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A Student Loan Mini-History And A Primer On The New REPAYE Program

Preach, Elizabeth Warren. Student loans are a huge stressor for a whole lot of people these days. How many people? Back in 2010, 1 in 5 households carried some form of student debt, according to a Pew Research study. Two years later, Pew found that 69% of college graduates had taken out loans to finance their education.

Of course, it wasn’t always this way. Student loans have only been a thing in America since the Space Race, when Eisenhower established the National Defense Education Act of 1958 as a means of financing and thereby improving science and technical education in the U.S. Back then, loans were low-interest and came directly from the government.

It only took seven years to change that. With Lyndon Johnson’s Higher Education Act, the way the federal loan program was financed changed: instead of the dollars coming directly from the treasury, loans were made by banks. The government guaranteed to repay loans that students defaulted on, which meant it was a win-win situation for both parties—banks didn’t have to worry about bad loans, and the government didn’t have to mark the outstanding loans as debt on their books.

Enter Nixon, and the birth of Sallie Mae. Are you ready for your Whoa Fact of the day? Sallie Mae is actually the nickname for the Student Loan Marketing Association, or SLM. People, they’ve given a corporation a female name to humanize it. (And as a complete aside, if you’re wondering if Freddie Mac is the same way, it is. It stands for the Federal Home Loan Mortgage Corporation, or FHLMC. Wut.)

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Sallie Mae was created in 1972 as a “government-sponsored enterprise.” What it did was buy up all the banks’ student loans so that money could be freed up for federally-insured lending. Which, if you take a step back, feels like a pretty roundabout way to finance student loans.

As it happens, Bill Clinton felt the same way. He saw that private companies handling the government-backed loans were costing taxpayers way more than the old-school direct loans of Eisenhower’s day; unfortunately, when he tried to return the loan system to The Way Things Were, Republican lawmakers accused it of being a government takeover. In the end, Congress compromised and phased in some direct loans while leaving Sallie Mae mostly untouched (“mostly,” because in 2004, following the urging of Clinton, the corporation privatized).

And then 2008 came. Which we all surely remember—if you don’t, go ahead and take a break here to watch The Big Short.

The financial crisis of ’08 meant that student loan money from those cash-strapped banks started drying up, causing colleges to turn once more to the government for those direct federal loans. The final nail in the government-backed student loan coffin, then, was hammered in two years later, with the passing of Obamacare in 2010. Packaged with the healthcare side of the bill was more legislation — handing student loans to the federal government, for better or for worse. (This is not to say that students can’t still receive financial aid from private banks anymore—they can. But those loans are no longer backed by the federal government.)

Mostly, it’s for the better. Federal loans tend to carry lower interest rates than bank loans. Which is good news, if you’re spending twenty years paying off those loans. The government is also fairly merciful to its poor (ha, get it?) graduates, temporarily suspending interest accumulation, offering flexible payment options, and even forgiving loans outright—based on very particular circumstances, of course.

That said, it’s not perfect. First of all, there are multiple repayment options grads can choose from. It can be confusing to know what’s best for one’s own personal circumstances. Second, even when a repayment plan is lucrative, a grad might not be eligible for it.

Which is where the new REPAYE program comes in, like a knight in flashy, shiny armor, arriving to (mostly) save the day.

To understand what REPAYE is, you have to understand its predecessor, the Pay As You Earn, or PAYE plan. PAYE was established in 2012, as an alternative to the Income-Based Repayment (IBR) option. Whereas folks on the IBR plan paid 15% of their monthly discretionary income toward their loans, with automatic forgiveness after 25 years of paying, the PAYE plan demanded only 10% of discretionary income, with forgiveness after 20 years.

It sounds good, except that the PAYE plan wasn’t available to just any regular grad. First of all, PAYE enrollees had to demonstrate that the standard 10-year repayment option was unfeasible for their situation. Additionally, borrowers with loans taken out pre-2007 weren’t eligible for the program. Finally, a second disbursement had to have been made on the loan after 2011 for a borrower to qualify for PAYE.

The U.S. Department of Education, thankfully, saw that PAYE wasn’t perfect, and on December 17, 2015, launched the Revised Pay As You Go, or REPAYE plan. (See what they did there?) REPAYE is the cool uncle of PAYE. Or something like that. Essentially, anyone with a direct loan is eligible for the program. The financial restrictions are gone. The pre-2007 restriction is gone. Heck, the government even pays for half of the interest accrual on loans after three years of subsidizing it outright.

Not everything in REPAYE land is shiny and golden, though. First of all, you have to sign up for the plan and renew it manually every year. Which isn’t so difficult, but, you know. Some people are lazy.

Second, while grad school loans are covered under REPAYE, they aren’t wiped out after 20 years—they’re wiped out after 25. This makes sense—more education means more responsibility for debt. But it’s a change from the other repayment programs, and therefore worth mentioning.

Third, though—and this is perhaps the most important caveat—REPAYE may not be the best loan repayment plan for married couples. Here’s why: whereas with the other repayment plans, income is considered individually if taxes are filed separately, REPAYE looks at married income as one lump pile o’ money. This means that, if you took out $100,000 in loans for your Master of Fine Arts in Knitting and currently make $25,000/year on your Artisanal Llama Sweater Etsy shop, while your spouse is completely debt-free and making $75,000/year working for The Man, REPAYE will lump your income together and consider it as $100,000. Which it is, technically—but if you want to get away with paying less on your loans each month, it might be wiser to not get married at all.

All in all, REPAYE looks like a great thing for cash-strapped graduates everywhere. And while it might not address the fundamental problem that is the ballooning student loan debt in America, it at least attempts to make it more manageable for those who owe.

This isn’t our last word on student loans, though. Stay tuned for our interview with Andy Josuweit, founder of Student Loan Hero, a completely free platform that helps graduates organize their loans and offers advice on repayment plans and consolidation, coming later this week.

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