Review: What’s Really Going to Happen With REPAYE?

Repeatedly throughout the draft rules of REPAYE (see our previous post here), the Department of Education states the desire to establish a “new widely available income-contingent repayment plan targeted to the neediest borrowers.” It becomes clear from the draft rules, that the meaning of the “neediest borrowers” is someone who is either short-term needy or very long-term needy, and definitely not (happily) married to someone with high-income. Or least that’s who would benefit most from choosing REPAYE. Let’s examine the draft rules.

“No Cap” Rule

Under REPAYE, there’s no cap on the monthly payment amount. That means the calculated monthly payment amount under the REPAYE plan would not be capped at the amount the borrower would have paid under a standard repayment plan based on a 10-year repayment period, unlike the previous income-driven repayment plans. The rationale behind this “no cap” rule is that it would ensure that “high-income, high-balance Direct Loan borrowers pay an equitable share of their earnings as their income rises.”

As a result of the “no cap” rule, any time a borrower has high-income, it doesn’t make financial sense to stay on REPAYE because their monthly payments end up even higher than if they were on the 10-year standard repayment plan. Instead, that borrower would probably switch to the 10-year plan during the high-income periods. The problem with this is that those periods of time where the borrower is not on the REPAYE plan, will not count for the REPAYE 20/25 year forgiveness.

The only way to accumulate enough years for the REPAYE 20/25 year forgiveness is to stay on REPAYE. This makes it so that REPAYE is not for income-jumpers who go through periods of low-high-low-high-etc. income. REPAYE will be very expensive during those times of high-income.

Thus, the eventual REPAYE 20/25 year forgiveness will only make sense and come to fruition for borrowers with consistently low-income. Consistently “needy” for 20/25 years. Short-term low-income borrowers (fresh out of school), may utilize REPAYE during the initial months of low-income, but will never see that REPAYE 20/25 year forgiveness if they expect periods of high-income.

Marriage Problem

It has been discussed during analysis of the previous income-drive repayment plans, that the tax-status (married filing separately vs. married filing jointly) will result in a significant difference in monthly loan repayments. Under REPAYE, this issue is essentially eliminated and those trying to use this tax-filing status method of reducing monthly loan repayment amounts will be treated as a single person.

For REPAYE, “the monthly payment for a borrower in the REPAYE plan would generally be no more than 10 percent of the amount by which the borrower’s AGI exceeds 150 percent of the poverty guideline applicable to the borrower’s family size, divided by 12.”

The draft rules “define the term ‘adjusted gross income’ to mean the borrower’s adjusted gross income as reported to the IRS. For a married borrower who files a joint Federal tax return, AGI would include both the borrower’s and spouse’s income and would be used to calculate the monthly payment amount. For a married borrower who files a Federal tax return separately from his or her spouse, the AGI for each spouse would be combined to calculate the monthly payment amount. For a married borrower who files a tax return separately from his or her spouse, the AGI of the borrower’s spouse would not be required however if the borrower certifies that the borrower is separated from his or her spouse or is unable to reasonably access the income information of his or her spouse. The borrower would provide the appropriate certification on a form approved by the Secretary.”

This means borrowers won’t be able to play the tax-filing game anymore. The Department believes “that, for married borrowers, it is more equitable to count the spouse’s AGI even when the borrower and spouse file separate tax returns,” except under those special circumstances.

But then the draft rules keep going. The married folks who qualify under those special circumstances won’t be able to count their (terrible) spouse as their family under “family size.” The definition of “family size” in proposed rules “would be consistent with the definition of that term in the Pay As You Earn repayment plan regulations, with one exception. Family size would not include a married borrower’s spouse if the borrower filed a Federal income tax return separately from his or her spouse and the borrower is separated from his or her spouse, or if the borrower filed a separate Federal income tax return from his or her spouse and the borrower is unable to reasonably access the spouse’s income information.”

The lower the “family size,” the higher the monthly repayment amount. So under REPAYE, there will be no marriage benefits, either through the former tax-filing or the family size tactics. Once you are happily married, you are basically married to your spouse’s income and debt for REPAYE calculation purposes. REPAYE is really fulfilling that “neediest borrower” goal, wherein REPAYE effectively rids benefits for married couples.

REPAYE Prediction

Our prediction is that REPAYE will be most beneficial for long-term low-income borrowers who will eventually trudge their way to the REPAYE 20/25 year forgiveness, regardless of marital status. This is exactly what President Obama wanted, to help the neediest borrowers, but REPAYE also manages to leave out the middle-class and the income-surfers.

As the student loan repayment plans continue to develop, we think there will be only a couple of repayment plan options. The sole income-driven repayment plan will probably serve only very low-income borrowers who would otherwise be straddled with a lifetime of debt. Other borrowers with above low-income will be deemed “capable” enough to crawl out of their student loan debt without the help from Uncle Sam. At least that’s the direction we see with REPAYE.

In the Draft Rules for REPAYE, non-Federal negotiators recommended opening up the existing PAYE plan available to all borrowers as opposed to creating another income-driven repayment plan. “Instead of adding a new plan, these negotiators recommended modifications to the Pay As You Earn repayment plan to make it available to more borrowers, while allowing borrowers who are currently repaying under that plan to continue doing so under the existing Pay As You Earn repayment plan terms and conditions. They believed that this approach would be simpler for the Department and its loan servicers to administer, and simpler for schools to explain to borrowers.”

But it looks like the Department of Education is just waiting until a future date to merge the income-driven repayment plans to one. The ED said the “current Pay As You Earn repayment plan should be retained until proposed reforms can be implemented that would establish a single income-driven repayment plan targeted to struggling borrowers.”

We see the same desire for a single income-driven repayment plan in the recent whitepaper from the Republican Priorities for Reauthorizing the Higher Education Act, House Committee on Education and the Workforce, “Streamlining repayment plans into two options – a standard repayment plan and a modified income-based repayment plan – will better serve taxpayers and students. The standard repayment plan will remain the same and provide borrowers with a predictable monthly payment for up to 10 years. The modified IBR plan will provide relief to struggling borrowers by capping their monthly payments at a percentage of their discretionary income.”

We think REPAYE will serve as a skeleton for the future single income-driven repayment plan. It is very likely that the future plan will serve to target long-term low-income student borrowers, similar to REPAYE.

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