Welcome back to another episode of The Student Loan Show. On today’s show, some exciting news to report from the US Department of Education about repaying your federal student loans.

On October 30, 2015 The US Department of Education amended the regulations governing the William D. Ford Federal Direct Loan (Direct Loan) Program to create yet another income dependent repayment plan.

It’s all part of President Obama’s initiative to allow more Direct Loan borrowers to cap their loan payments at 10 percent of their monthly incomes.

This new payment plan is called the Revised Pay As You Earn repayment plan (REPAYE plan), and it will go into effect in December 2015.

The press has been loving it, and says it’s going to save 5 million student loan borrowers a TON of money.

And though there’s a lot of good in REPAYE, it’s not right for everyone. In fact, I’ll go so far as to say it’s a terrible idea for some federal student loan borrowers.

Here’s what you need to know about REPAYE.
Qualification for REPAYE
REPAYE is available to all Direct Loan student borrowers regardless of when the borrower took out the loans or their income level. A Direct PLUS Loan made to a parent borrower, or a Direct Consolidation Loan that repaid a parent PLUS loan, may not be repaid under the REPAYE plan.

One benefit of REPAYE over all other income dependent repayment plans is that REPAYE eliminates the requirement for a partial financial hardship entirely.
Calculating the Payment Due Under REPAYE
Payments are set at 10% of discretionary income, even if that leads to a higher payment than under a standard repayment plan.

Discretionary income is calculated as being your adjusted gross income minus 150% of poverty line for your state and family size

If a process becomes available in the future that allows borrowers to give consent for the Department of Education (the Department) to access their income and family size information from the Internal Revenue Service (IRS) or another Federal source, the regulations will allow use of such a process for recalculating a borrower’s monthly payment amount.

If you are married but file a separate Federal income tax return, the adjusted gross income (AGI) of you and your spouse is used to calculate the monthly payment amount. A married borrower filing separately who is separated from his or her spouse or who is unable to reasonably access his or her spouse’s income is not required to provide his or her spouse’s AGI.

In cases where couples have separated their finances and the joint AGI reported on your Federal tax return is no longer applicable, you will be permitted to submit alternative documentation of income. If you do so, your spouse will be excluded from the determination of your family size regardless of the tax filing status of the borrower and the spouse.

This differs from how payments are calculated under PAYE, IBR, and ICR. Under those plans, married borrowers who file their Federal income taxes separately exclude their spouse’s income from payment calculations yet include their spouse in their family size. This results in an artificially low monthly payment for married borrowers who earn a low income and file taxes separately even if his or her spouse is a high income earner.
Effect on Interest Accrual and Negative Amortization
REPAYE places limits on the interest charged to a borrowers to 50 percent of the remaining accrued interest when monthly payment is not enough to pay the accrued interest (resulting in negative amortization). This limitation applies after the consecutive three-year period during which the U.S. Department of Education doesn’t charge the interest that accrues on subsidized loans during periods of negative amortization.

Though the same three-year period exists for subsidized loans under PAYE and IBR, there is no limit on the interest charged. Therefore, many loans paid through PAYE and IBR negatively amortize.