The New Student Loan REPAYE Plan: Almost Free College for Most?

Important Caveats:

1. Student loans are complicated, the rules change often, and I am not an expert. 
   
2. The new REPAYE Plan is still in the proposal stage. While it looks likely to go through later this summer (presumably before the student loan payment pause ends), there still could be adjustments to the provisions described below.
   
3. This is not one-size-fits all; your individual circumstances matter. This is going to be a high-level overview.
   
4. This post is going to focus on Federal direct subsidized and unsubsidized loans, not Parent PLUS or private loans.

On January 10th, 2023, the Biden Administration released new proposed regulations regarding student loan repayment plans. While this received some press coverage, it went mostly under the radar outside of the student loan consulting community. But this is a huge change for anyone who currently has federal student loans and for families considering taking out student loans in the near future. It very likely will reduce student loan payments for a large proportion of student loan borrowers (the exception being those families with high incomes who won’t qualify for loans in the first place) and, in some ways, may actually go much further then President Biden’s promises during the campaign. While I expect it will get much more coverage when it is finalized and goes into effect, I think it’s important enough to talk about now even though it’s not finalized.

For the rest of this post I’m going to focus on educators who will qualify for Public Service Loan Forgiveness (PSLF). Having said that, all of the things I’m going to talk about apply in much the same way to all borrowers, whether they qualify for PSLF or not. But, because students loans are so complicated, I needed to limit the scope of this post (plus most of you reading this are likely public school educators). In order to keep this post manageable, I’m also not going to go into the history of student loan repayment plans and I’m not going to address all the variations and complications. Instead, I’m going to give a high-level overview of these changes that I think will be applicable to a large percentage (maybe 80% or more) of educators who have federal student loans.

So let’s start by looking at the most important changes (not all of the changes) that the new REPAYE plan contains. (It’s called the new REPAYE plan because this is a revision of the existing REPAYE plan, more on that later.)

1. Increases the amount of income protected from repayment to 225% of the Federal poverty guidelines (from the current 150%).
   
2. Allows borrowers under the REPAYE plan to file their taxes as married, filing separately, so that their repayment amounts are based on their income only (not their spouse’s income).
   
3. Changes the repayment percentage for undergraduate loans to 5% of discretionary income (from the current 10%; still 10% for graduate loans, with a weighted average if you have both.) Discretionary income is Adjusted Gross Income (AGI), typically found on line 11 of Form 1040.
   
4. For non-PSLF borrowers, stops unpaid interest accumulation (currently only cancels 50% of it). This results in a much lower loan balance. (Also applies to PSLF borrowers, but since their loans will be forgiven, it isn’t as important.)
   
5. Even non-PSLF borrowers who have smaller loan balances can receive forgiveness sooner (as early as 10 years of payments). Particularly helpful to many who borrowed for Community College.

Those changes probably sound good (they are!), but it’s helpful to take a look at some specific hypothetical examples to see how big of an effect they might have. For all of the following examples, I’m going to look at a Colorado teacher who works for Littleton Public Schools (one of the higher paying districts in the state; with lower pay it’s even “better” in terms of your student loan repayment calculation).

Example 1: First year teacher with a bachelor’s degree, single with no dependents, with $60,000 in undergraduate student loans (Federal direct subsidized and/or unsubsidized loans).

The first thing we need to do is determine her discretionary income. Colorado teachers currently pay 11% into their pension plan, so that reduces her $43,559 salary down to $38,768. If she takes the least expensive choices for medical, dental and vision (in LPS), that will cost her $648/year, which comes out pre-tax, so that takes her AGI down to $38,120. For now, we’ll assume she doesn’t contribute anything to an FSA, HSA, limited FSA, dependent care spending account, or pre-tax retirement account. The 2023 poverty level for a family size of 1 is $14,580, multiplied by 2.25 (225%) is $32,805, leaving her with a discretionary income of $5,315. 5% of $5,315 is $265.75, divided by 12 is a student loan payment of $22.15/month. If she could manage to put $5,315 toward some combination of FSA, HSA, and/or pre-tax retirement account (401k/403b/457/IRA), her payment would be $0. (And even if she can’t do the entire $5,315, any amount she can do would reduce that payment down from the $22/month; essentially 5% of whatever she can contribute would come back to her as a lower student loan payment.)

Now, that’s just year one of course. As each year goes by, her salary will presumably go up, both by advancing vertically on the salary schedule (experience) and hopefully horizontally as well (additional education). But keep in mind that her pension contribution and insurance premiums will also go up and, crucially, so will the federal poverty level guidelines. The Federal poverty guidelines increase by inflation (CPI-U) each year and, since the new factor is 2.25, that means the exclusion for the REPAYE calculation will go up by 2.25 times the current rate of inflation each year. All those factors will at least partially negate the raise the teacher gets. For this example we’ll assume that each year the teacher can increase their contributions by at least $1,000 (just a portion of their raise) to their pre-tax FSA/HSA/401k/403b/457/IRA.

Here’s a quick and dirty spreadsheet that can be used to illustrate this. (You can make a copy of the spreadsheet and fill in with your specific information and default assumptions; any cell outlined in green can be changed to match your circumstances and assumptions.) Based on the assumptions (which you can change), this teacher would pay a total of $5,025 in payments over 10 years (on a $60,000 loan balance), and then have her loans forgiven under PSLF. Obviously, things won’t play out exactly like this but, directionally (and conceptually), it’s pretty accurate. (And, to be clear, the $60,000 loan balance itself isn’t relevant to the calculations, but it is relevant to how much she would save overall after forgiveness.) And, if she can increase her pre-tax contributions even more, she can lower that total.

Example 2: First year teacher with a master’s degree, married with one child, with $40,000 in undergraduate loans and $20,000 in graduate loans (again, federal direct subsidized or unsubsidized loans), so a weighted average of 6.67% repayment percentage.

Assuming her spouse makes a decent income, this teacher would likely want to file as married filing separately. Under the new REPAYE, that means they would get to use a family size of 2 (the excluded spouse does not count). We’ll assume they are able to put aside $2,500 in the dependent care spending account the first year (the maximum for married filing separately) and then increase their total pre-tax contributions by at least $1,000 each year (just a portion of their raise). We’ll also assume she covers her child on her insurance. See tab 2 of the spreadsheet for the details, but this teacher would pay $0/month for nine years, and the $3 a month for the last year ($33 total), and then have $60,000 of loans forgiven.

Example 3: Fifth year teacher with a master’s degree, married with two children, with $40,000 in undergraduate loans and $20,000 in graduate loans (again, federal direct subsidized or unsubsidized loans), so weighted average of 6.67% repayment percentage.

Assuming his spouse makes a decent income, this teacher would likely want to file as married filing separately. Under the new REPAYE, that means they would get to use a family size of 3 (the excluded spouse does not count). We’ll assume he covers the children under his insurance. See tab 3 of the spreadsheet for the details, but this teacher would pay $0/month for five years (from now, it’s not retroactive), so a total of $0, and then have $60,000 of loans forgiven. (Note: It’s possible they might not have the full five-years of credit toward PSLF if they deferred for a time on their undergrad loans while in grad school. So they might need to pay for longer than five years.)

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I can keep doing more examples with different assumptions, but I think you get the idea. (And, again, feel free to make a copy of the spreadsheet and change the numbers and assumptions to match your situation. Change any of the cells outlined in green and the rest will adjust.) But the bottom line is that under the new REPAYE program (as proposed), many educators will be able to pay very little or perhaps nothing at all for ten years and then have their loans forgiven. (And if they do have payments, then can lower them by increasing their pre-tax deductions.)

Which brings up one more possibility that is alluded to in the title of this blog post: it may be possible to end up going to college for almost free (or even get paid a little bit). Now this assumes that you can qualify for federal direct subsidized and unsubsidized loans that cover the cost of your college education, which means it’s going to exclude upper middle-class and upper class folks. But for most folks in the lower to middle classes, this is possible, although there are limits on the total of federal student loans you can take, so you may not be able to take out the full amount. You might even be able to factor Parent PLUS loans in as well, using the Parent PLUS Double Consolidation Loophole, which would increase tremendously the number of people who could borrow the full amount (or near the full amount) of the cost of college, But this loophole is very complicated and beyond the scope of this blog post, but check out the link to find out if you can do this.

So how could this work? If your child(ren) is about to enter college, take out as much in federal direct subsidized and unsubsidized loans as you can (and possibly Parent PLUS if you can utilize the loophole). Try to pay as little as possible (even nothing) out of pocket. If your child is going into a profession that qualifies for PSLF (like public school teaching), and their salary is going to be fairly low (like teaching), then they may pay very little (or nothing) for ten years and then have their loan forgiven. Essentially, a college degree for very little cost (or perhaps no cost). Even if they are in a profession that doesn’t qualify for PSLF, they could pay very little for 20 (undergrad loans) or 25 (graduate loans) years and then qualify for forgiveness, although in that case the amount forgiven will be taxable income (that’s after 2025; but keep in mind the interest all along the way would be wiped out by the new REPAYE, so it would only be the starting value of your loans at the time you graduate.)

Similarly, folks who go to Community College and presumably have a lower total loan amount, presumably will be making less when they get out of community college, and might be able to do REPAYE for between 10 and 20 years (depending on the amount of their loans; up to $12,000 total is ten years, then one additional year for each $1,000 up to the existing 20 years) and then receive forgiveness, making Community College almost (or perhaps completely) free as well.

In addition, don’t forget that even if you use student loans to pay for everything, you can still get the American Opportunity Tax Credit (up to $10,000 for undergrad) and Lifetime Learning Credit (20% of the first $10,000 per year for graduate) if your income qualifies. Which means you could actually come out ahead.

Now, to be clear, there are no guarantees here. As mentioned in the beginning, the way the Biden Administration is doing this is by modifying the existing REPAYE program. Which they can do because, ironically, previous Republican Congresses wrote the laws in such a way that they can. The Administration doesn’t have to get something through Congress, they can just change the terms of REPAYE through the Department of Education. But that’s also where the danger is, because a future Administration (presumably Republican) could come along and change them again. Now, nobody knows that if this were to happen whether the change would apply to those already in the REPAYE program, or whether the changes would only apply to new borrowers going forward. Certainly the latter will be much more politically popular, as they’d have a whole lot of pissed off voters if they didn’t grant those already in the program hold-harmless legacy status. Like many popular government programs, once it’s in place it can be awfully difficult to get rid of. But there are no guarantees, and since this apparently would not require legislation, it makes it a little less politically protected than many other programs.

What we definitely know (well, assuming REPAYE as proposed goes through this summer), is that these strategies will work for those with existing federal student loans for at least the next two years until the next presidential election. While there are exceptions (again, student loans are complicated and your individual circumstances could be different), the vast majority of folks with federal direct student loans are going to want to make sure they are in the REPAYE plan later this year. And, for those folks who are married, there’s a good chance you’ll want to start filing your taxes as married filing separately. (As a side note, the 225% of poverty guideline deduction applies to both spouses if they both have student loans and file separately, and they both get to count the kids as part of family size.) You also will want to take steps to minimize your AGI (by taking pre-tax deductions for insurance/FSA/HSA/Dependent Care Spending Account/401k/403b/457/IRA).

It’s quite possible that the “centrist Democrat” who got elected President in 2020 is the one who ended up providing a free – or almost free – college education for the lower and middle classes. How long this lasts, of course, we’ll have to wait and see.

References

• Department of Education REPAYE Press Release
• Fact Sheet (pdf)
• Teach and Retire Rich Podcast: 8 Million and Counting
• Student Loan Planner Podcast: How the Modified REPAYE Plan Could Cut Student Loan Payments In Half for Millions of Borrowers
• Student Loan Planner Podcast: New REPAYE Plan: What it Means and Why it’s a Game Changer for Borrowers
• More than 75% of Undergraduate Borrowers Could Seek Forgiveness Under Biden’s New REPAYE Plan
• Federal Poverty Guidelines
• Parent PLUS Double Consolidation Loophole: Pay 10% to 15% of Your Income Instead of 20%
• Types of Student Loans

Final Note: Please, if you find something that is wrong (or simply confusing), let me know in the comments and I’ll update the post.