Q: Is PAYE or REPAYE better?

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Stanley tate

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In the battle of PAYE vs REPAYE, the Pay As You Earn plan is the better repayment plan. It offers greater payment flexibility for a borrower who is married. It leads to loan forgiveness faster. And it caps your monthly payment when your income increases. Basically, it gives you all the benefits of the Revised Pay As You Earn plan and throws a little bit more benefits on top.

The only problem is that few borrowers qualify for the PAYE plan.

Eligibility Requirements

The PAYE plan and the REPAYE plan are 2 of the 5 income-driven repayment plans offered by the Department of Education. These plans were created during President Obama's administration to help student loan borrowers get an affordable monthly payment.

Not all of your federal student loan debt is eligible for these repayment plans. Both plans share a basic requirement:

You must have the right type of loan (Direct Loan)

The PAYE plan has two unique requirements:

  • A payment amount requirement and
  • You must be considered a new borrower.

Let's talk about the Direct Loan requirements

Your student loan debt must be a Direct Loan

Only loans made under the Direct Loan program are eligible.

Here's a list of the eligible Direct Loan types:

  • Direct Subsidized Loan
  • Direct Unsubsidized Loan
  • Direct Plus Loan made to a graduate or professional student
  • Direct Consolidation Loan that repaid a Plus loan not made to a parent

You can find out what type of federal student loan debt you have by signing into studentaid.gov. This website has a list of every federal student loan you borrowed.

Now, let's turn to the 2 unique requirements of the PAYE repayment plan.

#1 Payment amount

You're eligible for the PAYE plan if the monthly payment amount under that plan would be less than your payment amount under the Standard Repayment plan (that's the plan with a 10 year repayment period).

You can use the Department of Education's Repayment Estimator to compare your payment amounts under each plan.

In my experience, one easy eligibility check is to compare your federal student loan debt against your annual discretionary income. If your loan balance is higher than your income, you should be eligible.

The REPAYE plan does not have a monthly payment amount requirement. You're eligible so long as you have the right student loan type (Direct).

#2 New borrower

Under the PAYE repayment plan, you're a new borrower if:

  • you had no outstanding student loan debt on a Direct or FFEL loan on or after Oct 1, 2007 and
  • you borrowed a Direct Loan on or after Oct 1, 2011.

The REPAYE repayment plan doesn't have a new borrower requirement. You're eligible so long as you have the right student loan type (Direct).

What to do with non-eligible federal student debt

For those of you who have a student loan made under the Perkins Loan program or the Federal Family Education Loan Program (Stafford Loans), all is not lost. You can make either student loan eligible for the REPAYE plan by consolidating it into a Direct Consolidation loan.

Be careful if you're a Parent Plus Loan borrower.

A Direct Consolidation won't qualify for the REPAYE repayment plan if it included a Parent Plus Loan. The only income-driven repayment plan a Parent Plus consolidation is eligible for is the income-contingent repayment plan.

What if you have parent plus loans that are not eligible for IBR, PAYE, or REPAYE?

If you need a monthly payment based on your income for your Parent Plus loans, look into loan consolidation.

If you consolidate your parent loan into a consolidation loan, your loan now qualifies for the income-contingent repayment plan. The ICR plan gives you a monthly payment based on 20% of your discretionary income.

Click here to learn more about Deferment and Repayment Options for Parent Plus Loans.

PAYE vs REPAYE: Monthly Payment

Both repayment plans calculate your monthly payment using 10% of your discretionary income.

Your discretionary income is a combination of your family size and gross income (usually adjusted gross income).

This is where the similarity between the two plans end in determining your monthly payment.

Payment cap

The PAYE plan has a built-in cap on your monthly payment. No matter how much your income increases, your payment will never be higher then it would under the Standard Repayment plan.

The REPAYE plan doesn't have a cap. If your income keeps increasing, your payment will keep increasing. Increase enough, you could end up with a much higher monthly payment than you could have under the Standard Repayment plan.

Married borrower

The other difference between the two plans is high they treat married borrowers.

The PAYE plan will count your spouse's income only if you file a joint tax return. If you file separately, only your income will be calculated.

The REPAYE plan doesn't care if you file taxes jointly or separately. They'll use your spouse's income either way.

Because of that, if you're married and trying to get the lowest allowable monthly payment, choose the PAYE repayment plan.

Click here to read Why my Spouse has to Co-Sign my Income-Driven Repayment Application

PAYE vs REPAYE: Interest Subsidy

Both repayment plans offer borrowers an interest subsidy.

Under each plan, the government will pay the interest that accrues on your Direct subsidized loans for 3 consecutive years. After that, they'll cover 50% of the interest that accrues.

You'll still be responsible for the interest that accrues on any unsubsidized loan.

PAYE vs REPAYE: Loan Forgiveness

Both plans are eligible for two different types of loan forgiveness:

  • The Public Service Loan Forgiveness Program and
  • The debt forgiveness that comes at the end of each income-driven repayment plan loan.

Let's talk about each in turn.

Public Service Loan Forgiveness

Both plans are eligible repayment plans for the PSLF program. That means the monthly payments you make under either plan are considered qualifying payments towards your 120 months so long as the payment is made on time.

Your payment is on time if you make it within 15 days of the date it's due.

PSLF and Married Borrowers

If you're a married borrower and you're eligible for the PAYE plan, choose that plan.

Because you're eligible for the PSLF program, you have an incentive to pay as little as possible towards your loan balance.

The PAYE plan gives you the lowest student loan payment if you file taxes separately. And if you file jointly, your payment will be the same under both plans unless you and your spouse's income is high. In that case, the PAYE plan is still the better repayment option.

As for the loan forgiveness that's offered at the end of each income-driven repayment plan, the PAYE plan offers loan forgiveness sooner for many st

Repayment plan loan forgiveness

The Pay As You Earn plan forgives your remaining federal loan debt at the end of the repayment period (20 years/240 months). This forgiveness includes your undergraduate school loans and your graduate school loans.

The Revised Pay As You Earn plan, on the other hand, will forgive your undergraduate federal loan debt after 20 years of repayment. If you borrowed student loans for graduate school, the remaining balance will be forgiven after 25 years/300 months of payment.

Under either plan, the balance that's forgiven will be treated as taxable income. Depending on how much is forgiven, you could end up with a huge tax bomb to deal with later in life.

In my opinion, I don't think you should worry too much about the tax bomb for the forgiven amount.

Any forgiveness is so remote, so distance, that it's almost not real.

What matters now, in the moment, is getting an affordable monthly payment. As you age, there are ways to begin preparing for retirement that can shield you from any tax liability. I encourage you to speak with an estate planning attorney to learn ways you can best prepare yourself to avoid being harmed by any future tax liability.

Final thoughts

In the battle of repayment plans, the PAYE plan is the clear winner.

The unfortunate thing is that most student loan borrowers don't qualify for the plan. So they end up choosing the REPAYE repayment plan or the Income-Based Repayment plan.

Click here to read more about the Revised Pay As You Earn Repayment Plan.

We went over a lot of information in this post. Let's talk if you need help making the right choice for you.

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Hey, I’m Tate.

I'm a student loan lawyer that helps people like you with their federal and private student loans wherever they live.

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