In this episode, Emily interviews Meagan McGuire, a Certified Student Loan Professional and consultant with Student Loan Planner. Meagan goes over all the pertinent terms of the upcoming modified REPAYE plan, which is expected to join the other options for income-driven repayment plans in 2023. The relatively more generous terms of the modified REPAYE plan, such as the revised payment calculation and the interest subsidy, make it an attractive option not only for borrowers already in repayment but also for those currently eligible for deferment. That’s right! If you are a grad student, don’t default into deferring your student loans after the administrative forbearance ends! Instead, consider whether it’s worthwhile to enter repayment under modified REPAYE. You could potentially avoid all of the interest that would have accrued on your unsubsidized loans during grad school and/or reduce the number of years you have to pay on your loans post-PhD—all for free or a low cost. If you hold any federal student loans, do not skip this episode!
Links Mentioned in the Episode
- PF for PhDs Tax Workshops
- PF for PhDs S14E7 Show Notes
- PF for PhDs S7E13: How to Handle Your Student Loans During Grad School and Following (Expert Interview with Meagan Landress)
- Student Loan Planner
- Federal Student Aid
- PF for PhDs Subscribe to Mailing List (Access Advice Document)
- PF for PhDs Podcast Hub (Show Notes)
00:00 Meagan: This new REPAYE plan makes deferment look very unattractive for a lot of reasons. There’s not a lot of advantage to deferment anymore. And even if you had a payment kick in, keep in mind it’s a very, it’s a portion of your income. And if you’re closer to, let’s say 35, you know, $35,000 for your stipend, that’d be closer to maybe almost $10, $20 a month.
00:32 Emily: Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance. I’m your host, Dr. Emily Roberts, a financial educator specializing in early-career PhDs and founder of Personal Finance for PhDs. This podcast is for PhDs and PhDs-to-be who want to explore the hidden curriculum of finances to learn the best practices for money management, career advancement, and advocacy for yourself and others. This is Season 14, Episode 7, and today my guest is Meagan McGuire, a Certified Student Loan Professional and consultant with Student Loan Planner. Meagan goes over all the pertinent terms of the upcoming modified REPAYE plan, which is expected to join the other options for income-driven repayment plans in 2023. The relatively more generous terms of the modified REPAYE plan, such as the revised payment calculation and the interest subsidy, make it an attractive option not only for borrowers already in repayment but also for those currently eligible for deferment. That’s right! If you are a grad student, don’t default into deferring your student loans after the administrative forbearance ends! Instead, consider whether it’s worthwhile to enter repayment under modified REPAYE. You could potentially avoid all of the interest that would have accrued on your unsubsidized loans during grad school and/or reduce the number of years you have to pay on your loans post-PhD—all for free or a low cost. If you hold any federal student loans, do not skip this episode!
02:22 Emily: OK guys, if you’re listening to this in real time, it’s April. You have just weeks or days to finish up your tax return, if you haven’t already. I’m standing by, ready to help you the moment you say you want me to. I have four versions of my workshop on preparing your annual tax return available, covering postbacs, grad students, and postdocs, both US citizens/residents and nonresidents. The last live Q&A call for the citizen/resident versions of that workshop is on Thursday, April 13, 2023. I’m also answering questions for the nonresident version asynchronously, and the deadline to submit those is Tuesday, April 4, 2023, but I might be able to get to some after the deadline as well, we’ll see. I also offer a workshop on estimated tax, which you’ll probably want if you are currently on fellowship and were surprised with a large tax bill on your 2022 tax return. The quarter 1 Q&A call for that workshop is on Monday, April 17, 2023. You can find the links to purchase any of my tax workshops plus tons of free resources at PFforPhDs.com/tax/. You can find the show notes for this episode at PFforPhDs.com/s14e7/. Without further ado, here’s my interview with Meagan McGuire of Student Loan Planner.
Will You Please Introduce Yourself Further?
04:02 Emily: I am so excited to have on the podcast today, Meagan McGuire. She is a consultant with Student loan Planner, so we have an actual expert on the podcast with us which is a refreshing change of pace. And yeah, I’m just so excited that Meagan is here because she works for this amazing company called Student Loan Planner, which if you have federal student loans and you’re not already following them, get on their mailing list, get on their socials. They have great, great information. I’ve been heavily relying on them with all the excitement and student loan news recently. Meagan has actually been on the podcast before, back in season seven, episode 13. So if you haven’t yet listened to that you know, some of that information might be a little bit out date because things have been developing. So, we’re going to talk about the new modified REPAYE plan today, which is another one of the income-driven repayment plans. We’re going to explain all those terms in just a second, but that’s the subject for today. So, if you have federal student loans, do not tune out, do not hit pause. This is a crucial episode for you. So, Meagan, thank you so much for joining me. Will you please introduce yourself a little bit further?
05:04 Meagan: Of course, yeah. Thanks for having me again! I love nerding out about student loans. It’s also a very not fun topic. So we will <laugh> we will talk about it as you know, directly and informationally as possible to help you take a nugget of information from this conversation. But yeah, so I’m Meagan McGuire. Prior last name was Landress. I got married last year, so my last name is different now. But I’ve been with Student Loan Planner since 2019. I’ve been doing student loan planning for a while for my whole career, <laugh> pretty much. And I found that it, you know, student loan planning, in specific, like when it comes to financial planning is such a big piece of somebody’s financial plan. And it’s sometimes the first introduction to finance, which is not fun. And so, having an idea of what you should be doing with your student loans can help ease some of that, you know, anxiety or angst when it comes to thinking about money and finances in general. So, I’m happy to be here. Thanks for having me!
06:06 Emily: I love it. Thank you so much! And you have an actual professional designation, do you not?
06:10 Meagan: Yes. Oh yeah, I forgot to mention that. Yes, <laugh>, I’m what’s called a Certified Student Loan Professional or CSLP. It is a new-ish designation in the financial planning space. I got it back in 2019, very beginning of 2019, when I started with Student Loan Planner. But that just tells you that a professional has the financial planning background along with the specialized education in student loan planning.
06:37 Emily: Yeah, it’s so important. I know that people sometimes get really bad professional advice around what to do with their student loans and that’s why I love following Student Loan Planner. And there are other similar, you know, people who provide similar services. But having that designation is so important because as we’ve learned, there are so many fast moving changes and updates in the student loan world. And so, you really need someone who is up to date. Speaking of being up to date, we are recording this on March 3rd, 2023 <laugh>. So, very important between the time of our recording and the time of this release, maybe there’s been some major upheaval in the student loans world. We don’t know, just earlier this week, a couple student loans cases went before the Supreme Court, but of course we don’t have a decision yet. We’re still waiting on that and many things are waiting on that plan.
07:20 Emily: So, actually the subject for today is not the cancellation, which is very exciting on its own. But instead we’re talking about this new IDR plan, or modified IDR plan. So Meagan, I want you to take us back to the beginning with federal student loans because some people in my audience, you know, maybe current undergrads currently in grad school, they may have never had their loans go into repayment. So, they might not even know what the options are. What all these acronyms are? So, can you just tell us what are repayment plans? What are IDRs?
07:48 Meagan: Mm-Hmm. <Affirmative>. Yeah, for sure. So, there are kind of two different buckets of repayment plans or types of repayment plans you can consider when you’re entering repayment in the future. One bucket would be amateurized options, which are kind of like a normal loan, how that would operate where you get a term. So, 10 years, 20 years, could be as far out as 30 years. They take your balance, spread the payments out over that timeframe, and you pay off the whole balance within that timeframe. So, very standard, very normal definition, or you know, way of paying back debt. So, that’s one route. The other bucket are income-driven plans or IDR plans. That is the blanket term for the different income-driven options there are, because there are technically five different income-driven plans available, currently. And so, you know, depending on your situation, your marital status, your income, you know, it could lean you one direction or another when it comes to those income-driven plans. But so far there’s REvised Pay As You Earn as one, or REPAYE. Pay As You Earn, or P A Y E. There’s IBR, income-based repayment, new and old. So, technically those are two different plans. New IBR and old IBR. And income contingent repayment, or ICR. That’s the the laundry list of income-driven plans that are available currently. <Laugh>
09:20 Emily: And, correct me if I’m wrong, but the idea with the income-driven plans is that your payment is recalculated based on a recent income, maybe the previous tax year, for example. And it should, ideally, be lower than what you would have on the standard plan if you were going to opt for an IDR plan. So, you have this lower payment, but it scales with your income. So if your income goes up or down in the future, your payment may go up or down. And the purpose is not necessarily to pay off the loan in its entirety. So, what happens with IDR plans once you’ve been paying on them for a while?
09:51 Meagan: Yes, that’s a great question. So, unlike the amateurized options where it’s designed to pay off the loans during a certain time period, income-driven repayment plans, they are not designed to pay the loans off. They can, mathematically, if your payment is enough to do so over time, but it’s not designed for that. It’s designed to make a payment affordable based on the income that you’re bringing in. And let’s say you’re in a situation where mathematically your payments are never enough to pay off the balance. Well, those income-driven plans all come with a maximum repayment period of either 20 or 25 years. And if you’ve made payments for that 20 or 25 year threshold, whatever balance is left over at the end of that timeframe is then forgiven. So, it really helps people who are never really going to be able to get out from under their loans. No one is ever going to die with their debt <laugh>. They can get on that income-driven plan and go towards loan forgiveness. I hear that a lot where someone will say, “Ah, I’m going to be paying this until I die.” And I’m like, “Ah, check out those income-driven plans. Probably not.” <Laugh> you might be paying for a while but not forever. So, that is a safe haven for those that have large balances in comparison to their income.
11:13 Emily: I think you put that very well. It’s really designed to help people get out from massive student loan balances where their income is not really high enough to support a standard payment on that high debt balance. So, maybe your career plans changed, I don’t know what could have happened. Maybe your education plans changed, something has gone on where, yeah, your career income does not support this. And certainly for people in my audience who are graduate students, maybe they’ve gone through a lot of career shifts in the many, many years they’ve been in higher education. Or maybe they’ve accrued a lot of debt during that time.
11:47 Emily: One more question around sort of the technicalities of these IDR plans. Now, I understand that there is what was called a tax bomb at the end of some of these plans. Can you explain what that is?
11:58 Meagan: Yes. So, a tax bomb, that’s kind of the term we use for what happens after the loans are forgiven. So, when the loans are forgiven, there’s a debt that’s discharged. And the IRS sees any debt that is forgiven or canceled or discharged as a benefit to you. So, they tax that as income in the year that it’s forgiven. So, I know that sounds unfair <laugh> that is not fun. So, an example of this would be, let’s say you’re paying for 20 years. You still have a balance of $50,000 at the end of that 20-year timeframe. That is forgiven, yay. But then you hypothetically would be getting a 1099 for that $50,000 that was forgiven. And of course you didn’t pay income taxes on that because that wasn’t part of your income. It was something that was forgiven. So then you have to report that as if you did make it as income and pay income taxes on it. That sounds really scary. But mathematically, if your balance is a lot larger than your income, it can still make sense to go that direction even if the tax implication exists. When we do our planning with folks, we plan out how much we need to save per month to prepare for that. And oftentimes the savings amount that you have going towards that tax bomb and the monthly payment that you have going towards your loans is still a lot less compared to what it would look like if you were trying to pay it off traditionally.
13:28 Emily: Yeah. And I want to note that one of the reasons that student loans have become such a hot button issue, and one of the reasons why these IDR plans have in the past gotten a lot of criticism, is because of the negative amortization schedule. So some people, and what that means is that some people who, you know, you have these low payments available if your income is low enough or if you have enough kids or whatever the calculation is, their payment might be so low that it’s not even covering the interest that is accruing on that loan. And that means that the loan balance is ballooning and ballooning and ballooning over time. So, the plan that we’re going to talk about, I want to say too many spoilers, but it does address this. Okay, so one of these major, major issues with student loans is being addressed. And we’ll talk about that in just a few minutes. But before we get too far off of this basic “what’s going on with student loans” question, I want you to explain what public service loan forgiveness is and how it plays in with these other plans that we were just talking about.
14:23 Meagan: Yeah, so public service loan forgiveness or PSLF for short. It’s not a repayment plan, but it is a program that you can pursue while on an income-driven plan if you’re working full-time in a public service capacity. So this is for those that work in non-profit, work in government, you know, academia is a great example. If you’re working at a public university. You know, or private yeah, it could be private as long as they’re 501(c)(3) status. So public service loan forgiveness, if you make 120 qualifying payments, which means that you’re on an income-driven plan, you make 120 qualifying payments, which shakes out to 10 years if you’re completely consistent, and whatever balance is left over at that time is forgiven. And a really great part about that too is that it’s forgiven tax-free, unlike those income-driven forgiveness paths. So, PSLF can be a really great option for those whose career is in public service. It’s a much shorter timeline than the 20 or 25 years, and it doesn’t have the tax implication with it. So, it’s definitely a great program if it makes sense with your career path.
15:39 Emily: Yeah, and I know probably a lot of people in my audience, maybe more so than the general population, does have plans to work in academia or in government or for non-profits or for other kinds of qualifying employers after their graduate school is done. So, this definitely could factor into the plans for a lot of people. Especially if you do a postdoc, maybe that’ll take a few years at a university or in government and those years count if you’re making your payments, you’re enrolled in the program and so forth. One thing that I do want to note for current graduate students is that you have to be a full-time employee for the payments that you’re making under PSLF to count towards PSLF. So, graduate students are almost always considered halftime employees or less.
16:19 Emily: And so, even if you are an employee of a university during graduate school, even if you are in repayment, that time is not going to count for PSLF unless you’re a very, very unusual case. But if you’re a part-time employee, it’s not going to count towards PSLF, unfortunately. However, I know most people who are in graduate school are choosing deferment in any case, so they’re usually not making payments anyway.
16:38 Emily: So, let’s get into kind of the meat of this new, modified, I don’t know what language you use. The new version of REPAYE. Okay.
16:45 Meagan: Yeah, <laugh>.
16:46 Emily: So, back in August, 2022, the president proposed a new IDR plan. Now that plan has kind of been modified over time, so it’s no longer a new IDR plan, but you explain what is this new-ish plan that we’re looking at?
16:59 Meagan: Yeah, new-ish. Yeah, that’s the right terminology. So, their plan originally was to come out with a whole new income-driven plan. But then a couple things I think happened that made them reconsider that. One is we already have five income-driven plans, so that wasn’t really going to simplify things. It was going to add one more thing to the equation to make things a little more complicated for decisions. And also the Department of Ed did not get an increase in their budget this year. So, they are operating off of the same budget that they’ve been operating off of with all of this stuff going on. So, they’re not going to have the capacity to be implementing a whole brand new plan. I think that is my assumption, <laugh>, why they started to instead of have a a new plan, they’re thinking about modifying an existing plan. And the existing plan that they’re thinking about modifying is REPAYE, revised pay as you earn. REPAYE is one of the cheapest income-driven plans, currently. There are some pros and cons to this plan currently, but some of the modified changes could be very attractive. Especially for those you know, starting out their career coming up who might have long training periods, which we could certainly get into.
18:20 Emily: So, when you were last on the podcast, we talked about very, very broadly, very generally, kind of a rule of thumb around what the ratio is of your student loan balance to your income once you go into repayment. So, for my audience, this is usually going to be post-PhD, perhaps post-postdoc. So, your career income at that point, and what those ratios might be in order for you to really want to consider an income-driven repayment plan versus just going down the standard repayment route. Now I think what’s going on with this modified REPAYE plan is that that rule of thumb has probably gone out the window. It may be completely different now. So, we’ll talk about that in a moment. But I just say this because I want the audience to stick with us because we’re going to be talking about some technical parts of the plan now. But really an IDR might be more attractive to you with this new version rather than in the past. So like, if you have any kind of student loans, I want you to stick with us through this next, like, pretty technical section. Okay, so this modified new-ish REPAYE plan. You said we think it’s going to look like this. How firm is this plan, and when is it going to go into effect, or we think it’s going to go into effect?
19:24 Meagan: It has passed the 30-day commentary period. So, it was officially proposed. There was a 30-day commentary period where folks could make suggestions and now they’re reviewing those. We’re outside that 30 days. So I think the timing of this, I think we are going to hear more information on if what was proposed is actually going to be implemented. I think we’re going to hear about that in the next couple months. So, maybe by May, June. And maybe those rules will be locked and loaded for July, meaning maybe we can enroll in this by the end of the year or early 2024. That is my estimated timeline. Payments, as we know, are not currently enforced, like no one’s making income-driven payments or payments towards their federal student loans.
20:17 Meagan: And it’s all kind of, the start date is contingent on this Supreme Court case, as you had mentioned earlier at the beginning of the podcast episode, which is debating if that one-time cancellation can be done. Can Biden forgive $10,000 or the $20,000 of student loan debt for anybody under those income thresholds? We don’t know yet. And I think Congress and the Department of Ed is waiting to see how this is going to shake out so they can know if they need to make any modifications to this modified proposed repay plan. Or if they want to make it more generous or if they need to take stuff out. So, I think they’re kind of waiting on that, if that makes sense. But we could see this, you know, definitely within the next year, which I think is exciting.
21:05 Emily: Yeah. Okay, so we’re going to talk about the plan as of today’s date, and you know, if there are more changes that come down, you know, stick with Student Loan Planner. Follow them, follow me. I’ll try to make updates to this as well if any major updates are to be had. But we’ll talk about the proposal as it exists today. Okay, so who is eligible once this plan is in effect? Who would be eligible to enroll in it?
21:29 Meagan: So, anyone who has federal direct loans. So, if you, and direct loans, you can tell if you have these, if you log into your studentaid.gov account, you should see literally the word direct in your loan name. If you see something like Perkins Loan or FFEL, which stands for Family Federal Education Loan, those loans in particular are not going to be eligible for this new plan, but they can be if you consolidate them. So, that is an option if you needed to fix that. And that would only be relevant to anyone who had borrowed before 2010. These loans are not issued anymore. So, if you are newer to borrowing or started borrowing after 2010, don’t worry about it. You’re going to have the right loans. And private loans are excluded. This is just for federal student loans.
22:20 Emily: Okay, yes, thanks for that clarification. So, one of the things that is being modified about this REPAYE plan is how your payment is calculated. So, can you explain maybe both, but definitely the new way that the payment, if there’s any payment, what it would be?
22:36 Meagan: The current calculation, how they do this is they take your adjusted gross income, usually from your tax return. There’s like an IRS data retrieval tool that they have that they just pull it through from your most recently filed tax return. So, adjusted gross income, that’s not gross, that is your gross pay minus any pre-tax deductions. So, think you know, 403(b) contributions, 401(k) contributions, HSA, FSA, those things are taken out. So, we get our adjusted gross income, then they subtract 150% of the poverty line, which that’s about $20,000, $21,000 for one person, for a family size of one. So they take your AGI minus that 150% of the poverty line, and you get what’s called your discretionary income. And then that is what the payment itself is based off of. And REPAYE is based on 10% of that discretionary income number. The new way that they’re proposing this to be done is similar, still going off of adjusted gross income, but instead of 150% of the poverty line deduction, they want to take 225%.
23:51 Meagan: So, it is a big hike in how much would be part of your discretionary income. So, naturally, that would make anyone comparatively looking at the old REPAYE and the current REPAYE, it would make anyone have a slightly lower payment. It could be worth as little as maybe75 to a hundred dollars a month compared to the current REPAYE plan. It could be a lot more if your income is a lot more. It just depends. So not only that, so that’s one way that they’re going to calculate the payment a little bit less. But the other way that’s going to impact the actual calculation is the portion of your balance that’s for graduate loans would stay based off of that 10% of discretionary income. If you have a portion of your balance that was from undergrad, let’s say you have like $30,000 from undergrad, $70,000 from, you know, graduate school, that would mean 30% of your loan balance is undergrad.
24:52 Meagan: So, they plan on, or the proposal is for undergraduate loans, they would charge 5% of discretionary income. So, you’d have some weighted proportion of the two. 30% of your payment is based on 5% of discretionary income, and the other 70% would be based off of 10%. So, your percentage will certainly vary depending on what your actual weight is for the undergraduate loans. But all in, it does make the payment slightly cheaper for just about anybody. Maybe a lot less for some that have a lot of undergraduate loans. Maybe not, you know, that 5% may not come in if you never borrow it for undergraduate, but that’s currently how it’s proposed.
25:40 Emily: Okay, so let me restate, make sure that I understand.
25:43 Meagan: Yeah, I know that was a lot. <Laugh>.
25:44 Emily: So, of your adjusted gross income, your AGI, which is your gross income minus your above the line deductions, as you mentioned. Things like traditional retirement account contributions. So, you get your AGI, and then a certain amount of that is going to be not used in the calculation. So, it is 225% of the federal poverty line in the case of the new REPAYE plan. I think I looked at that, and for one person it’s about $30.5K. 30 and a half thousand dollars for one person. If you had children, if you had a bigger family, that number would be larger. So the amount that is excluded from your income, that’s not going to go into the calculation is going to be larger. And then whatever marginal amount of income you have above that calculated level, that’s what you’re going to be calculating the payment from.
26:31 Emily: So, it’s 5% from your undergraduate loans, 10% from graduate. If you have both, it’s going to be a weighted combination of the two to make the calculation. So, many people in my audience, I would think probably only have undergraduate loans. And so if they’re looking at that calculation, they’re going to be, you know, it’s 5%, but just of the discretionary income, just of that amount of income that’s exceeding this 225% of the federal poverty line. Okay, I think I restated that okay. Because this is a really important part of this is like, how is this payment calculated?
27:00 Meagan: Yeah. And just a quick note, if that kind of made your head hurt and it made you sick to your stomach thinking about those calculations, we do have a free calculator on our website, studentloanplanner.com, that you can go and plug in your income and it’ll do the math for you. So, there are resources, free resources out there that can help you with that <laugh>. So.
27:21 Emily: Emily here for a brief interlude! Tax season is in full swing, and the best place to go for information tailored to you as a grad student, postdoc, or postbac is PFforPhDs.com/tax/. From that page I have linked to all of my tax resources, many of which I have updated for tax year 2022. On that page you will find free podcast episodes, videos, and articles on all kinds of tax topics relevant to PhDs. There are also opportunities to join the Personal Finance for PhDs mailing list to receive PDF summaries and spreadsheets that you can work with. The absolute most comprehensive and highest quality resources, however, are my asynchronous tax workshops. I’m offering four tax return preparation workshops for tax year 2022, one each for grad students who are U.S. citizens or residents, postdocs who are U.S. citizens or residents, postbacs who are U.S. citizens or residents, and grad students and postdocs who are nonresidents. Those tax return preparation workshops are in addition to my estimated tax workshop for grad student, postdoc, and postbac fellows who are U.S. citizens or residents.
28:37 Emily: My preferred method for enrolling you in one of these workshops is to find a sponsor at your university or institute. Typically, that sponsor is a graduate school, graduate student association, postdoc office, postdoc association, or an individual school or department. I would very much appreciate you recommending one or more of these workshops to a potential sponsor. If that doesn’t work out, I do sell these workshops to individuals, but I think it’s always worth trying to get it into your hands for free or a subsidized cost. Again, you can find all of these free and paid resources, including a page you can send to a potential workshop sponsor, linked from PFforPhDs.com/tax/. Now back to the interview.
New Interest Subsidy
29:24 Emily: Now, some other stuff is going on with the interest and how that is accruing and so forth. So, explain what’s going on in the new plan for the interest.
29:30 Meagan: Mm-Hmm. <affirmative>, yes, the interest subsidy. So, this is another really big deal with this new proposed plan. So, just as you had mentioned previously, one of the big, maybe downsides or just factors of being on an income-driven plan is, you know, if you’re on an income-driven plan, you’re going for payment affordability, you’re going towards loan forgiveness, most likely. So, your payment could very well not be enough to be covering even the interest that’s charged per month. And that would mean with a student loan debt your interest that’s not paid would be accruing on the balance. This is different than capitalization. So, it’s not actually being added to the balance and then interest is charged off of that new balance, thankfully. Student loans grow in a simple interest format. But it still accrues on your balance. So, that means your balance is growing as you’re going towards loan forgiveness, which really gives a lot of people some heartache because that’s not normally how debt works. <Laugh>.
30:38 Emily: And contributes to the tax bomb we were talking about earlier.
30:42 Meagan: Yes, exactly. So, that gets to the meat of this. So, this subsidy with the proposed new revised REPAYE plan, they plan to have a 100% interest subsidy, which means it would not allow the balance to grow at all, even if you know, it should have been based on the regular rules today. So, that’s really big. It’s big for a few reasons, not just for people who are going towards forgiveness. And this is an important note that I wanted to mention earlier. I just remembered now, these income-driven plans don’t have to be the forever plan for you. Like they don’t have to be the long-term plan, but you can use them as a tool, especially in the years where you’re not making a lot of money. And if this new REPAYE plan is approved as it’s proposed, it would be a huge benefit to you to be on this new REPAYE plan.
31:37 Meagan: Because even if your income’s really low, even if your payment is calculated to be zero a month, which is possible, as long as you’re in repayment on that new REPAYE plan, your balance cannot grow. That is different if you go into deferment, which is allowed if you’re in a training program. So, that’s something to definitely consider. And I know that was something we wanted to talk about here in a bit too, but the a hundred percent interest subsidy is a big deal cause it keeps the balance growth at bay. It can’t go higher than what it is, you know, at its current principle and interest today, which is great. And so, that helps reduce the future tax implication in the future and it can help maybe people with lower income now but plan on paying the loans off later to keep the balance as low as possible.
32:30 Emily: Yeah, thank you so much for saying that that way. Now when you’re saying a hundred percent interest subsidy, what I understand about this is that if you are making a payment, your payment goes against the interest that accrued that month first. If you’re making a larger payment than just the interest that’s accrued, then the principle comes down. If you’re making a payment that’s less than the interest that has accrued, you’re still making that payment, but then the government will be paying the other portion of the interest that’s accrued. Is that what you mean by 100%? So, it’s like it’s never going to grow, but that doesn’t mean you’re not paying interest.
33:06 Meagan: Yeah, that’s a good point.
33:06 Emily: You could be paying interest. It’s just not going to grow and grow and grow.
33:09 Meagan: Yes. Yeah, basically, you could look at it as an interest only loan where you’re just paying interest but the balance isn’t going to be going down, but it’s not going up. So that’s a good thing, <laugh>.
Undergrad Versus Grad Timeline
33:21 Emily: Yeah, absolutely. So, let’s compare this quickly to what many people in my audience may be familiar with because if they’re, let’s say currently in graduate school, their loans are probably in deferment. And if they had subsidized loans from their undergraduate degree, subsidized doesn’t mean that no interest ever accrued. It meant interest accrued and then the government paid it completely for you. So, it’s very similar to that. It’s just that it might not be paid completely if you are making some kind of payment as well, versus if you’re in deferment and you have unsubsidized loans, of course you’re not making payments, but that interest is still accruing, it’s not being subsidized at all. So, this modified REPAYE plan is kind of somewhere in between, right? Fully subsidized and fully unsubsidized loans. If we’re talking, you know, if we’re comparing to people who are in deferment, which this is not for people who are in deferment, this is for people who are in repayment.
34:09 Emily: We did just cover when you’re calculating the payment that undergraduate and graduate loans are treated differently. But I understand there’s also a difference in terms of the repayment term before forgiveness occurs. Can you clarify that?
34:22 Meagan: With the proposed plan, the undergraduate loans could be eligible for forgiveness after 20 years. Graduate loans would be on the 25-year timeline unless you’re on either pay as you earn, which is a different income-driven plan or new IBR. So, there is a 20-year timeline for graduate loans. It just will not be associated with the new REPAYE or the existing REPAYE. So, that’s something that goes into the planning when we decide, you know, is this new plan going to make sense? Or do we just rely on the existing plans for the shorter term?
Married Filing Jointly or Separately
34:58 Emily: I see. Gotcha. So, because your payment is based on your tax filing <laugh> forms, your AGI, how you file your taxes affects that payment. So, I understand that most people who are married, most Americans who are married file jointly, it kind of makes sense calculation-wise for most people. But student loans are one of those areas where it can throw a wrench in that, and some people do choose to file separately. So, what is going on with married filing jointly versus married filing separately? And how is the modified REPAYE plan treating that?
35:29 Meagan: Right. Yes, so you’re exactly right. Filing taxes as a married couple, normally you’re going to be filing jointly. There are a lot of tax advantages to filing jointly with a spouse. Main reasons to be filing separately would be if there are IRS debt situations with a spouse that you want to exclude from your situation, if you’re going through a separation or a divorce. Those are some big main reasons, but also student loans are becoming a large reason why people consider to file separately. And that is because when we’re on an income-driven plan, the payment is based off of your adjusted gross income that pulls from your tax return. So, if you’re filing taxes jointly, then the Department of Education is going to want to know what your household income is because you filed jointly with your spouse. So, even if it’s just your loans, the payment is going to be based off of the household income, which can be a problem for folks, especially, I mean for a number of reasons.
36:29 Meagan: It will make the payment higher if your spouse has income. It weirdly makes it seem like your spouse has to be contributing to your loans even if you went into a relationship with the understanding that it was your debt. So, it can create some issues there. And so there is a solution to this. Filing taxes married separately, depending on the plan, will allow you to exclude spousal income. So, that is a big advantage for a lot of people who are pursuing an income-driven plan or forgiveness because it keeps the payment just based off of their income. It keeps the payment lower, so it’s maximizing the forgiveness path. The current REPAYE plan as it is right now does not allow you to exclude spousal income regardless, which is kind of stinky. So, we’d have to revert to either PAYE, the pay as you earn plan, income-based repayment, either the new or the old IBR, or income-contingent repayment.
37:32 Meagan: Those other four income-driven plans allow you to keep the payment off of your own income as long as you’re filing taxes separately. REPAYE currently does not. Now, bear with me. The new revised REPAYE plan would then allow <laugh> this to actually be the case for REPAYE to exclude spousal income. So, that is a big deal because that’s been the one plan that, you know, has been an issue for folks where maybe they wanted to be on REPAYE for whatever reason, it was the cheaper payment option for them. But it requires you to include spousal income. The revised REPAYE plan that could be coming out is going to operate like PAYE, IBR, and ICR. So, that is a big advantage because it allows folks to have that benefit and, you know, have all the other benefits that come along with this new REPAYE plan.
Consider What’s Best for You
38:31 Emily: Yeah, thank you so much for that clarification. Is there anything else that we should know about the new proposed REPAYE plan?
38:40 Meagan: So, one just word of caution is I think if this plan does get approved, I hope it does, I think it could be a really great option for a lot of people, but I know it’s going to be positioned or it’s going to be talked about as if it is the best plan for anybody. That is not necessarily the case. So, what I mean by that is we talked about how it could make an income-driven payment a lot less. It could allow you to exclude spousal income. It could have a 100% interest subsidy. So, there are a lot of benefits to it. But one big downside is if you have graduate school loans, it is a 25-year timeline to forgiveness. That is five extra years of repayment compared to the existing pay as you earn plan and the new IBR plan.
39:34 Meagan: So, that’s something that really needs to be weighed because if they come out with this new plan, they do plan on phasing out pay as you earn, which is the 20-year timeline. They still would have new IBR, but to be eligible for that plan you couldn’t have borrowed before July of 2014. So, it’s limited to newer borrowers. So, if you’re someone who borrowed before 2014 and you value maybe being done with your loans or being done with forgiveness in 20 years instead of 25, then the new modified REPAYE plan, even though it’s cheaper, like maybe a little bit cheaper per month, that may not outweigh the extra five years of repayment. So, that’s something to just be aware of is it may not be the best plan for everybody. So, it still warrants some careful consideration.
40:28 Emily: Yes. Thank you so much for adding that. And I’ve grown a new appreciation for your profession from listening closely to the Student Loan Planner podcast over the last handful of months because there are so many more complexities that I, even as sort of a person in the financial space, but not really, you know, following student loans really closely. There are so many more complexities that I was not aware of. And so I say for anybody for whom your student loan repayment is a very high stakes decision. A lot of money involved, a lot of income, a lot of debt, I really think going for a plan from you all or from a similar organization is going to pay off. Like for some people, I know there have been examples on the podcast where people were not aware of some of the forgiveness options available to them, and they are forgiven hundreds of thousands of dollars that they would not have otherwise been able to do. Now, if you have $10,000 of student loans, this is not necessarily a high stakes decision for you, but really if it is a high stakes decision for you, it’s worth getting a professional to advise you on this. So, that’s my little plug for you all for Student Loan Planner, mid-podcast.
41:33 Meagan: Thank you.
Changes to Rule of Thumb
41:33 Emily: So, having gone through the, you know, many of the terms of this modified REPAYE plan, is there someone for whom this makes a lot of sense? How has the rule of thumb that we discussed earlier been updated with this new plan as an option?
41:47 Meagan: Mm-Hmm. <affirmative>? Yep. If you’re someone who’s working towards PSLF, this rule of thumb will be different for you. So, keep that in mind. There are greater chances of you being eligible for PSLF, it making sense to go towards PSLF, even with smaller balances. So, this would be more of a rule of thumb for those that are not doing PSLF but are interested in the longer-term forgiveness. Previously, our rule of thumb was if your balance was two times your income, then forgiveness is definitely going to mathematically make more sense than trying to pay the loans off. Then we had the COVID forbearance happen, and 0% interest for a long time and we started to get a little more conservative with that number and saying maybe it’s like one and a half times your income because the federal student loan system is kind of interesting right now. We don’t know what’s going to happen <laugh>, they have a lot of flexibility to, you know, make student loan repayment better.
42:48 Meagan: And now, with this new revised REPAYE plan proposal, we’re starting to think that it could be, if your balance is around the same as your income, especially if you have a large household, if you have, you know, a couple kids and you’re married, then pursuing longer-term forgiveness might actually make more sense even if your balance is about the same or just barely above your income. So, it’s worth checking out, don’t write it off until you run the numbers. And then you can weigh the pros and cons of going both routes, but certainly don’t write it off before you take a look at it if you’re kind of in those balance ranges.
43:27 Emily: Okay, so quick restatement is if your income, and now right now we’re talking about your career income, we’re not talking about your grad student stipend.
43:35 Meagan: Yeah, correct.
43:35 Emily: Not even necessarily your postdoc salary, but your career income is, let’s say in the first year that you have that quote unquote real job. If it is around or less than your student loan balance at that time, that’s when you should be taking a look at this plan and possibly some of the other plans as well, depending on those ratios. If your income far exceeds your loan balance, mm, probably the standard plan most likely is going to be good for you.
44:00 Meagan: Yeah.
Should Current Students Consider this Plan?
44:01 Emily: Okay. Now we’re going to get into what I think is the super, super interesting part of this interview. Because so far, we’ve been learning about this modified REPAYE program generally, but what nobody is talking about <laugh> is what should current students do? Should current students be considering this plan?
44:22 Emily: Nobody’s talking about this. So I want to know, and we have a few different ways of asking this question. So basically, what I’m talking about is for people for whom deferment is an option, should they instead, what are the advantages of perhaps enrolling in this new proposed REPAYE plan versus sticking in deferment? And so obviously there are going to be different considerations for different people. So, we’re going to talk through a few of these different scenarios. Let’s talk first about someone, let’s say either a single person or someone with a family, but their income is lower than that 225% of the federal poverty line that we talked about earlier. Now we’re not giving advice because this is a podcast <laugh>. What are the thoughts about someone who has that level of income?
45:03 Meagan: Yep. So, thoughts there are that if you were to enter the new revised REPAYE plan, your payment could be as little as $0 a month. So, and that that is a legitimate income-driven payment. It counts towards the forgiveness timeline. If you were full-time, you know, working 30 hours or more a week, that could be an eligibility for public service loan forgiveness as well. So, that’s good as far as getting you on track for loan forgiveness and kind of getting free credit in a way. But what’s also good to consider is if maybe you’re unsure about loan forgiveness, you’re not too sure if that’s going to be the path for you, this could still make sense to get on the new REPAYE plan because it’s going to have that 100% interest subsidy. So, instead of your balance growing while you’re, you know, finishing this time period, this training period, it will be staying at the existing balance that it is today.
46:04 Meagan: So, let’s say you decide five years from now, 10 years from now, you know, forgiveness wasn’t going to be the route. Well, if you were on REPAYE all through this training period, even with your income being really low, your payment being zero, you’re paying back what you owe today. You know, the current principle and interest versus paying back what has accrued on that balance. Because the unsubsidized loans will be accruing while you’re in deferment. And so that just means interest is growing on your balance. So that’s a significant reason to consider going into this this new REPAYE plan if compared to going into deferment.
46:46 Emily: Yeah. So, let’s tease out the different types of loans you might have now. If you had subsidized loans, let’s say a hundred percent of your loans were subsidized, the advantage of going into this particular repayment, as I understand, would be then that you, and again in this scenario, we’re not making a payment because the income is low. You’re not making a payment, but you are accruing months and years under this repayment plan. So if you do end up choosing to go an IDR route and going the whole forgiveness plan, you have many more years that you’ve been in repayment even though you’re making that $0 payment. And there’s no advantage either way with the interest because it was going to be subsidized anyway. Now, if you had unsubsidized loans, throwing that into the mix, if you choose deferment, those loans are accruing interest. But if you choose this modified REPAYE plan, and again, your income is below this threshold level, you’re paying zero, which means that effectively your loans have become a hundred percent subsidized during that period of time. It looks like a for sure advantage for someone who holds unsubsidized loans and somewhat of an advantage for someone even with subsidized loans.
47:52 Meagan: Mm-Hmm. <affirmative>. Yeah, there’s an advantage either way. And it, you know, this new REPAYE plan makes deferment look very unattractive for a lot of reasons. There’s not a lot of advantage to deferment anymore. And even if you had a payment kick in, keep in mind, it’s a portion of your income. So, you gave me a good example before we had started this on, you know, maybe at most someone’s getting a stipend of about $45,000.
48:23 Emily: That’s real high-end people. Really outside.
48:27 Meagan: <Laugh>. So, we’ll go with like the highest number, which will give us the worst-case scenario payment-wise for this new REPAYE. That would be about 90 bucks, a hundred bucks a month. So, not too bad. And if you’re closer to let’s say 35, you know, $35,000 for your stipend, that’d be closer to maybe almost $10, $20 a month. So like, there’s less of a reason now to go into deferment. Because usually the first kickback I’ll get for that is, well, you know, I cannot afford a payment. I think you can afford $10 a month <laugh>, if it’s going to save you this amount of interest later, I think you can afford $10 a month or zero. Everyone can afford $0 a month <laugh>.
49:12 Emily: Right. So, if you’re under that 225% of the federal poverty level, it’s like, okay, your payment was going to be zero anyway. Awesome. If you’re above it, as you said, generally speaking for grad students, it’s only going to be slightly above. And if we’re talking about undergrad loans, let alone, that’s only 5% of your discretionary income for the calculation. And so, it could be just a few dollars, as you said, a few dollars, $10, $20, $50 if you had a particularly high income a month. And so, really in that case you’re making these small payments, but what you’re gaining is the interest subsidy on the remaining amount of interest that’s accruing each month and those years of payment towards this IDR plan. Is that right?
49:48 Meagan: Mm-Hmm. <Affirmative>, yes.
49:50 Emily: So, you can think about it as paying this small cost for those particular benefits. Now if you didn’t think for whatever reason that that was an advantage for you, maybe your loans are all subsidized, for example, whatever the case may be. Maybe you don’t think that small payment is worthwhile, but it is something to at least think about and consider and not just default into deferment as we have done for so many years in the past. Thank you so much for stating that.
Can You Be in Repayment and Still Taking Out Loans?
50:14 Emily: And then let’s think also about someone who, because this question might come up. So what about graduate students who think that there’s a possibility that they may be taking student loans out at some point during their graduate degree? Either they know they’re going to for sure, or do they think, “Oh wow, this is a possibility if x, y, z happens, I may take out a loan.” Is it even possible to be in repayment and still taking out student loans? How does this work?
50:39 Meagan: It is not. Yes and no. So, it depends. It always depends. But if you’re taking out loans for your current graduate degree, those loans in particular that are associated with that graduate degree cannot go into repayment until post-graduation. Your undergraduate loans can be. They can go into repayment. They can take advantage of maybe this interest subsidy or the forgiveness clock getting started. But loans for your current degree cannot. So, that’s one maybe downside for those who are borrowing.
51:12 Emily: Okay. So, let me restate. So, let’s say we have a current graduate student. The loans that they took out for their undergraduate degree could go into repayment if they want them to, or they can choose the deferment route.
51:21 Meagan: Mm-Hmm. <affirmative>.
51:22 Meagan: Loans from a previous graduate degree, maybe a master’s program, same deal. But any loans that are being taken out for the PhD program, let’s say that they’re currently in, those have to stay in deferment for the time being, until that degree is done? Yeah.
51:37 Meagan: Correct. Mm-Hmm. <affirmative>. Yep. You got it.
51:39 Emily: Excellent. So we talked earlier, Meagan, about how, you know, this is still <laugh> a little bit tenuous and so forth. How likely is it do you think that this is going to come into effect as stated? Or do you think there are going to be edits that we’re looking at over the coming months?
51:55 Meagan: I don’t think there are going to be a lot of edits. I do think this is very probable. So, I do think that they’re going to be implementing this. If there are any proposed changes, I don’t think they’re going to be to these big ticket items that we’ve already discussed. I think they would be like really minute changes. But stay tuned. We will keep people posted <Laugh>.
52:15 Emily: Absolutely. Again, follow Student Loan Planner anywhere you like. Especially their newsletter, their podcast. Meagan, thank you so much for sharing your knowledge with us. I knew I could not get this information from anyone else, so I’m so glad that you were able to come on the podcast. Thank you so much!
52:31 Meagan: Of course. Thanks for having me and letting me nerd out as usual, <laugh>!
52:35 Emily: Excellent.
52:41 Emily: Listeners, thank you for joining me for this episode! I have a gift for you! You know that final question I ask of all my guests regarding their best financial advice? My team has collected short summaries of all the answers ever given on the podcast into a document that is updated with each new episode release. You can gain access to it by registering for my mailing list at PFforPhDs.com/advice/. Would you like to access transcripts or videos of each episode? I link the show notes for each episode from PFforPhDs.com/podcast/. See you in the next episode, and remember: You don’t have to have a PhD to succeed with personal finance… but it helps! The music is “Stages of Awakening” by Podington Bear from the Free Music Archive and is shared under CC by NC. Podcast editing by Lourdes Bobbio and show notes creation by Meryem Ok.