PAYE vs. REPAYE: Which Student Loan Repayment Plan is Better?
Both PAYE and REPAYE cap your payments at 10% of your monthly discretionary income. The main difference is that you can still use REPAYE if your monthly payments would be higher than on the Standard 10-Year plan, but not with PAYE.
The standard repayment plan requires you to repay your loan over a period of 10 years, so your monthly payments are calculated based on how much principal and interest you need to pay in order to retire the debt in a decade.
However, you also have income-driven repayment plans, including Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR).
All of these are good options if you want to cap your monthly payments to a certain percentage of your income, so your student loan bills aren’t too high for you to keep up with. While you’ll typically take longer to pay back your loans under these plans than under the 10-year standard repayment plan, they can make your monthly payment much more affordable. And if you pay for long enough, you could potentially qualify for loan forgiveness.
If you are deciding between PAYE and REPAYE, it’s important to understand the differences, and this guide will provide the answers you’re looking for about which program—if either—is right for you.
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What is PAYE?
PAYE stands for “Pay As You Earn.” It’s a repayment option for four types of federal student loans:
- Subsidized Direct Loans
- Unsubsidized Direct Loans
- Direct PLUS Loans for Students
- Direct Consolidation Loans
When you choose a PAYE repayment plan, your monthly payment will be capped at 10 percent of your discretionary income. However, if your payment amount would be more than the monthly payment required under the standard plan, you won’t be eligible for PAYE.
After 20 years of qualifying payments under PAYE, you will be eligible for student loan forgiveness.
Eligibility is determined based on when you borrowed, as your first Direct Loan must have been issued after October 1, 2007, and you must have also received a Direct Loan after October 1, 2011.
What is REPAYE?
REPAYE stands for “Revised Pay As You Earn” and the same four types of Direct Loans may be eligible for this repayment plan.
Under this plan, you will make payments capped at 10 percent of your discretionary income.
REPAYE, like PAYE, will also result in forgiveness of your outstanding loan balance after 20 years of payments. However, if you have professional or graduate school loans, your repayment timeline could be stretched out to 25 years before you’re able to get the remaining balance discharged.
The big difference between PAYE and REPAYE plans is that you can still qualify for REPAYE plan if your payment under this plan is greater than the payment would be under the standard 10-year plan. This provides you with more flexibility in choosing your repayment plan and gives you the opportunity to lengthen your repayment timeline beyond the 10-year standard repayment plan if you need to.
Does PAYE or REPAYE Make the Most Sense for You?
Because PAYE and REPAYE plans are very similar, choosing between them can be difficult for loan borrowers. In general, however, REPAYE plans are more flexible than PAYE plans.
If you have a higher income, PAYE may not be an option for you because your capped monthly payment would exceed your payment under the 10-year standard repayment plan. If that’s the case and you want an income-driven repayment plan, REPAYE may be your best option. However, if you have just a small amount of debt and your main focus is on getting the lowest possible payments, PAYE could be the right choice.
If you want to compare what your payments would be under PAYE vs. REPAYE, you can use the repayment estimator on the Federal Student Aid website. Knowing what your payments will be can help you to make the most informed choice regarding which plan is best.
Of course, before you choose PAYE or REPAYE, you need to be aware that both of these plans are generally going to result in you paying more in total interest over the life of your loan than you would pay if you stuck with the standard repayment plan.
That’s because whenever you pay your loans over a longer period of time, you pay interest for longer, and your interest costs go up because of it. So, don’t assume that the capped monthly payments are always going to make REPAYE or PAYE the cheapest option, even with loan forgiveness.
You also need to know that if you have a portion of your loan balance forgiven under PAYE or REPAYE, you will be taxed on the amount that is forgiven as if it were income. This could leave you facing a substantial tax bill, not just because you have to pay tax on this discharged amount but also because the big amount of “income” could bump you up into a higher tax bracket.
What Are Some of the Other Repayment Options Available?
Many borrowers choose REPAYE or PAYE in order to try to make paying back student loans more affordable. This is not the only option to do that, though. You could also consider refinancing your federal student loans.
Student loan refinancing is offered through private lenders. If you shop around, you may be able to find a private lender willing to offer you a refinance loan at a lower interest rate and with different payment terms than your current loan.
You can use this new refinance loan to pay off existing student debt, so you’ll only be paying one new loan with your refinance lender. You can also consolidate federal and private student loans when refinancing into one new private loan.
If the interest rate is lower and you keep your repayment timeline the same or make it longer, your monthly payment will also fall.
When you refinance federal student loans, you do give up certain special protections only federal loans provide to borrowers. You won’t be eligible for Public Service Loan Forgiveness any more, for example, nor will you be eligible for deferment. And if you’re able to put your refinanced loan into forbearance in times of financial hardship, the forbearance period will likely be shorter and the requirements stricter to qualify.
Still, if your goal is to reduce your payments and you aren’t going to be taking advantage of borrower protections, refinancing is another good option to try to make paying off loans easier.
PAYE and REPAYE are both good choices if you are interested in income-driven repayment in order to make sure your monthly student loan payment is affordable.
Just be sure you understand you could end up paying a substantial amount of interest if you stretch out your loan repayment over two decades—and you could get hit with a big tax bill in the end.
You should compare all of your repayment options, including the total cost of repayment as well as the affordability of monthly payments, to determine which payment plan is best for you.
Author: Christy Rakoczy
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