Episode Transcript
Brenton: [00:00:00] The Department of Education recently released updates to their Revised Pay As You Earn plan that in their estimation, will make it so that many black and brown borrowers will see their lifetime payments cut by up to 50% and can even make it so that graduates of community colleges can have their loans forgiven before they ever make a payment.
In this episode, we talk about the changes to Revised Pay As You Earn, as compared to the original version, and give you information you need to know for whether or not this is the right plan for you. Let's get started.
Brenton: Hello, my name is Brenton Harrison of Escape Student Loan Debt, and your host for the Escape Student Loan Debt podcast. If you've been joining us over the last few episodes, with the exception of the brief break we took a couple weeks ago to cover the Biden student Loan forgiveness program, we have been going step by step through things [00:01:00] you need to know before you make a decision as to whether you're going to participate in the Revised Pay As You Earn plan, or the Pay As You Earn plan.
So what I thought we would do in this episode is I would walk you through some of the changes to Revised Pay As You Earn, and this will be another multi-part little series within a series. In this episode, we're gonna focus on some of the major changes to the payment structure and in the next episode we're gonna talk about some of the details as it pertains to your eligibility for forgiveness programs and essentially the consequences, good or bad, of having your loans forgiven under this new version of Revised Pay As You Earn.
Let's talk first about eligibility. The previous version of Revised Pay As You Earn had no eligibility requirements above and beyond the fact that you can only pay direct loans back using this payment program.
The updated version of Revised Pay As You Earn works the exact same way. There [00:02:00] is no eligibility requirement as to the dates you took out your student loans, but you can only pay direct loans using this plan. Next, let's talk about the length of repayment. With the updated version of Revised Pay As You Earn it is mostly the same. If you have graduate school loans, it's 25 years. If you have undergraduate only, it's 20 years, but here is a unique wrinkle for this update.
If you borrowed $12,000 or less for your student loans, instead of 25 instead of 20, you can have your student loans forgiven after 10 years of repayment.
And if you've borrowed a small amount, but still more than $12,000, then after you reach that $12,000 barrier, the years of repayment go up by a year for every thousand dollars you owe over $12,000. So for example, if you owed exactly $12,000, you would have to pay for 10 years.
But if you owed $14,000, That's [00:03:00] $2,000 over the limit, so you would have two extra years tacked onto your repayment for a total of 12 before any remaining loans are forgiven.
Now the Department of Education is being pretty explicit about why they're decreasing the length of time to such a degree. They're essentially trying to make it so that community college borrowers either don't have to make payments based on their level of income or have to pay for a significantly shorter period of time.
And when we get into how they structure the payments, you will also see how based on income it is highly likely that many of these borrowers wouldn't even have to make a payment during those 10 years because of how low their discretionary income would be under the new payment calculation.
Speaking of the new payment calculation, let's go there and talk about the major changes as it pertains to calculating your discretionary income in the first place. This updated version of Revised Pay As You Earn, instead of the 150% [00:04:00] of the federal poverty line as it is seen in the original version of REPAYE, it is now 225% of the federal poverty level. They are increasing the amount of your income you can take off of the table before your student Loan payment is calculated and this can have a major impact on payments even for high income borrowers.
To illustrate the difference, let's use an example of a household who has an adjusted gross income of a hundred thousand dollars and has four people in the household.
In the previous version of Revised Pay As You Earn, they would take their a hundred thousand dollars adjusted gross income and they would subtract 150% of the federal poverty level for a family of four, which in 2023 is $30,000. Now, when they do this calculation, if they paid 10% of that number, as was the percentage required under that plan, they would pay $458 a month towards their student loans. Based on these new [00:05:00] rules, they still have the same adjusted gross income, but now they get to subtract 225% of that $30,000 federal poverty level. As a result, instead of the $458 they would've paid under the previous plan, they now are going to see their payment drop almost $200 a month to $270.
So you have a couple that earns six figures, yet they are only paying $270 in total toward their loans.
And this only applies if the loans they're repaying are all graduate student loans. Because not only has this updated version of Revised Pay As You Earn radically decreased payments for graduate school borrowers. If you are an undergraduate school borrower only, there is another wrinkle that would reduce it even further.
And after the break, we'll tell you what that wrinkle is.
[00:06:00]
Brenton: Before the break, we shared that under this updated version of Revised Pay As You Earn, when calculating your discretionary income you are now allowed to remove from that [00:07:00] equation 225% of the federal poverty level as compared to the 150% of that number that you saw in the original plan.
What we did not share is that if you have undergraduate loans only under this plan, instead of paying 10% of your discretionary income, you would instead pay 5% of your discretionary income.
Now you're probably wondering, okay, 10% for graduate school loans, 5% for undergraduate school loans.
What if I have a combination of the two? And to explain what happens in that scenario, we have to reintroduce a term that we covered in the past called a weighted average.
Now we have covered in the past that there's a major difference between an average and a weighted average. The example we shared is if I have two student loans and one of those loans is somehow at 0% interest and the other is at 10% interest, the average interest rate is right in the middle.
It's a 5% average between my two student loans. But the weighted [00:08:00] average takes into consideration different elements. One of those elements could be the amount you owe on those student loans. So going back to our example, if I have those two student loans the one at 0% is only $10,000, but the one at 10% is a hundred thousand dollars. The weighted average interest rate is going to be much closer to the 10% because it is heavier, it has more weight because I owe more on that Loan.
As it pertains to this updated version of Revised Pay As You Earn, they look at what combination of your loans are graduate and undergraduate, and the percentage that you pay is a weighted average of those numbers. So for example, if you had five student loans and three of the five were graduate school loans those graduate school loans would require you to pay 10% of your discretionary income if they stood alone.
If two of the five are undergraduate loans, they would require you to pay 5% of your [00:09:00] discretionary income. And what would happen in this scenario is the Department of Education or your Loan servicer would take a weighted average of these numbers.
And because there are three that require 10%, they have more weight and it draws the interest that you pay towards the 10% number, and the result would be the weighted average of 8%. And I can tell you all of these iterations can make a major difference. We're covering a high income earner with some graduate school loans and they're paying somewhere between a hundred, couple hundred dollars a month on their student loans.
This is a radical effort to eliminate student Loan payments for a significant portion of borrowers in this country.
But before I let you go, I also want to share with you since this episode is focused on payments, A Wrinkle for Married Borrowers as compared to the original version of Revised Pay As You Earn. With the original version of Revised Pay As You Earn,
if you were married, there was no difference between you filing your taxes [00:10:00] together as a married couple or filing separately as a married couple. Now this was something that when compared to Pay As You Earn, you could file your taxes married, filing separately from your spouse, and in doing so, you would allow their income to be wiped away before your student Loan payment is calculated. With the original version of REPAYE, however, there was no exclusion. It was included no matter what, and it led to significantly higher payments in some cases.
Now for those other plans, it was also unique because not only could you file married filing separately, you could also still include that family member in your household size as it pertains to federal poverty level. For example, we have our couple that earned a hundred thousand dollars and they have two kids.
You could remove your spouse's income by filing separately, but you could still use the federal poverty level for a family of four, which as we've shared in 2023, is $30,000. Now in the updated version of Revised Pay As You [00:11:00] Earn, they are including a married filing separately exclusion. But they are disallowing the use of that person in the number of your federal poverty level.
So instead of including them as the fourth person, you can take their income off the table, but now there's three people in your household when it comes to calculating your income. I'll show you the difference that this could make. Let's say that we now have a couple that instead of a hundred thousand dollars adjusted gross income makes $200,000 of adjusted gross income.
And let's assume in this initial example that they filed their taxes together, married, falling jointly under the new version of Revised Pay As You Earn.
And when you calculate, they would have a monthly payment of $1,104 a month.
Now, let's assume that they choose to file married filing separately and recalculate their payment so that they could remove one of the partner's incomes From the calculation.
We're going to assume that the person who has the student loans earns [00:12:00] $125,000 adjusted gross income. So we're gonna drop the number in the calculation from 200,000 down to 125,000, but because they filed separately, they can no longer use the federal poverty level for a family of four, and instead they must use the federal poverty level for a family of three, which drops that number from 30,000 down to $24,860.
As a result, they have an adjusted gross income of $69,065 with leads to a monthly payment of $575. So that's still a significant difference, but you have to keep in mind that in many scenarios, Filing your taxes married, filing separately leads to significantly higher taxes for that couple.
So even though it's a significant difference in student Loan payment, you would now have to compare it to what they are costing themselves in taxes to see which is the right decision. So I would imagine that because of that 225% number, this will still make sense for a [00:13:00] significant number of people, but it may not make sense for every couple if the end result is a significantly higher tax bill.
That was it. A whole lot of nitty gritty details about the changes to the payment structure of these new versions of Revised Pay As You Earn. In the next episode, we'll tell you about some of the background and forgiveness elements that have been updated and will end this whole series by comparing the new version of Revised Pay As You Earn to the version of Pay As You Earn that, you'll have to leave forever if you decide to take advantage of this new option.
