Americans have been grappling with how to balance love and students loans for a while now. There will be even more to think through next month, when the Department of Education is scheduled to roll out the Revised Pay As You Earn (REPAYE) plan, an expanded version of the Pay As Your Earn (PAYE) repayment plan that caps monthly payments at 10 percent of discretionary income.
Unlike PAYE, which is only open to students who took out loans after October 2007, the REPAYE plan will be open to anyone who borrowed directly from the federal government. This includes older borrowers who were previously shut out from PAYE.
Everyone enrolled in the REPAYE plan will also be able to receive taxable forgiveness -- if borrowers only have undergraduate debt, they are eligible after 20 years. However, if a borrower has even just one graduate loan, all of their loans won't be eligible for taxable forgiveness until 25 years of repayment. Under the PAYE plan, all borrowers are eligible for forgiveness after 20 years regardless of whether the debt is from graduate or undergraduate education.
Currently, if you are enrolled in an income-driven repayment plan and your monthly payments don't cover the interest, your overall loan balance will continue to increase through a process called "negative amortization." The new REPAYE plan comes with much better interest accrual protections: if your monthly payments don't fully cover the accrued interest for that month, you will only be charged 50 percent of the unpaid interest.
Sounds great, right? For many, signing up for REPAYE will offer huge benefits and help them stay financially afloat while paying off student debt. But there's a bit of fine print that may stop many married Americans from switching over to this new plan.
Under the other income-driven repayment plans -- Pay As You Earn, Income-Based Repayment, and Income-Contingent Repayment -- when married borrowers file their taxes separately, only their individual income and debt are used to calculate their monthly payments, even though they can still claim their spouse when reporting household size. They may not get all of the tax perks associated with filing jointly, but they are still able to keep their monthly student loan payments fairly low.
Under REPAYE, married couples will not be able to separate their income. Monthly payments will be based on combined household income regardless of whether married borrowers file separate tax returns or not.
It sounds dramatic, but some couples may be faced with a difficult decision: marry and face higher loan payments, or stay single to pay the lowest amount possible on student loans.
Here's an example of REPAYE at work: Jamal graduated from law school in 2005, and is currently working as a prosecuting attorney. He makes $45,000 a year and has $130,000 in student debt. His wife Rachel chose to skip college and start a small business, where she makes $100,000 a year.
The best plan currently available to Jamal based on when he took out his loans would be the Income-Based Repayment (IBR) plan. Under this plan, Jamal and Rachel could file separately and his monthly payments would be around $264.
Under the new REPAYE plan, Jamal's relatively low income and high debt would combine with Rachel's high income and lack of debt, which would balloon his payments to over $1,000 every month. (All calculations are based on the Department of Education's Repayment Estimator.)
- PAYE may still be the best plan for any married borrowers with graduate and professional school debt who took out loans after October 2007.
- For unmarried borrowers currently enrolled in the older IBR plan with high student debt and low income, it may be time to think about switching over to REPAYE to take advantage of lower payments.
- If you're a married borrower with a spouse that has a high income and little to no debt, it may be best to stay put in IBR.
To get a clearer picture of how the REPAYE plan could impact your monthly payments, we recommend checking out the Repayment Estimator for yourself.
If you need help understanding all the debt relief options for your student loans, download our free e-book Take Control of Your Future or listen in on one of monthly webinars. We provide lots of information about income-driven repayment plans and Public Service Loan Forgiveness to help students and graduates learn how to better manage student debt. Unfortunately, we don't give relationship advice. But you never know -- debt advice might help enhance your marriage (financially, at least)!
Ashley Matthews is a Program Manager for Law School Engagement & Advocacy, managing the Student Debt and Student Engagement programs. Prior to joining Equal Justice Works, she worked as Communications Manager for Legal Services Corporation where she helped design strategies to increase congressional awareness of federally funded civil legal aid. She also led the digital content and communications team for PSJD.org, a public service initiative of the National Association for Law Placement (NALP). Ashley received her J.D. from the University of Miami School of Law.