Proposed Student Loan Repayment Rules to Help More Borrowers

Newly proposed student loan repayment rules could help more borrowers better manage their student loans. The Obama Administration has proposed to offer a new income-driven student loan repayment plan, called Revised Pay As You Earn (REPAYE). The proposed rules seek to allow more borrowers to be eligible for the repayment plan, provide an upper limit on the monthly repayment amount, and forgive loan balances after 20 or 25 years of repayment. These proposals are a step in the right direction.  The proposal, however, only deals with Direct Student Loans (loans made after October 1, 2007) and does not directly address borrowers struggling with loans made prior to October 1, 2007. This fix would take new legislation. Tips on how to repay your student loans can be found here.

The proposed plan would be in addition to the existing three income-driven repayment plans:

  • Income-Based Repayment Plan (IBR Plan) (Generally limits payments to 10 or 15 percent of your discretionary income (depending when you borrowed your loans), but never more than the 10-year Standard Repayment Plan amount.)
  • Pay As You Earn Repayment Plan (Pay As You Earn Plan) (Generally 10 percent of your discretionary income, but never more than the 10-year Standard Repayment Plan amount.)
  • Income-Contingent Repayment Plan (ICR Plan) (The lesser of the following either 20 percent of your discretionary income or what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income.)

A great resource describing the existing three income-driven loan repayment plans is the Department of Education Student Loan Summary.

Who is Eligible under the Proposed Plan?

The three existing income-driven plans are available only to borrowers who borrowed for the first time after October 1, 2007 under the Direct Student Loan Program. Borrowers who had an outstanding student loan prior to October 1, 2007 are ineligible for any of the existing income-driven plans.

The proposal eliminates this first-time restriction. The proposal allows students with loans made prior to October 1, 2007 to be eligible for the new plan.

What is the Amount of the Payment?

The proposed repayment amount would be limited to no more than 10% of the amount by which the borrower’s Adjusted Gross Income (AGI) exceeds 150 percent of the federal poverty guidelines for the borrower’s family size. AGI is generally your annual income less your retirement plan contributions and your health benefit plan premium.

For a single borrower (family size of one) 150% of the federal poverty line is $17,655/year in income. So if the person’s annual AGI is $35,000, the student loan payment cannot be more than $144.54/month ($35000 – $17,655) x 10% = $1,734.50/year or $144.54/month.

This limit on the repayment amount applies to the borrower’s Direct Student loans (those borrowed after October 1, 2007). Ford Federal loans (FFEL loans) made before October 1, 2007 are not subject to this proposal. It is only your Direct Student Loans whose payment is limited to 10% of your discretionary income.

How is AGI Calculated for Married Borrowers?

Under the existing three income-driven repayment plan, only the borrower’s income is included in the AGI calculation if the borrower is married and files his/her federal tax return using the “married filing separately” status. Both spouses’ incomes were used in the AGI calculation if the borrower filed his/her federal taxes using the “married filing jointly” status.  Many married borrowers used the married filing separately status to limit their repayments under the existing plans because spousal income was not included in the AGI calculation.

The proposal takes away this loophole. Under this proposal, spousal income will be included in the calculation of the borrower’s AGI regardless of the tax filing status of the borrower. There is an exception for separated spouses.

How Long Do I Have to Keep Paying the Loans?

Under the proposed plan, borrowers with any graduate school loans will have to make 25 years of payments on all of their loans before any remaining debt is forgiven.  Borrowers with only undergraduate debt can receive forgiveness after 20 years.  The one hitch is that if a borrower consolidates multiple loans into one loan, qualifying payments made before the loans were combined don’t count. The 20- or 25-year clock starts all over again.

The Administration hopes to finalize these proposals in the fall of 2015.  There is some relief here for eligible borrowers to begin to better manage their student loan repayment. It is important to stay tuned to see if the Administration adjusts any of these proposals when it releases its final rule.

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