College graduates already have a number of repayment options for federal student loans, but a new one was added to the bunch in December.
Called Revised Pay As You Earn, or REPAYE, it is another type of income-driven plan that ties your monthly payment to your earnings.
Like some of those plans, your payment is capped at 10 percent of your discretionary income (defined as adjusted gross income above 150 percent of the federal poverty level for your household’s size).
But unlike other plans, REPAYE is available to undergraduate and graduate federal student loan borrowers, regardless of the year the money was borrowed. And you don’t have to meet debt-to-income ratios to qualify.
“One of the important improvements of REPAYE is that it removes the barrier to entry if you want assurance that your payment won’t exceed 10 percent of your income,” said Lauren Asher, president of the Institute for College Access and Success.
Still, with the addition of REPAYE, federal student loan borrowers now have as many as eight repayment plans from which to choose, more than half of which are income-driven plans.
“It’s a mess,” said Mark Kantrowitz, a student loan expert. “Things were complicated enough before.”
To help you make the best repayment choice for your situation, consider the following tips.
Learn about income-driven plans. Many borrowers don’t realize that income-driven plans are available, Asher said.
“You don’t have to be an expert on student loan policy to take advantage of them,” she said. “You just have to know that they are out there.”
A good place to begin learning about the plans is two Department of Education websites, studentaid.ed.gov and studentloans.gov.
REPAYE is included in the Department of Education’s online repayment estimator at studentloans.gov, which calculates your monthly payment under various repayment plans.
It’s a good idea to start learning about all your options. College students who graduated in May should pay special attention because the six-month grace period before repayment begins ended in November.
Think ahead. Although REPAYE is available to more borrowers, there are some restrictions.
Only federal loans borrowed through the Direct Loan program qualify. If you have loans through the Federal Family Education Loan program (which might be the case if you borrowed before July 1, 2010, when FFEL ended) you will have to consolidate the debt through the Direct Loan program.
Also, Parent PLUS loans are not eligible.
Keep in mind that under REPAYE, your monthly payment will never be more than 10 percent of your discretionary income. But that means if your income jumps, you could end up with a significantly larger student loan bill down the road.
Other income-driven plans will cap your bill at the standard 10-year repayment as your income rises. If you want the assurance that your bill will never go higher than that figure, consider one of the other plans.
Make changes. You can change repayment plans at any time as you pay back your loans.
But generally, an income-driven plan—regardless of the specific one you choose—is going to be one of your cheapest options.
Said Asher, “If your priority is the lowest possible monthly payment that’s tied to your income, an income-driven plan is something you should consider.”
