Beginning this month, student loan borrowers will have a new repayment option to consider, and it could lead to significant relief for an estimated five million borrowers. The National Foundation for Credit Counseling® (NFCC®) is taking steps to share important information about this new program and how it will impact those who are seeking more affordable ways to pay their debt. The new program, Revised Pay As You Earn (REPAYE), enables borrowers to cap their monthly payments at ten percent of their discretionary income regardless of when they borrowed or how much they owe. Another benefit is that after 20 years of making payments (25 years for graduate students), any outstanding loan balance will be forgiven under the program. It’s similar to the current Pay As You Earn (PAYE) option, but REPAYE is open to all students who borrowed directly from the federal government.
What this means in dollars and sense.
The monthly reduction could make a substantial difference for those having trouble making ends meet. Discretionary income for this purpose is calculated as the difference between adjusted gross income (taken from the tax return) and 150 percent of the current poverty line. For this year, that payment would be 10% of what is earned over $17,655 divided by 12 months. For instance, a person earning $30,000 a year would see payments capped at a budget-friendly level of about $102.88 a month.
Why now?
The new REPAYE option addresses an overwhelming need to reduce student borrowers’ financial stress. That stress is blamed for the delay in home purchases and other life-stage commitments. But of even greater concern is the upward trend in student loan defaults. Those defaults can have a long-lasting impact on a borrower’s financial well-being. A record of late or missed loan payments impacts a borrower’s credit history by making any new loan requests—for cars or homes—more expensive or just extremely difficult to qualify for.
There is a downside.
The downside to this type of repayment option is that, for some borrowers, the monthly payment may not cover both interest and principal payments, which means the balance due could keep growing. That makes it harder to obtain other personal credit—from credit cards to mortgages—because the borrower’s credit capacity is exhausted. Another risk is that the lower monthly payment under REPAYE will lead the borrower to pay substantially more over the life of the loan when compared to a Standard Repayment plan. Reach out to an NFCC® Certified Student Loan Counselor to determine which one would be the most beneficial for their individual circumstances. To get started, consumers can visit www.studentloanhelp.org or call (877) 406-6322.
