November 8, 2019

PAYE vs REPAYE

Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) are two of the four federal student loan income-driven repayment (IDR) plans. Why do we need multiple IDR plans? Good question.

But, unfortunately, that’s a question that only the Department of Education can answer. In the meantime, it’s up to each person to do their own homework to understand PAYE vs REPAYE and their respective pros and cons.

Unfortunately, the rules can get rather complicated, and they aren’t exactly easy reading. But don’t worry. In this guide, I’ll show you everything you need to know about PAYE vs REPAYE to help you make the best choice.

PAYE vs REPAYE: 5 Key Questions to Ask

With both the PAYE and REPAYE plans, your monthly payment will generally be 10% of your discretionary income. But beyond that core similarity, these plans have several important differences.

As you’re weighing the pros and cons of PAYE vs REPAYE, there are a few key factors that can tip the scales in either direction. Here are five questions that you’ll want to ask yourself before you choose.

1. When did you take out your student loans?

If you took out your student loans before 2011, then the PAYE vs REPAYE discussion becomes much simpler.

That’s because you can only join the PAYE plan if you’re a “new borrower.” And to be classified as a new borrower, you have to meet two criteria:

  1. You must have had no outstanding balance on a Direct Loan or Federal Family Education Loan (FFEL) Program loan when you received a Direct Loan or FFEL Program loan on or after Oct. 1, 2007.
  2. You must have received a Direct Subsidized Loan, Direct Unsubsidized Loan, or a Direct PLUS Loan or after Oct. 1, 2011.

If you don’t meet both of these requirements, then, unfortunately, you don’t qualify for PAYE. But REPAYE doesn’t have either of these restrictions so it could be a good choice. Older borrowers could also consider PAYE’s predecessor IBR (Income-Based Repayment).

2. Do you meet the income qualifications for PAYE?

With PAYE, you’re only allowed to join the plan if your monthly payment would be lower than it would be on the 10-Year Standard Repayment Plan.

So let’s say that you’d be paying $200 per month with the 10-Year Standard Plan. And then imagine that your payment with PAYE would be $300 per month. In that case, you’d be better off sticking with the 10-Year plan. So PAYE won’t even allow you to join.

But REPAYE doesn’t have this requirement. Anyone can join REPAYE, no matter their income level.

But why would you want to join REPAYE if your payment would be higher than the 10-Year Standard Repayment Plan?

One reason would be that you’re afraid you may have an income drop in the near future. Or perhaps you just like the idea that your payment will always be based on your income, and that the more money you make, the faster you’ll pay off your student loans.

2. Are you married (or plan to be soon)?

Ok, so this is a biggie.

If you’re married, you may want to stay away from REPAYE. And here’s why. With REPAYE, your discretionary income must take both spouses’ incomes into account.

However, with PAYE, your payment can be based on your income alone if you and your spouse file choose to file your taxes separately.

This rule is especially important if you’re pursuing Public Service Loan Forgiveness (PSLF). Here’s why. Let’s say that you’ve been making payments for three years on REPAYE. In seven more years, you’d be eligible for PSLF.

Then you get married and your joint income doubles. With REPAYE, your payments may rise so high that you’ll have very little (if any) balance remaining seven years down the road to be forgiven. In this case, making the wrong PAYE vs REPAYE decision could literally cost you tens of thousands of dollars.

4. Do you have a graduate degree?

With PAYE, graduate loans are given the same treatment as undergraduate loans. Either way, you’ll be eligible for forgiveness after 20 years.

But with the REPAYE plan, graduate loan borrowers are treated differently than undergraduate borrowers.

  • If you have an undergraduate degree, you’ll be eligible for forgiveness on REPAYE after 20 years.
  • But if you have graduate loans, you won’t qualify for forgiveness on REPAYE until 25 years have gone by.

Some would point out that you’d also have slightly smaller payments on REPAYE since your payment schedule would be extended by five years. But I’d rather you be rid of your student loans sooner. So if you have graduate student loans, you may want to stick with PAYE.

5. Do you expect your income to rise significantly down the road?

Remember how I mentioned that with REPAYE your payment will always be based on your income? Well, that stipulation could make REPAYE the wrong choice if you meet two conditions:

  1. You plan to pursue PSLF.
  2. You expect to have a big jump in income a few years down the road.

If you meet both of those requirements, you’d better choose PAYE. With PAYE, your payment will never rise higher than the 10-Year Standard Repayment Plan. And even if your income rises to the point that you no longer qualify for income-based payments, you can still stay on the plan.

How REPAYE can eat away at your PSLF forgiveness

Here’s why that matters. Let’s say that you spend four years on PAYE. But then you get a big pay raise in your fifth year that no longer qualifies you for income-driven payments on PAYE.

Well, in that case, your payment would simply revert to what it would be on the Standard Plan. And you’d still receive a significant amount of PSLF forgiveness five years down the road.

But with REPAYE, your payment would rise beyond the 10-Year Standard Repayment Plan amount. And you could significantly reduce how much PSLF forgiveness you end up receiving. In fact, if your income rose high enough, you could end up with no amount left to forgive whatsoever.

Conclusion:

When it comes to PAYE vs REPAYE, there’s no one-size-fits-all answer. For some borrowers, PAYE would be their best choice. And other borrowers may find that REPAYE is a better fit.

By asking yourself the questions above, you’ll be able to make an informed choice. And if you’re wondering whether joining an income-based repayment is the right choice in the first place, check out our guide to income-driven repayment.

About the author 

Clint Proctor

Hi, I'm Clint! I love writing about everything personal finance. In addition to this site, my work has been featured on several major publications including Business Insider, Forbes, Credit Karma, and U.S. News and World Report. My hope is that you'll be able to find plenty of helpful information and inspiration on this site to help you reach your financial goals. Thanks for visiting!

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