Federal student debt proposal would change REPAYE, phase out PAYE
Buried in a sea of federal student loan announcements and changes over the last few years was the promise of a new income-driven repayment plan. It was first mentioned in August at the same time as a one-time cancellation of up to $20,000 in debt per borrower — a headline-grabbing, controversial idea that’s being challenged in a case before the U.S. Supreme Court.
To less fanfare, the Biden administration on Jan. 10th posted its proposed changes to income-driven repayment. It’s not a new plan but instead, modifies an existing plan and phases out two others.
Listen to the recent podcast episode on the latest student loan changes:
Specifically, it would phase out the Income-Contingent Repayment (ICR) and Pay as You Earn (PAYE) options and change the existing Revised Pay As You Earn (REPAYE) plan. The stated goal of the changes is to make student loan repayment simpler. I respectfully disagree. The proposed changes may make repayment simpler for undergraduate borrowers, but will cause confusion, loss of flexibility, and increased time and cost in repayment for many graduate school borrowers, including veterinarians with student loans. While the proposed changes to REPAYE stand to lower my own household student loan payment, for the sake of other borrowers’, I do not support the phase-out of any available repayment plans.
The VIN and VIN Foundation Student Debt Team Wizards have recently added the proposed REPAYE changes into the Student Loan Repayment Simulator. The Revised REPAYE, shown as “RE-REPAYE” shows how those changes may impact veterinarians and other graduate school borrowers.
The proposed changes will have a significant impact for two groups of veterinarians that we counsel routinely: 1) borrowers with graduate school student loans who are eligible for PAYE and not eligible for the latest version of Income-Based Repayment (IBR 2014); and 2) recipients of the one-time forgiveness count adjustment who would benefit from using ICR to cover any remaining repayment time before reaching forgiveness.
The U.S. Department of Education public comment period ended Friday, February 10th. You can review all submitted comments or view the comment I submitted on how the changes will affect veterinarians.
To date, we have never seen the elimination of an existing repayment plan. That is likely to change unless they receive enough feedback to change their minds. Please read on to learn why you may want to join me in pushing back against some of the proposed changes, particularly the phase-out of ICR and PAYE. Comments from those most directly impacted will carry the most weight.
I know how confusing and frustrating federal student loan repayment can be. Unfortunately, it’s going to be more so before it gets better. With the pending Supreme Court cases on the special forgiveness benefits, changes due to take effect July 1st, 2023, the presumed restart of interest and payments later this year, and the recently proposed changes to IDR, it will be harder than ever to keep things straight. Bear with us as we work to break some of these things down into digestible segments. It’s not easy. We’ll link to certain concepts we have covered elsewhere and expand where we can. There’s no way around the fact this requires some curiosity and patience. Ask a lot of questions and if you need help, reach out to VIN Foundation. Let’s dive into the recently proposed IDR changes:
Summary of Major IDR Changes Affecting Veterinarians
Modified REPAYE payment will be between 5%-10% of your discretionary income. The Modified REPAYE discretionary income will also protect 225% (up from 150%) of the HHS Poverty Guidelines in your calculated payment.
Modified REPAYE will no longer charge unpaid interest each month when your payment is less than the monthly interest accrual. Essentially, modified REPAYE raises the current REPAYE 50% unpaid interest subsidy to 100%.
Modified REPAYE will now allow borrowers who file their taxes separately to calculate their REPAYE payment based only on their taxable income.
Existing terms of REPAYE would be automatically amended. No one using REPAYE currently will need to do anything to receive the new benefit.
For all IDR plans, any married borrowers filing taxes separately and using ICR, IBR, or PAYE will no longer have their spouse included in the family size.
Limit PAYE eligibility to anyone eligible for and using PAYE before the new regulations take effect.
Limit ICR eligibility to anyone using ICR before the new regulations take effect or to borrowers who use a Direct Consolidation Loan that repaid a Parent PLUS loan.
Expanded provisions for helping certain periods of deferment and forbearance to count towards forgiveness.
Progress towards forgiveness does not fully reset when a borrower consolidates loans that have qualifying forgiveness time. Forgiveness time in a Direct Consolidation Loan will be a weighted average of the loans included in the consolidation.
Mathematically, they succeeded in improving REPAYE, but missed that mark for making it better than PAYE or IBR 2014 for graduate school borrowers. As stated in their own discussion of the changes, the Department of Education sought to address three major frustrations with income-driven repayment: the length of time to reach forgiveness, repayment complexity, and not seeing any progress with consistent payments. Unfortunately, they only succeeded in decreasing time to forgiveness for undergraduate borrowers. The other frustrations will remain, while adding a few new ones for borrowers to navigate.
Proposed IDR modifications: Winners
The biggest winners are undergraduate borrowers. Their payment will be 5% of their discretionary income and their loans will be forgiven after 20 years of payments. Undergraduates with balances of $12,000 or lower will see their debt forgiven after 10 years of payments.
Anyone using REPAYE will see a lower monthly payment. The discretionary income formula will now protect a higher share of your taxable income (225% of the federal poverty guidelines). For borrowers like myself who are only eligible for the older version of Income-Based Repayment (IBR 2009) or REPAYE, the proposed modification to REPAYE will automatically make the best available repayment option to me better by lowering the monthly payment and increasing the flexibility for married borrowers.
Married borrowers not eligible for PAYE or IBR 2014 who were not using income-driven repayment or who are using old IBR (IBR 2009) to keep their payment lower will benefit from the modified REPAYE. Unlike the current REPAYE, married borrowers will have the option to exclude their spouse’s income if they file their taxes separately.
Graduate school borrowers who are eligible for IBR 2014 are also winners. Modified REPAYE will allow them to benefit from a dual income-driven plan approach. The lower REPAYE payment and the improved unpaid interest subsidy will save borrowers money while their income is lower. Then, switching from REPAYE to IBR 2014 will help them to receive forgiveness sooner. The catch – you can only switch to IBR if you have less than 120 payments in REPAYE in the proposed modifications.
Public Service Loan Forgiveness (PSLF) hopefuls are also winners in the modifications. The lower monthly payments in the modified REPAYE helps increase the PSLF benefit, particularly for most married borrowers.
Loan servicers are unlikely winners in the new modifications. Phasing out one of the 20-year forgiveness plans will push more borrowers into repayment longer. And more confusion seems to allow the loan servicers to charge more to taxpayers for providing terrible service to borrowers.
Proposed IDR modifications: Losers
Graduate school borrowers are losers in the proposed changes, despite some of the improvements made. For years, the Dept of ED has added “new borrower” requirements that determine who is allowed to use certain plans, like PAYE or IBR 2014. The most favorable plans have shorter timelines to forgiveness. For example, PAYE and IBR 2014 require 20 years of payments vs. 25 years for ICR, IBR 2009, and REPAYE to reach forgiveness for those with a single graduate school loan. I graduated from veterinary school in 2012 and do not meet any of the new borrower requirements. Somehow, it is OK to allow not-so-new borrowers like myself to be in repayment longer than new borrowers with the same loan types.
Borrowers who are eligible for PAYE, but not IBR 2014 (due to the arbitrary new borrower rules) are also losers. It’s hard to overstate how helpful PAYE is for graduate school borrowers. Unfortunately, knowingly or unknowingly, many are not using PAYE. By phasing it out before they get a chance to use it, the Dept of ED will create further frustration when these borrowers find themselves left with REPAYE as their best remaining repayment option. This includes borrowers who have either been misinformed, have not yet discovered PAYE, or who are still in school, planning to choose PAYE but may find it unavailable by the time they graduate and can apply for it.
IBR 2014 and PAYE New Borrower Requirements:
PAYE: To be a new borrower for PAYE, your first federal student loan must have been received after October 1, 2007 and you must also have received at least one loan after October 1, 2011. Alternatively, if they received a loan before that date, then the loan must have been paid in full prior to borrowing again after Oct 1, 2007.
New IBR or IBR 2014: Eligible Direct Loan borrowers must have received their first student loan after July 1, 2014. If they received a loan before that date, then the loan must have been paid in full prior to borrowing again after July 1, 2014.
Another group of veterinarians will lose out if ICR is phased out. The eagerly awaited one-time forgiveness count adjustment will help borrowers who have been in repayment for decades see an end sooner rather than later. For those who have some forgiveness time remaining after the count is applied, ICR can be the best option to satisfy those payments. Finally, ICR could have some utility beyond those with Parent PLUS loans. But only for those who learn that before these changes take effect if ICR is phased out.
Finally, the proposed changes will set up some new traps for borrowers. Loan servicers have been horrendous at administering the federal student loan repayment plans. The mistakes and misinformation are staggering. The proposal to phase out PAYE and ICR and not allow borrowers who were previously using those plans back into them is a trap. Phasing out plans contractually obligated when borrowers received loans is wrong. At minimum, I hope the ED will provide an appeal process in the event a borrower is mistakenly taken out of a plan they can no longer get back into. If not, even more responsibility will be thrust onto someone using PAYE or ICR to make sure no mistakes are made going forward. History has not shown those expectations to be realistic.
Another trap is set by the proposed 120 monthly payment limit to use IBR. For new borrowers eligible for IBR 2014, there is a strategic case for using REPAYE early in repayment, then switching to IBR 2014 after exhausting the benefits of REPAYE. The proposed changes require a borrower to switch to IBR before reaching 120 monthly payments using REPAYE. To date, it has been difficult to know the number of payments made in any income-driven plan. Once again, the onus is on the borrower to be savvy enough to know and switch before reaching that limit. Otherwise, they will lose access to IBR and end up in repayment longer.
What should you do now?
Confirm your current and eligible repayment plans. You may think you’re using PAYE, but double-check. The VIN Foundation has a variety of free tools to help you conduct a student loan “physical exam.” Visit the Student Debt Center and use the My Student Loans tool.
You will also see your eligible income-driven plans and the current repayment plan you’re using. If you are eligible for IBR 2014 too, then losing access to PAYE is not that big of a deal because it is similar to PAYE.
Next step, crunch the numbers using the VIN Foundation Student Loan Repayment Simulator to see if PAYE is the best choice for you.
Whether a new REPAYE, PAYE, IBR 2014 or ICR will be better for you will depend on your circumstances: current repayment plan eligibility, taxable income, marital status, tax filing status, state of residence, family size and financial goals.
In early reviews comparing the REPAYE modifications to PAYE, I’ve found PAYE continues to beat REPAYE, mostly because of the shorter duration of payment and because veterinarians tend to have higher earnings later in their careers.
See for yourself – a preview of the “Re-REPAYE” plan is now available in the VIN Foundation Student Loan Repayment Simulator. See if you may benefit from PAYE before it goes away.
If you need student debt help, reach out to VIN and VIN Foundation. We have free online tools like the VIN Foundation Student Debt Center and special message board areas to help you make sense of your options. If you have questions on any of the available tools and options, reach out to studentdebt@vinfoundation.org.
Tony Bartels, DVM, MBA
Dr. Tony Bartels graduated in 2012 from the Colorado State University combined MBA/DVM program and is an employee of the Veterinary Information Network (VIN) and a VIN Foundation Board member. He and his wife have more than $400,000 in veterinary-school debt that they manage using federal income-driven repayment plans. By necessity (and now obsession), his professional activities include researching and speaking on veterinary-student debt, providing guidance to colleagues on loan-repayment strategies and contributing to VIN Foundation initiatives.
2 thoughts on “A ‘new’ income-driven repayment plan?”
I thank you for all the details about the news
Thank you for the summary! This was super helpful.