Draft Rules for the New Repayment Plan REPAYE: Effect on PSLF

On July 9, 2015, the draft rules on the newest repayment plan, REPAYE, were published (http://www.gpo.gov/fdsys/pkg/FR-2015-07-09/pdf/2015-16623.pdf).

The rules that affect PSLF, as discussed in our previous post (http://www.holdfasttodreams.org/repaye-compared-to-ibr-and-paye-for-pslf/) , are:

“[P]ayments made under the alternative repayment plan would not count as qualifying payments for purposes of the Public Service Loan Forgiveness Program, but may count in determining eligibility for loan forgiveness under the REPAYE plan, the income-contingent repayment plan, the income-based repayment plans, or the Pay As You Earn repayment plan (each of these plans may be referred to as an ‘‘income-driven repayment plan’’ or ‘‘IDR plan’’) if the borrower returns to the REPAYE plan or changes to another income-driven repayment plan.” See page 3 of Draft Rules.

“The proposed regulations also would allow lump sum payments made on a borrower’s behalf through the student loan repayment programs administered by the Department of Defense to count as qualifying payments for purposes of the Public Service Loan Forgiveness Program in the same manner as lump sum payments made by borrowers using Segal Education Awards after AmeriCorps service or Peace Corps transition payments after Peace Corps service.” See page 3 of Draft Rules.

Let’s take a closer look at that “alternative repayment plan” under the draft rules. The draft rules for REPAYE keeps the requirement where borrowers who don’t submit the annual income documentation will be removed from REPAYE and placed in an alternative plan. Then, payments made under that alternative plan won’t count towards PSLF! The payments do count for the 20/25 year forgiveness though. You can refresh your memory here: http://www.holdfasttodreams.org/repaye-compared-to-ibr-and-paye-for-pslf/.

The draft rules give the following explanation for the alternative repayment plan (Page 14 of Draft Rules):

“Reasons: In the absence of a process that allows borrowers to provide consent to access their income information for multiple years, the proposed approach for handling borrowers who do not provide required income documentation by the annual deadline serves two important purposes.”

“First, the proposed regulations should provide an incentive for borrowers to comply with the annual income documentation requirement in a timely manner. At the same time, allowing payments made under the alternative repayment plan to count toward REPAYE plan loan forgiveness if the borrower later returns to the REPAYE plan ensures that borrowers who do not submit income documentation by the annual deadline but later correct the problem are not unduly penalized.”

“Second, the proposed approach provides a disincentive for borrowers who might intentionally withhold updated income information when there is a significant increase in their income so as to avoid a corresponding increase in their calculated monthly payment amount. The proposed regulations would ensure that, if such borrowers wish to return to the REPAYE plan, they must repay the difference between the amount they were required to pay during the time they were in repayment under the alternative repayment plan or any other repayment plan and the amount they would have been required to pay during that same period under the REPAYE plan if they had provided the required updated income documentation. This is consistent with the Department’s goal of targeting the REPAYE plan to the neediest borrowers by ensuring that the required monthly payment amount for a borrower whose income increases over time will always be adjusted upward as the borrower’s income increases.”

Compare that to IBR/PAYE. Borrowers who do not update their annual income documentation are required to pay the equivalent to if they had entered a fixed 10-year repayment plan when they entered PAYE. As long as the borrower remains in IBR/PAYE, monthly payments will count toward the required 120 payments for PSLF.

Thus, under IBR/PAYE, sneaky borrowers don’t seem to be punished because there’s a cap on their repayment amount (~10-year plan), yet needy borrowers are punished because of the increase in repayment amount; needy borrowers and sneaky borrowers stay on a PSLF-eligible plan.

On REPAYE, sneaky high-income borrowers see an upwards adjustment in their required monthly payment; needy borrowers don’t. But no one receives PSLF-eligible payments while on the alternative repayment plan.

Therefore, under REPAYE, the neediest borrowers would essentially be “punished,” in terms of PSLF, just like the sneaky borrower trying to hide income increases, because payments made under that alternative plan don’t count towards PSLF. That is, when needy borrowers forget to submit the annual documentation of income, they will be forced into the alternative repayment plan; those repayments will not count toward PSLF.

Perhaps the REPAYE should only allow those repayments on the alternative repayment plan to be eligible for PSLF if there was not an upwards adjustment in the required monthly payment amount. That way, borrowers, including the needy ones, who just happened to forget to update their income documentation will not be punished as much as the sneaky high-income borrower.

Hold Fast to Dreams has submitted an excerpt of the above as a comment to the draft rules. If you want to submit a comment, you should look here: https://www.federalregister.gov/articles/2015/07/09/2015-16623/student-assistance-general-provisions-federal-family-education-loan-program-and-william-d-ford and http://www.regulations.gov/#!submitComment;D=ED-2014-OPE-0161-0002.

To summarize the REPAYE draft rules in the context of loan forgiveness, we have this from Page 19 of the draft rules:

Repayment period …………………………… § 685.209 ……………….. For a borrower who has loans for undergraduate education only, the balance of the loans will be forgiven after 20 years of qualifying payments.

For a borrower who has at least one loan for graduate study, the balance of the loans will be forgiven after 25 years of qualifying payments.

Payments made under the alternative repayment plan would count towards forgiveness under income-driven plans if the borrower returns to such a plan, but not towards public service loan forgiveness.

Treatment of Department of Defense lump sum payments for public service loan forgiveness.

  • 685.219 ……………….. Lump sum payments made under Department of Defense loan repayment programs would be applied as the number of payments resulting after dividing the amount of the lump sum payment by the monthly payment amount the borrower would have otherwise been required to make or twelve payments.
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