Get Out of Debt Guy

Why REPAYE is Such a Horrible Student Loan Repayment Option

Posted February 29

The Department of Education recently launched the much awaited new federal student loan income based repayment option REPAYE (Revised Pay As You Earn). They should have named it WTF.

While the program gives some consumers additional options, it is a complete miss for those wanting to get beneficial relief, especially if they are married or ever plan to get married.

Under REPAYE, a married couple must now include the income from both partners in determining the payment. While it is true that under REPAYE the monthly payment is capped at 10 percent of monthly discretionary income, discretionary income is not what you think it is.

According to the Department of Education discretionary income is not what you want to have available but instead it is the difference between your income and 100 percent of the poverty guideline for your family size and state of residence. The poverty guidelines are maintained by the U.S. Department of Health and Human Services and are available at www.aspe.hhs.gov/poverty. So your discretionary income does not include any accommodation for your other financial obligations like mortgage, car payment, or other debt.

Under the original Pay As You Earn (PAYE) program, this inclusion of spouse income was conditional. Now, some might say that the income of the spouse should be included in the calculation. It is an understandable point. But what really happens is if you get married after you have gone into student loan debt, your future spouse can get penalized for your loans and lose part of their income even if they file separate tax returns.

This "friendly" adjustment to policy and repayment by the Department of Education seems to fly in the face of the original intent of Congress to offer indebted students some assistance. According to education finance law expert Professor Philip Schrag, the original regulations regarding Income Contingent Repayment:

“The statutory authority for ICR did not give the Department the authority to impose a marriage penalty on borrowers who file separate tax returns. It provides that ‘[a] repayment schedule . . . shall be based on the adjusted gross income . . . of the borrower or, if the borrower is married and files a Federal income tax return jointly with the borrower’s spouse, on the adjusted gross income of the borrower and the borrower’s spouse.’ 20 U.S.C. § 1087e(e)(2). Thus, the Department is authorized only to base the repayment obligation on the AGI of the borrower, unless the borrower files a joint return.”

You can read his full comments here.

Another scholarly author, Frank Pasquale of the University of Maryland Francis King Carey School of Law, stated:

"Unfortunately, the DOE has proposed several conditions on entry into REPAYE of dubious merit either as a matter of policy or as a reflection of the President’s wishes. For example, DOE has chosen to include the borrower’s spouse’s income in calculations of the 10% repayment figure."

He also observed, "DOE has made the time-to-forgiveness twenty-five (25) years for those with any graduate school debt, even though it could have made it less. DOE has also included a number of confusing provisions about eligibility for non-accrual of interest once a borrower is enrolled in REPAYE."

You can read the full observations of Frank Pasquale which were published in the Loyola Consumer Law Review, here.

Federal student loan debt and repayment remains what this unscholarly author would like to call a "hot mess."

It is a complex problem that feels as if it requires a graduate degree to understand. You see, on one hand you have government financing of inflated tuition during a period where states have contributed less to the education of it's citizens. You also have the explosion of federally funded for-profit schools with nuclear tuition rates.

From 1992-2014 the cost of a public four-year college rose 60 percent and far outpaced any increase in incomes. Education became much more expensive with a great likelihood of submerging all students into deeper debt.

Now, with the advent of multiple repayment plans you have others screaming that there should be more restrictive or less student loan forgiveness programs. You get the "they borrowed it, they should repay it all" argument.

And then you have the silent killer that most income based repayment plans double whammy students by nailing them with a massive tax bill for forgiven debt at the end of the multi-decade repayment period and silently growing balances.

I'd love to tell you these repayment plans, like REPAYE, include some compromise to craft fair regulations, but I can't. In the end, the least sophisticated person in this equation still gets the right to suffer the full life, income, marriage, and tax penalties for taking our student loans encouraged by society and the schools.

Without fixing our higher education student loan reality what we will be left with is a country with less well educated and more economically burdened students than a growing list of other countries. It's one thing to say America is the greatest country with educated citizens, it's another thing to be it.

This article by Steve Rhode first appeared on Get Out of Debt Guy.

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About this Blog:

Steve Rhode has had careers in opthalmology, real estate and as the head of a nonprofit debt counseling firm. On his blog, he offers hard-won, free advice about getting out of debt, consolidation and making the right choices as you manage your money.