978.89 for the unsubsidized loans.). This makes her new balance $100,978.88.