Episode Transcript
Brenton: [00:00:00] In our last episode, we started digging into the differences between Pay As You Earn and the updated version of Revised Pay as You Earn that borrowers will have to choose between in July of 2023.
In this episode, we go through scenarios where a person might choose one of these plans over another, so that you can apply that same logic to your situation. 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. In our most recent episode, we started the process of comparing Pay as You Earn to the updated version of Revised Pay As You Earn that borrowers will have to choose between this coming July of 2023.
And in this episode, what I thought we would do is give you some specific scenarios based on things like the degree you've attained, your marital status, [00:01:00] your student loan balance and even your industry, to give you real world examples of what your payment would be, what your forgiveness details would be, so that you can apply them to your situation, to find the best fit for you.
Let's first start with breaking these up into sections based on the degree that you've attained. And we'll begin with community college. We've covered that the department of education when updating this plan made it so that it incentivized low income earning community college graduates to choose this new version of Revised Pay as You Earn.
The reason for that is instead of paying for 20 years before loans are forgiven, like you would find in Pay As You Earn, if you owe $12,000 or less then you would have your loans forgiven after 10 years of payments under the updated version of REPAYE. Even if you're above the threshold, it would only increase your years of repayment by one year per $1,000 above the threshold, up to a cap of 20.
Because of the changes [00:02:00] that they've made to the calculations of these plans, if you're a low income community college borrower, the payment under this plan would be radically different as well.
For example, if you had an adjusted gross income of $50,000 as a single borrower under the updated version of REPAYE, you would pay $71 a month. As compared to the current and unchanged version of Pay As You Earn, you would have a payment of $234 a month. So that is a radical difference of over $150 a month.
It's worth keeping in mind that this new version of Revised Pay As You Earn still does not have a payment cap.
Whereas with Pay As You Earn, there is a payment cap that says if they calculate your payment under Pay As You Earn and it would save you money by being on the 10-year standard plan, you would simply be put on that payment while still receiving credit towards the forgiveness that comes with Income Driven Repayment.
Next let's consider whether you have [00:03:00] undergraduate loans only. In this scenario, we covered that Pay As You Earn requires you for undergraduate or graduate or whatever combination you have to pay towards your loans for 20 years until balances are forgiven.
With Revised Pay. As You Earn, if you have undergraduate loans only it is also 20 years.
Let's now increase the income a bit for the person to our previous example. And let's assume that this single person has a $75,000 adjusted gross income. Under Pay as You Earn, they would pay $442 a month towards their loans. Whereas with Revised Pay As You Earn that payment would go from 442 all the way down to $175 a month. And there's two reasons for this.
One of those reasons is the increased percentage of the federal poverty level that they allow you to subtract from your income before calculating your payment. But it's also because with undergraduate loans only the percentage of that [00:04:00] Discretionary Income you must pay is 5% as compared to the 10% that is found with Pay as You Earn.
Next let's consider the scenario of a person who only has graduate school loans. If we're comparing the two plans to another ,with graduate school loans under the new version of Revised Pay As You Earn, it's the same 10% payment of Discretionary Income as you would find in Pay As You Earn. But the way that you calculate it is different. Under Pay as You Earn, they allow you to take 150% of the federal poverty level out of the equation. Whereas with Revised Pay, As You Earn, it is 225% of the federal poverty level. And this again is showing it. And this again, will show you a difference in payment, but I want to bring up something that might tilt you towards Pay as You Earn, even though you would be paying more.
If we increase the income again, and we have a person in our example with an adjusted gross income of a hundred thousand dollars, under the Pay As you weren't playing, they would pay [00:05:00] $651 a month. Whereas under the updated version of REPAYE, they would pay $559 a month. So there's two things that play that I want you to consider here.
The first is for graduate school loans, where that percentage of Discretionary Income is the same, as your income increases the gap between the two payments is reduced. We're no longer looking at a 400, $500 a month difference or a $200 difference between the two plans in this.
We're no longer looking at a 200 or $300 difference between the two plans in all scenarios. As a matter of fact, in this example, it's a little over a hundred dollars a month more to stay on Pay As You Earn. And you might think, well, why would I pay a hundred dollars a month more if I don't have to? You must also remember that with Revised Pay as You Earn, if you have graduate school loans in the mix, you have to pay your loans for 25 years before forgiveness as compared to 20 under REPAYE. So this is all about personal preference, but I can tell you that if you [00:06:00] asked me would I'd rather pay a hundred dollars more but have my loans forgiven five years earlier, I would take that option. So Pay As You Earn in this example would be a better fit for me because even though I have to pay more, I'm finished with my loans sooner and I can move on with the rest of my life.
And then lastly, let's consider someone who has a blend of undergraduate and graduate school loans. They have both that are in this pot. With Pay As You Earn it doesn't matter what that blend is, but it changes when you go over to the new version of Revised Pay As You Earn. Because as we've shared, you have 5%. If you have undergrad only that you pay towards your loans. 10% if you have graduate school only that you pay. And if you have both, it is a blend of the two.
So let's use the example and assume that we do this weighted average. And we find out that because you have so many graduate loans with the high balance, you're paying 8.5%,9% of your Discretionary Income. Is it really better to do that and save a percent or a percent and a [00:07:00] half, but pay for five years longer than you would by simply getting it out of the way by using by using Pay As You Earn.
[00:08:00]
Brenton: Let's now look at some options based on the makeup of your family, and even how you file your tax return.
Let's say that we have a couple that earns a hundred thousand dollars of adjusted gross income, and they have three children. So they have five people in their household. Based on the calculations for Pay As You Earn, they would have a total monthly payment towards their student loans of $394 a month. Whereas if these were graduate school loans and we did that same calculation for the new version of Revised Pay, As You Earn their payment would go all the way from 394 down to $174 a month. So you have a couple with three kids that earns six figures as a household, but they're paying less than $200 a month on their student loans because of the benefit of being able to take that 225% away from their Discretionary Income.
Now if you both have student loans and you're trying to navigate Income Driven Repayment plans together, that may make perfect [00:09:00] sense. But we covered that in not all marriages is that the case, there are cases where a partner may make a significant income, but not have student loans. And their spouse may not want their salary driving up their household student loan payment.
So they make a decision of whether they're going to file their taxes Married, Filing, Jointly, or Married, Filing Separately. And prior to these changes, if they filed taxes Married, Filing Separately, it could lead to more taxes, but Pay As You Earn would allow them to remove that other partner's income from the calculation.
Whereas with the old version of repay, it did not matter how you filed your taxes separately or jointly the spouse's income had to be included no matter what. That has changed with these revisions and they now have a Married Filing Separately, exclusion that's available to you under Revised Pay. As You Earn, just like you find with Pay As You Earn.
The next area that we're going to touch on are people who have really high student loan balances on either plan. [00:10:00] And the reason this is important is because of the changes to the interest subsidies that you find with Pay As You Earn versus Revised Pay as You Earn.
With Pay As You Earn the interest subsidy is 50% of the unpaid interest, but it only lasts for three years. Now, we're not going to go into the details of the previous version of Revised Pay As You Earn subsidy. But in the new version, they cover 100% of all interest in all years.
Now, this is very relevant for a person who might be trying to buy time on an income driven repayment plan while they're earning a low income. And maybe eventually they plan to pay it off in full and make bigger payments, or even refinance it with a private lender and pay it down.
Because if you have a hundred percent interest subsidy, you know that your loan balance won't increase as compared to Pay As You Earn where it does have the pin. As compared to Pay As You Earn where after that third year, there is no subsidy at all to limit the balance that's growing onto your loans.
But it's also relevant for people who are [00:11:00] seeking forgiveness. If Congress does not decide to extend one of the major exclusions they've allowed for recent years. We've covered that until the year 2026, any remaining student loan balances that you have that are forgiven are not taxable to you in the year of forgiveness.
But that's not how it usually works. In typical times, if you have a student loan balance forgiven under Income Driven Repayment plans, that balance is taxable to you in the year of forgiveness. If you have a hundred thousand dollars income and you have $50,000 of student loans forgiven, you would have to pay taxes on 150,000 as if you earned it.
Now, if they decide to extend their allowance of not having this forgiven you're not going to have to pay taxes on it anyways. But if they don't extend it and we go back to typical times where that forgiven balance is taxable, then having an interest subsidy that ensures there's no growth on that balance could be vital as compared to Pay As You Earn, which could increase your [00:12:00] taxable burden as that balance increases as well.
I'll give you an example. Let's say that we have a person where they $400,000 student loan balance growing at 5% interest, and maybe they're paying a thousand dollars a month on their student loans.
Well, $400,000 at 5% interest means that there's $20,000 of interest growing on that debt each and every year. But if they're only paying a thousand dollars a month, then there's about $8,000 every single year that's the gap between what they've paid and the interest that was accruing. And over a 20 year period, that adds up to $160,000 of extra student loans that's added onto that balance.
If we're going to assume that it's taxed at a rate of 32%, just that extra balance on top of what they already owed would lead to an additional $51,000 in taxes that this person would have to pay as a result of that forgiven debt. If you compare that [00:13:00] to Revised Pay, As You Earn, it doesn't matter how much extra interest is growing at the end of the year, the government is paying in full.
So when they have their student loans forgiven, even if it is taxable, they would know that the amount that's forgiven would not be any higher than what it was the day they graduated.
And this last area is a bit of projection.
Typically the department of education will give you a waiver or they'll give you guidance when they're making sweeping changes and we're still waiting for that to come out. So there's a lot of information we don't know. So this next thing that I'm going to say, it could end up being the exact same for Pay As You Earn as it is for Revised Pay As You Earn.
But as of right now, the only change we know will occur is the one that's happening to Revised Pay as You Earn. And that has to do with them applying past credits for years that you weren't paying. We've covered in the last two episodes that for periods where you had your loans in deferment or forbearance, the department of education is considering letting you pay for back credits in [00:14:00] pursuit of forgiveness. As an example, if you're a medical resident or a medical fellow, and for two years of your training, you decided to not make payments towards your loans and instead chose deferment, you could go back years later to the department of education and say calculate what my payment would have been during those two or three years. And I'm going to give you a lump sum check or make monthly payments to earn back that credit. And if they don't do this with Pay, As You Earn, and the other plans, this is a radical advantage for people who are going to be in scenarios where their income during training would be reduced, but they would see it explode after their training years. So now I can just get my years of credit when I'm making more money without having to go through the sweat and the pressure of making that payment when I'm making a smaller amount during residency. If they allow this for all the plans, Hey, really cool feature that you'll be able to take advantage of. But if they do not Revised Pay, As You Earn would be a really, really, really attractive option for people, [00:15:00] specifically those in the medical profession who are pursuing public service loan forgiveness. Because that 10 years will come a lot faster after training than they think, especially if they do a fellowship or if they're in surgical training. So the prospect of being able to make a lump sum payment when your income increases and have your student loans forgiven in a shorter order is one that they would consider when choosing between these two options.
That's it. A lot of numbers, a lot of details. But this should give you at least a foundation for being able to get a scratch pad out and go through some scenarios to determine which of these plans might be correct for you. You still have a few months to make the decision and we'll keep giving me everything you need to know in advance of that time as new information becomes available so that you are informed and you can act on that informed opinion when the time comes.
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