Don't Overlook PAYE

The income-driven repayment plans just might be the best thing to ever happen to student loans. They are extremely useful for a wide range of borrowers, whether you need short-term relief or are renewing every year and seeking student loan forgiveness. I remember being extremely excited about the Revised Pay As You Earn (REPAYE) plan when it was first launched. I was still in pharmacy school at the time, but I knew I would be completing a residency after graduation. I was glad that I could qualify for REPAYE and have my interest subsidized while I was making income-driven repayments. I was planning on staying in REPAYE the entire time and seeking student loan forgiveness after 25 years, since I have graduate school loans. 

Then I dug a little deeper into my other options. Always remembering that student loan repayment is much more complicated than it should be, and my student loan servicer doesn't care what repayment plan I'm in. They aren't my financial advisor, and they don't care what my financials goals are. They just care that I keep making payments so their business can keep making money and servicing more student loans. 

That being said, I took a good hard look at my own personal financial goals assessed how they fit with REPAYE. The first thing that jumped out to me when comparing student loan repayments plans was the forgiveness periods for REPAYE and the original Pay As You Earn (PAYE) plan. Since I have graduate loans, I need to make 25 years of payments in order to have my loans forgiven under REPAYE, but I only need to make 20 years of payments for my loans to be forgiven under PAYE! When I noticed this, I was already 2.5 years into my REPAYE payments, and I was told by my loan servicer (Great Lakes) that those payments don't count towards the 20 years of payments for PAYE, and that my accrued interest would capitalize if I recertified under PAYE. The interest capitalized, but I will still work to see if I can get those 2.5 years of REPAYE to count towards the 20 year forgiveness under PAYE, when the time comes. Regardless, continuing under REPAYE (22.5 additional years) would cost me an additional $48,000 in payments compared to 20 years under PAYE. The choice to switch was obvious. 

But wait. There's no need to make any rash decisions when it comes to student loan payments. I wanted to do a little more research to be certain that I wasn't missing any loopholes with REPAYE or PAYE that would come back to haunt me 10, 15, or 20 years down the road. So I dug a little deeper.

That's when I realized that I should have been in PAYE the whole time. Not only would I have hit forgiveness years earlier, I would also be punished by my wife's income. What? That can't be right. We aren't rich. We don't have fancy cars, or a massive home with a view. As I've written before, my wife has almost $200,000 in student loans. She's a nurse with an average salary, and on the surface, we would be fine under REPAYE, because her income would be combined with mine, but so would her student loan balance. Under REPAYE, We both qualify for income-driven repayment, because our loan balances are much higher than our annual incomes. That is, until they aren't.

My wife works at a hospital that is tax exempt under Section 501(c)(3) of the Internal Revenue Code (IRC), and she is seeking Public Student Loan Forgiveness (PSLF) after 120 qualifying payments. She graduated from nursing school in 2016, which is the same year I graduated from pharmacy school. Looking ahead, after 10 years her student loans will be forgiven, but I will still have 12.5 years of income-driven repayments (2.5 years under REPAYE +20 years under PAYE - 10 years under REPAYE for my wife= 12.5 years remaining for me). Under REPAYE, my spouse's income and student loan balance are added to my income and student loan balance, and my payments are based on that regardless of whether we file jointly or separately. Reread that sentence. This is a huge factor for us because there is over a decade between our projected forgiveness dates, and also because my wife is expecting a massive increase in income in the next 5 years when she completes her nurse practitioner degree with no additional student loan debt through her employer.  

If we are both in REPAYE, after 10 years her student loan balance will be $0, but her nurse practitioner salary of $103,000 would be added to my salary and my monthly student loan payments would be based on our combined salaries. Under PAYE, however we're able to file our taxes separately each year, and her income isn't included when calculating my student loan payment. Not only that, payments under PAYE are capped at the standard 10 year repayment rate. Under REPAYE, your payments are not capped. The difference of not including my wife's salary in my repayment calculation is $883 per month, or $124,950 in additional payments until my forgiveness. That's a lot of money.
Married Borrowers

I'm not saying that REPAYE is better than PAYE for everyone in all scenarios, but I'm guessing that not everyone who is seeking student loan forgiveness will get there the same time as their spouse. If you are seeking student loan forgiveness, and plan on getting married before your student loans are forgiven, take a look at the different repayment options, and plan ahead for how they might impact you and your spouse. Turns out getting married could be more expensive than you thought.