PAYE vs. REPAYE: How These Repayment Plans Stack Up
If you can’t afford to pay your federal student loans, you might want to look into an income-driven repayment (IDR) plan. Two IDR options include Pay As You Earn (PAYE) and the Revised Pay As You Earn (REPAYE) plans.
So how do you choose between PAYE versus REPAYE? First of all, you might not qualify for both plans. If you are, you’ll want to review key differences between PAYE and REPAYE like your marriage status, what your monthly payment amount would be and whether all of your federal loans would be eligible.
On Jan. 10, 2023, the Department of Education announced plans to change the REPAYE program. Specifically, they are recommending the following:
- Cutting monthly payments by half of current amounts
- No monthly payment requirement for single borrowers making less than $30,500 (or $62,400 for a family of four)
- Lowering the time required for forgiveness to 10 years for those who borrowed $12,000 or less, with an addition year required for each $1,000 over that amount
- Will stop accumulating interest for those paying less than the monthly interest charge on their loans
See this government information sheet for more.
PAYE vs. REPAYE: How are they similar?
PAYE and REPAYE are both income-driven repayment plans that adjust your monthly payment amount based on your income and family size. In addition to using the same factors to determine your monthly payment amount, PAYE and REPAYE share the following details.
Qualifying loans
If you’re considering PAYE versus REPAYE, the same four types of federal loans are eligible under both of these IDR plans:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans made to students
- Direct Consolidation Loans (not including Parent PLUS Loans)
Loans that are eligible if consolidated:
Federal Perkins Loans, FFEL PLUS loans for graduate students or professional students, subsidized and unsubsidized Federal Stafford Loans from the FFEL program, and FFEL consolidation loans that did not include any Parent PLUS loans can be eligible for PAYE or REPAYE if consolidated.
Monthly payment
Payments under both plans are calculated as a percentage of your discretionary income — that is, the amount of cash you have left after accounting for taxes and other routine expenses such as rent.
Under both PAYE and REPAYE, your maximum monthly payment is 10% of your discretionary income.
Term length
PAYE and REPAYE both span 20 years if you borrowed your loans for undergraduate study. Borrowers who are repaying graduate loans under REPAYE have a 25-year term.
Keep in mind that with a longer repayment term, more interest accrues on your loan amount. However, the plans offer a reduced monthly payment amount that can be more manageable long-term, depending on your situation.
Forgiveness eligibility
Whether you opt for PAYE or REPAYE, after your plan’s full repayment term, any remaining balance on eligible loans is forgiven. Keep in mind that the IRS might view the forgiven amount as taxable income so discuss your options with a tax professional and plan accordingly.
PAYE and REPAYE plans are also eligible repayment plans under Public Service Loan Forgiveness (PSLF). This alternate federal forgiveness program helps you cut the time frame toward loan forgiveness to only 10 years. To receive PSLF, you’ll need to work full time for a qualifying nonprofit or government employer for at least 10 years.
What’s the difference between PAYE and REPAYE?
To decide which IDR plan is best for your situation, you’ll need to understand the difference between the PAYE and REPAYE programs. Differences between PAYE and REPAYE include your eligibility, the interest subsidy and whether your marital status will impact your payments.
Eligibility requirements
REPAYE’s requirements are broader — any borrower can access this plan as long as they have eligible loans. PAYE, on the other hand, has more unique criteria.
PAYE is only available to “new borrowers.” A new borrower is defined as those who borrowed for the first time on or after Oct. 1, 2007, and received a Direct Loan on or after Oct. 1, 2011. REPAYE doesn’t impose this restriction.
Additionally, to qualify for PAYE, a borrower’s calculated monthly payment under the plan can’t exceed what they’d pay under a 10-year Standard Repayment Plan.
For example, if your standard monthly payment was $550, and your payment under PAYE would be $600 per month, you’d automatically be ineligible for the PAYE plan. You would still be eligible for the REPAYE plan in this scenario, however.
Interest subsidy
Depending on your unpaid student loan debt, income and family size, your monthly payment might be lower than the interest that accrues on your eligible loans. When this happens, it’s called “negative amortization”. The government offers interest subsidies that help pay for unpaid, accrued interest, but the subsidy differs for PAYE versus REPAYE.
Under PAYE, any remaining interest on your subsidized loans that isn’t covered by your payment is paid for by the government for the first three years of enrolling in the plan. After that, you’re responsible for unpaid interest that accrues. You would also be responsible for all interest charges on unsubsidized loans.
If you have unsubsidized loans or high interest rates, REPAYE might be a better deal for you. For the first three years under REPAYE, the government pays for all unpaid interest that’s not covered by your payment for subsidized loans. After this three-year period, the government pays for 50% of the unpaid interest throughout the remainder of the term. The government also covers 50% of surplus interest on unsubsidized loans during the entire REPAYE term.
Marriage impact
As mentioned earlier, the Department of Education uses borrowers’ income and family size to calculate monthly payment amounts for PAYE and REPAYE. However, married couples have more flexibility with the PAYE plan.
Under the PAYE plan, married borrowers who file a joint tax return must include their spouse’s income for the payment calculation. But if you and your spouse file separate tax returns, you can exclude your spouse’s income from your payment calculation. If your spouse is a higher earner and has no student loan debt, filing separately can help reduce your payment.
When enrolled in REPAYE, however, a marriage penalty may occur. Regardless of whether couples file separately or jointly, the income of borrowers and their spouses are always included in the payment calculation. A higher reported income increases the likelihood of having a higher monthly payment under REPAYE.
PAYE vs. REPAYE: Which is right for you?
If your debt is starting to dwarf your income and you’re seeking the lowest possible monthly payment, PAYE is likely your best option. It’ll cap your monthly payments at 10%, never asking you to pay more than what you’d owe via a Standard Repayment Plan.
Additionally, PAYE is ideal for married borrowers who prefer to keep spousal income figures out of their IDR payment calculation.
Conversely, single borrowers — or borrowers that earn more than their spouse — might consider REPAYE. It offers more interest subsidies compared to PAYE, and offers a longer repayment period of 25 years for loans borrowed during graduate study.
Before choosing PAYE or REPAYE, calculate your potential payment amount for each plan using Federal Student Aid’s repayment estimator.
Another way to lower your monthly payment: Student loan refinancing
It’s usually a bad idea to refinance federal student loans, because you’ll lose access to the flexibility and protections they provide. But if you owe private student loans, it’s worth checking what refinance offers are available.
Like income-driven repayment, student loan refinancing could allow you to lower your monthly payment, either by extending your repayment term or lowering your interest rate. To qualify, you typically need to have a strong credit history and low debt-to-income (DTI) ratio.
If you refinance, you could trade in all your loans (ideally, private loans) for one new loan, and reduce the number of monthly payments.
Just remember the biggest caveat between refinancing student loans versus income-driven repayment is once you go private, you can’t go back. You’ll lose access to any current and future help the federal government might provide to federal student loan borrowers.