Federal IBR Loans vs. FitBUX ISA
The federal government recently introduced a new federal income-based student loan repayment plan, called Revised Pay As You Earn (“REPAYE”).
This resource explains:
- What REPAYE is,
- What other existing federal income-driven loan plans are available, and
- The differences between federal income-driven loans and a FitBUX Income Share Agreement.
For a quick reference guide click here.
What Is REPAYE?
The Revised Pay As You Earn (REPAYE) plan is the newest federal income-driven loan repayment plan and is the revised version of the Pay As You Earn (PAYE) plan. The Federal Government launched it on December 17, 2015.
Like other federal income-driven repayment plans before it, REPAYE ties the size of your loan payments to your income. Under REPAYE, your monthly payments are equal to 10 percent of your discretionary income.
If you’re not earning enough to pay off undergraduate student loan debt in REPAYE after 20 years, it’s forgiven. It takes 25 years to qualify for forgiveness of graduate school debt under REPAYE. Similar to other federal income-driven repayment plans and loans, the balance of the loan that is forgiven is considered taxable income.
What is a federal income-driven repayment plan?
Federal income-driven plans are meant to be more flexible than traditional loans. Income-driven plans are also customized to your situation unlike traditional standard plans that are one size fits all. Instead of a fixed monthly payment over the course of 10 years — which is how the Traditional Repayment Plan typically works — income-driven plans take into account factors like how much money you make and the size of your family.
How does it work?
Federal income-based plans are capped at 10 percent of your discretionary monthly income. Federal income-driven repayment plans include the Income-Based Repayment (IBR) plan, Income-Contingent Repayment (ICR) plan, Pay As You Earn (PAYE), and now REPAYE. IBR plans for borrowers who had Direct Loans or FFELP loans on or before July 1, 2014 cap monthly payments at 15 percent of discretionary income.
How is it different from the 10-year Traditional Repayment Plan?
Federal income-driven plans sound great to borrowers because they limit how much you have to pay each month. However, you might actually end up paying more money overall under a federal income-driven plan than you would under a traditional loan or a FitBUX Income Share Agreement.
The key thing to remember is that federal income-driven plans like REPAYE might save you money, but it largely depends on how much debt you have and how much you are paying verse deferring each month.
Unlike refinancing, consolidating loans into a federal income-driven plan doesn’t actually reduce your interest rate — it simply limits your monthly payments to a percentage of your income, so that, in theory at least, you’re never paying more than you can afford.
You may save money using federal plans is if a good chunk of it ends up being forgiven. However, when that debt is forgiven, you could be faced with a very large tax bill.
When using an Income Share Agreement from FitBUX, there is no principal balance or deferral of interest. You are given the total number of monthly payment you must make. If you do not defer payments then the maximum you could pay is the cumulative total shown to you at the beginning of the agreement. If you do defer but make the required number of payments over time and you never hit the max, don’t worry. With FitBUX, the agreement is over. No more money owed, no taxable income.
When does it make sense to use a FitBUX ISA?
The FitBUX Income Share Agreement makes sense for individuals that want flexibility and, in many cases, significant savings relative to traditional loan options. The FitBUX ISA is most useful for individuals with an advanced degrees and/or undergrads that work in high demand industries.
In addition, traditional government loans are 10 years. If you can afford to make the monthly payments on a 10 year loan, then a FitBUX Income Share Agreement, in our opinion, is a better option since you'll benefit from additional flexibility..
When does it make sense to use a Federal income-based repayment plan?
The way Federal income-driven repayment plans typically work is by extending the term of your loan which reduces the monthly payment. These plans are geared toward the borrower who’s loan requires sizable monthly payments that might be unaffordable or impossible to make.
Keep in mind though that while making the lowest possible monthly payment may sound great, there could be a price to pay. Federal income-driven plans might make your monthly payments more manageable, but the longer you take to repay the loan, the more you will pay in the long run as interest will accrue over the life of the loan.
Now, if you are combining multiple loans into a single Direct Consolidation Loan or FFELP Consolidation Loan, then the Federal loan works a little differently:
Instead of being fixed at 10 years, the term of a Traditional Repayment Plan for consolidation loans depends on the loan balance. Your term could be stretched out up to 30 years — if it is strectched out for 30 years you will not qualify for forgiveness, ever.
Keep in mind though, that borrowers with FFELP loans only have access to one income-driven repayment plan: IBR. But combining FFELP loans into a Direct Consolidation Loan gives borrowers access to the REPAYE, PAYE, and ICR plans.
The Department of Education has updated its student loan calculator to help understand the pros and cons of different repayment plans. This is a great tool when accessing your options and we recommend you use it. If you have questions on what all the figures mean, let us know. We will do our best to help you sort through it.