The REPAYE interest subsidy may not get a lot of attention, but I’d argue that this rarely discussed benefit makes REPAYE the best federal student loan repayment plan.
While the calculations may seem complicated at first, REPAYE’s interest support can save borrowers thousands of dollars per year.
What is the Revised Compensation If You Receive Interest Subsidies?
Only certain borrowers are eligible for REPAYE’s interest support. To qualify, a borrower’s monthly payment on REPAYE must be less than the monthly interest generated by the student loan. In other words, if your loan is growing faster than you can make payments, the government will help pay your interest.
No special registration is required. Borrowers just need to sign up for the REPAYE plan.
Those who receive the Interest Subsidy will see a monthly transaction called “Interest Subsidy” each month. As interest support, the capital balance does not change. However, it does reduce the outstanding interest on the loan.
The amount of the grant depends entirely on the borrower’s balance sheet and income.
REPAYE interest subsidy calculations
The best way to understand the REPAYE interest subsidy is with a simple example.
For example, suppose a borrower has a federal student loan balance that generates $ 500 monthly interest. The same borrower has a monthly repayment of USD 100.
In this situation, the borrower’s balance actually increases by $ 400 per month.
The REPAYE grant covers half of the excess Interest. In this case, the loan will generate interest of $ 500 per month, of which $ 400 will exceed the borrower’s monthly payment. 50% of $ 400 is $ 200.
Thus, in this example, the borrower would receive an interest subsidy of USD 200 per month for REPAYE.
Background on the REPAYE pan
REPAYE, full name Revised Pay As You Earn, was originally created to help borrowers who are not eligible for Pay As You Earn (PAYE).
At the time, PAYE was the only repayment plan that charged 10% of a borrower’s discretionary income each month. The other plans required 15% or more.
Unfortunately, borrowers with older loans were not eligible for PAYE. The then President Barack Obama issued an executive order to create REPAYE with the primary goal of expanding 10% to all borrowers.
During the settlement process, Revised Pay As You Earn evolved into more than just PAYE for everyone. The most notable difference to PAYE is the REPAYE interest subsidy. It’s designed to help borrowers who can’t even cover the monthly interest on their federal student loans.
Why does REPAYE support borrowers with interest?
The interest subsidy is intended to prevent the balances from getting out of hand.
To be clear, interest in REPAYE will continue to rise, but it’s happening at a much slower pace. Those who receive the maximum subsidy, borrowers who make $ 0 payments, will essentially cut their interest rate in half.
Interest subsidy helps borrowers get back on track after a period of unemployment or underemployment. Before REPAYE, a lengthy job search could make a successful repayment impossible. Under REPAYE, borrowers get a little more breathing room.
Interest subsidies for IBR, PAYE and ICR borrowers
Unfortunately, the IBR, PAYE, and ICR repayment plans do not qualify for an interest subsidy.
REPAYE is the only plan that offers this protection to borrowers who cannot afford to keep up with their federal student loan rates.
However, it should be noted that the REPAYE plan has some shortcomings. Borrowers shouldn’t automatically assume that REPAYE is not the best option under any circumstances.
When is REPAYE not the best option?
The best choice for most borrowers with larger balances and lower incomes is usually REPAYE. However, there are some circumstances in which other IDR plans may be better.
- Certain married borrowers – For some couples it makes sense to submit taxes separately. Unlike IBR, PAYE and ICR, filing separately does not exclude spouse income from monthly REPAYE payment calculations. Borrowers must weigh the value of the interest subsidy against the value of the exclusion of the spouse’s income from the payment calculations.
- Graduate borrowers plan IDR forgiveness – With PAYE and IBR for new borrowers, student loan issuance occurs after 20 years. Under REPAYE, borrowers must wait 25 years if they are in debt. Borrowers in this situation must compare the benefits of an interest subsidy with the value of forgiveness five years earlier.
Sign up for REPAYE
Registering with REPAYE works just like any other IDR repayment plan. No additional steps are required for the interest subsidy.
- First, borrowers need to visit studentaid.gov website to apply for an income-based repayment plan.
- At registration DO NOT Choose the plan with the lowest monthly payment. REPAYE can be tied to PAYE or IDR for the lowest monthly payment. Hence, there is no guarantee that choosing the lowest monthly payment will mean choosing REPAYE.
- Instead, state REPAYE as the preferred repayment plan.
(Note: in the event of a tie between repayment plans, the default option is usually REPAYE. However, specifying REPAYE is the best approach to avoid possible errors or problems.)