Recent spring college graduates who are not yet employed may be getting worried about impending student loan payments. If the payments cannot be made, there is an option in a little used, but highly effective program called REPAYE. US News recently looked at REPAYE and PAYE, the differences, and the push for more people to take advantage of REPAYE.

Obama Overhaul

When President Obama was elected, he had plans to overhaul parts of the education system. He wanted to focus on the student loan debt problem. As he was elected into office for a second term, he never lost that focus. While speaking at the University of North Carolina in Chapel Hill in 2012, he said, “ Americans now owe more on their student loans than they do on their credit cards.  And living with that kind of debt means that this generation is not getting off to the same start that previous generations — because you’re already loaded up with debt.  “

His concern for young people’s obligation was the underlying reason for the REPAYE program. However, people are not taking advantage of the program in the summer of 2016.

He continued his push in 2104 with his Presidential Memorandum, which begged the Department of Education to consider regulations to help remove the burdens of student loan repayments. Then in late 2015, he issued his REPAYE regulation.

The Nuts and Bolts

Education Secretary Aren Duncan shows his pleasure at the plan when he gushes, “This proposal is an investment in our economy’s future that provides targeted benefits to even more borrowers, so they can stay current on their loans and furthers our commitment to lifting the burden of crushing student loan debt.”

The plan will allow Direct Loan borrowers to cap their monthly loan obligations at 10 percent of their discretionary income. The government lists four of these direct loan programs and designates them as The William D. Ford Federal Direct Loan program:

  • Direct Consolidation Loans-when all your loans are combined for one single payment
  • Direct PLUS Loans-loans given to professional students, graduate students, and parents who have dependent undergraduate students
  • Direct Unsubsidized Loans-loans awarded to eligible undergraduate students, graduate students, and professional students when the student does not have to show financial need to obtain it
  • Direct Subsidized Loans- given to students who show financial need for covering college or career school costs
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The REPAYE is not based on when the borrower was first awarded his or her loan. This plan is considered to be an improvement of the Pay as You Earn Plan passed by President Obama in 2012. PAYE had restrictions and only applied to those who had a loan disbursed after October 1, 2007 and had no FFEL or Direct Loan balances.

Other REPAYE Perks

REAPYE also has a forgiveness component. It will forgive any existing debt after 20 years for a borrower using it for undergraduate study and then for 25 years for a person who borrowed for his or her graduate study program.

In order to participate in the program, no partial financial hardship is required and if your payment does not fully handle any interest charges, you will only be charged 50% of the unpaid interest. And for REPAYE, it does not matter when your loan was taken out.

Tom Anderson of Forbes notes that the plan is best used under four scenarios:

  1. You can’t afford your student loan monthly payment and you do not qualify for IBR or PAYE plans
  2. You will to use a public service loan forgiveness and you do not meet the criteria for IBR or PAYE loans
  3. At this time, you are using IBR and have been since before July 2014 because of PAYE ineligibility
  4. You desire to pay off all your loans prior to qualifying for loan forgiveness under the repayment plan

REPAYE will give an interest subsidy benefit to prevent the loan balances from ballooning and therefore enabling people to keep up with accrued interest. You will have to income pay taxes on the amount forgiven once the debt is paid. There is no cap on your monthly payment, as well. Those married should note that your spouse’s income would be calculated and included into the set monthly payment amount even if separate federal tax returns are filed.

The plan was in effect as of December 17, 2015, as in July of 2016, the push is on for more people to take advantage of the program.