Revised Pay As You Earn (REPAYE) Student Loan Repayment Plan
REPAYE is an income-driven repayment plan that caps monthly student loan payments at 10% of the borrower's discretionary income and may result in loan forgiveness after 20 or 25 years of on-time payments.
Paying back your student loan debt can be challenging, especially if your educational aspirations cost far more than what your current paycheck provides. Fortunately, if you have federal student loans, you may be able to take advantage of the Revised Pay As You Earn program, more commonly referred to as REPAYE.
Like many other income-driven repayment plans currently offered by the federal government, the REPAYE plan caps monthly payments at 10% of your discretionary income as determined by state poverty guidelines and other factors. For many, this option can represent some relief from what can often be an overwhelming monthly debt obligation.
However, with so many student loan repayment options on the table, how do you know if REPAYE is the right one for you?
In this guide:
What Is REPAYE?
Prior to 2015, select federal student loan borrowers relied on the Pay As You Earn (PAYE) program to lower their monthly payments. Though this program certainly helped some borrowers, the benefits were limited to those who took out their first loan after Oct. 1, 2007, and were able to meet specific financial hardship requirements.
As a result of rising student debt and the limited nature of the PAYE program, former President Barack Obama requested the U.S. Department of Education create a plan that extended the benefits of PAYE to include more borrowers, namely those with older federal student loan debt or those who didn’t meet the financial requirements of other plans. The result was a revised Pay As You Earn program.
Under the REPAYE program, eligible borrowers can receive the benefit of lower monthly payments and the possibility of loan forgiveness after 20 to 25 years of on-time repayment.
Monthly Payments Through REPAYE
If you enroll in the REPAYE program, you can expect monthly payments capped at 10% of your discretionary income. Your discretionary income, at least as it relates to the REPAYE program, is based on the difference between your annual income and 150% of the poverty guideline for your household size.
Since your annual income and family size can change over time, you must re-certify your enrollment each year with up-to-date information (including your income). As such, your monthly payments will vary over time, increasing as you make more money or decreasing should you take a pay cut or have more children.
Loan Forgiveness with REPAYE
Another primary benefit of the REPAYE program is student loan forgiveness. Under this plan, borrowers who are repaying loans for their undergraduate degree will receive loan forgiveness after making qualifying payments for 20 years. Borrowers who make payments on a loan used for graduate or professional studies will be eligible for forgiveness after making 25 years of qualifying payments.
Keep in mind that at this time, any loan amount forgiven at the end of the repayment period is considered taxable income. Therefore, you may be required to pay income taxes on the remaining amount.
Am I Eligible for REPAYE?
Some income-driven payment options, like the Income-Based Repayment Plan (IBR) and PAYE, require borrowers to meet certain income requirements. REPAYE, on the other hand, is not income contingent and is usually available to anyone who has eligible federal student loans.
The following Direct loans are eligible for the REPAYE program:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS loans for graduate or professional students
- Direct Consolidation Loans that did not include Parent PLUS loans
The following loans are eligible only if they are consolidated into a Direct Consolidation Loan:
- Subsidized Federal Stafford Loans
- Unsubsidized Federal Stafford Loans
- FFEL (Federal Family Education Loan program) PLUS Loans for graduate or professional students
- FFEL Consolidation Loans that did not include PLUS Loans
- Federal Perkins Loans
Though many borrowers will qualify for REPAYE, it’s important to note that loans currently in default are not eligible for this program. However, there are ways to rehabilitate your loans, many of which will open the door to income-driven repayment plans. If your loans are in default and you’re considering an income-driven repayment plan, you can contact your student loan servicer for guidance.
Who Should Consider REPAYE?
The right income-driven repayment plan can help you manage your monthly bills and avoid sending your loans into default — and, by extension, your credit score plummeting. If you’re reviewing your options, here are a few reasons why you may want to consider REPAYE:
- You qualify for Public Service Loan Forgiveness (PSLF). If you work for a government agency or nonprofit, you may be eligible for the PSLF, but one of the qualifications is that you enter into an income-driven repayment plan.
- You don’t qualify for IBR or PAYE but are still struggling to make your monthly payments.
- You enrolled in an IBR program prior to the launch of REPAYE. (However, before you switch plans, always check to see if your payment history will count towards the new plan.)
- Your loans are in default and you are considering federal student loan consolidation as a method to remove them from their current status. If choosing this route, you must agree to repay your new Direct Consolidation Loan with one of the income-driven repayment plans currently offered, which include REPAYE.
Pros and Cons of REPAYE
The REPAYE program, like other federal student loan repayment plans, has both its benefits and downsides. Benefits include:
- Monthly payments are capped at 10%, making this a more affordable option for borrowers, especially those who don’t qualify for IBR or PAYE.
- Borrowers receive loan forgiveness after making regular payments for 20 or 25 years.
- REPAYE offers some interest subsidies, which can prevent a sizable tax obligation at the end of the repayment period. When enrolled in this repayment plan, the government will pay: all remaining interest on subsidized loans for the first three years; after that point, they will pay 50% of the remaining interest. It will also pay 50% of remaining interest on unsubsidized loans for the duration of the repayment term.
Meanwhile, the potential disadvantages of the REPAYE program include:
- Payment amounts for married borrowers who choose REPAYE will be based on their combined annual gross income (AGI), even if they file taxes separately.
- Though REPAYE offers loan forgiveness at the end of the repayment period, the IRS considers the remaining balance to be taxable income; this can lead to a sizeable tax burden at the end of your loan term.
- Borrowers who could otherwise commit to a shorter repayment term may end up paying significantly more interest over the course of the 20- to 25-year REPAYE loan plan.
Although REPAYE may be a great option for some borrowers, there are several other repayment plans you should consider before deciding. Here are a few options you may want to evaluate:
Standard Repayment Plan
If you’re looking for the quickest way to pay off your loan or want to limit the interest you pay over the life of your loan, this is likely the best option. Under this plan, you will be required to pay your loan within 10 years. However, because this is the shortest route, it typically results in the highest monthly payments.
Other Income-Driven Repayment Plans
In addition to REPAYE program, the government offers Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Income-Contingent Repayment (ICR). Though the qualifications vary by program, they each result in loan forgiveness at the end of the repayment period.
Some programs, like IBR and PAYE, are designed to help borrowers who can show financial hardship. These repayment plans generally include 20- or 25-year repayment periods and cap monthly payments at 10%. However, borrowers in the IBR program who took loans out prior to July 2014 will need to pay 15%.
ICR, on the other hand, will result in a payment that amounts to 20% of your discretionary income or the amount you would pay under a 12-year fixed payment plan, adjusted according to your AGI. This payment plan extends repayment to 25 years. Though it’s not the most attractive option when it comes to monthly payments, ICR is one of the only income-driven repayment plans available to borrowers with Parent PLUS loans.
Refinancing with a Private Lender
For many borrowers, refinancing through a private lender can be an attractive option. In some cases, particularly for borrowers with excellent credit, refinancing federal loans to the private sector can result in lower interest rates and significant savings over the life of the loan.
However, before doing so, it’s important to weigh the pros and cons. Once your loans are refinanced through a private lender, you will lose access to income-driven repayment plans and any potential loan forgiveness. Unfortunately, though many private lenders do offer flexible repayment plans, they don’t typically offer income-driven plans to borrowers who are facing financial hardships. Some do allow you to temporarily stop payments in the event of a job loss.
Your student loans probably aren’t going anywhere soon. Although monthly payments can feel overwhelming, repayment plans like REPAYE can make your loan debt more manageable. If you’re feeling the strain of federal student debt, contact your loan servicer to discuss your options or visit StudentLoans.gov to learn more.
Author: Jeff Gitlen
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