The PAYE (Pay As You Earn) and REPAYE (Revised Pay As You Earn) plans are two of the 4 income-driven repayment plans that the government offers federal student loan borrowers. (Sorry, private student loan holders.) Which is better? Let me tell you.
In the battle of PAYE vs. REPAYE, the PAYE plan is the better repayment plan. It offers greater payment flexibility for a married borrower. It leads to loan forgiveness faster. And it caps your monthly payment when your income increases.
The only problem is that few borrowers qualify for the PAYE plan.
Keep reading to learn how the eligibility requirements differ, how repayment is different, whether interest accrues the same, and how PAYE is better for loan forgiveness.
Disclaimer: Although I am a student loan lawyer, this article contains general information and should not be taken as legal advice. If you want legal advice that pertains to your specific situation, you should schedule a free consultation with me.
Contrasting these loans
What are the differences between PAYE and REPAYE? There are 5 key differences between PAYE and REPAYE:
- It is easier to qualify for REPAYE.
- PAYE has a monthly payment cap, whereas REPAYE is based on your income even when you start making a lot of money.
- PAYE won’t factor in your spouse’s income if you file taxes separately, but REPAYE will.
- The government may subsidize 3 years of interest on both PAYE and REPAYE plans but only continues subsidizing half on REPAYE plans.
- After the first 3 years on PAYE, the government no longer subsidizes any unpaid interest.
- Payments made on both PAYE and REPAYE plans count towards loan forgiveness programs.
Can you switch between REPAYE and PAYE? Yes, you can switch from REPAYE to PAYE or from PAYE to REPAYE (although there’s little reason you would ever want to switch from PAYE to REPAYE). As long as you qualify, you can switch back and forth every year.
PAYE vs. REPAYE: Eligibility Requirements
The PAYE plan and the REPAYE plan are 2 of the 4 income-driven repayment plans (IDRs) offered by the U.S. Department of Education. These plans were created during the Obama administration to help student loan borrowers get an affordable monthly payment.
While their names are similar, there are slightly different eligibility requirements for each loan.
Eligibility for REPAYE
What are the eligibility requirements for REPAYE? To qualify for REPAYE:
- You must have the right type of loan — a Direct Loan. Most Direct loans qualify for REPAYE, but not Parent PLUS loans lent to parents. If a graduate or professional student took out a Direct PLUS loan, that loan is eligible for REPAYE.
- You have to consolidate Stafford (FFEL) or Perkins loans into a Direct Consolidation loan to make them eligible for REPAYE. If the Direct Consolidation loan includes any PLUS loan paid to parents, it is ineligible for REPAYE.
Eligibility for PAYE
The eligibility requirements for PAYE loans include holding the correct type of loan, be considered a new borrower, and must have a certain monthly payment.
- You must hold the right type of loan — a Direct Loan. Most Direct loans qualify for PAYE, including Subsidized, Unsubsidized, a PLUS loan lent to graduate or professional students. Any consolidation loan that does not include a PLUS loan lent to a parent.
- Any Parent PLUS loans lent to parents are ineligible, as are Consolidation loans that include PLUS loans paid to parents. You can find out what type of federal student loan debt you have by signing into studentaid.gov.
- You have to consolidate Stafford (FFEL) or Perkins loans into a Direct Consolidation loan to make them eligible for PAYE. If the Direct Consolidation loan includes any PLUS loan paid to parents, it is ineligible for PAYE.
- You must be considered a new borrower. To be a “new borrower,” you must meet the following two requirements. You must have had no outstanding student loan debt on a Direct or FFEL loan on or after Oct 1, 2007. You must have received your first disbursement from a Direct Loan on or after Oct 1, 2011.
- Your monthly payment under PAYE must be lower than your monthly payment under a standard 10-year repayment plan. This just means the government won’t require you to pay a higher monthly payment than you would under the normal plan. Some sources call this “partial financial hardship.” You can use the Department of Education's Loan Simulator to compare your payment amounts under each plan.
One easy eligibility check is to compare your total federal student loan debt against your annual discretionary income. If your debt is higher than your discretionary income, you should be eligible for an IDR plan.
What to do if you don’t qualify for PAYE or REPAYE
You still have options for those of you who have a student loan made under the Perkins Loan program or the Federal Family Education Loan Program (AKA Stafford Loans).
You can consolidate most student loans to make them eligible for the REPAYE plan, including Perkins or FFEL/Stafford loans. However, any Direct Consolidation Loan that includes a Parent PLUS loan is ineligible for the REPAYE plan.
A Direct Consolidation won't qualify for the REPAYE repayment plan if it includes a Parent PLUS Loan. The only income-driven repayment plan a Parent PLUS consolidation is eligible for is the Income-Contingent Repayment (ICR) plan.
Parent PLUS loans made to parents (not graduate or professional students) are ineligible for any income-driven repayment plans unless you consolidate. If you need a monthly payment based on your income for your Parent PLUS loans, you can consolidate and qualify for ICR.
An ICR plan (Income-Contingent Repayment) gives you a monthly payment based on 20% of your discretionary income. ICR is the only income-driven repayment option available for Parent PLUS loan borrowers, and only after you’ve consolidated your PLUS loans.
This is a more comprehensive look at Deferment and Repayment Options for Parent PLUS Loans.
Remember, consolidation is different from student loan refinancing. A private refinance loan can include both federal and private loan types, whereas a federal consolidation loan is only for federal student loans.
Refinancing is for getting a lower interest rate but can cost borrowers many federal loan benefits and options.
PAYE vs. REPAYE: Monthly Payments
Both PAYE and REPAYE 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).
Is there a difference in payments with REPAYE and PAYE? Yes, there are two differences in how REPAYE and PAYE plans calculate monthly payments:
- Payment caps
- Married borrowers
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 than it would be under the Standard Repayment plan.
The REPAYE plan has no payment cap. If your income keeps increasing, your payment will keep increasing. Eventually, you could end up with a higher monthly payment than you would have under the Standard Repayment plan.
Pro tip: If your monthly payment rises above what you would pay on a 10-year Standard Repayment plan, consider not recertifying your income. You will automatically be placed on an “alternative repayment plan,” which might actually lower your monthly student loan payments.
The only issue with this is that, if you ever want to return to REPAYE — perhaps when your income dips below a certain threshold — you will need to pay what you would have paid during the months you were not on REPAYE.
Two examples of failing to recertify income for REPAYE:
- Imagine you don’t recertify your income one year because your monthly payment on REPAYE is higher than it would be on a standard 10-year plan. There is no penalty if you simply stay on that Standard Repayment plan for the remainder of your loan repayment term.
- Now imagine the same situation, except that the following year, your income dips, and you want back on REPAYE. Your loan servicer will check your new income documentation to see what you would have paid during that last year if you were on REPAYE. If your standard payment was $500/month, but your REPAYE amount would have been $600/month, your lender notes that you would have paid an extra $1,200 on REPAYE. They tack that $1,200 onto the remaining monthly payments, divided by however many months remain in your loan term. If you have 8 years of payment left, an extra $12.50 ($1200/8 years/12 months in a year) will be added to every monthly payment from then on.
The other difference between PAYE and REPAYE is how these plans treat married borrowers.
The PAYE plan counts 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 to figure out your monthly payment.
Because of that, if you're married and trying to get the lowest allowable monthly payment, choose the PAYE plan.
Check out this handy article on Why Your Spouse Needs To Be A Co-Signer On Your IDR Application.
PAYE vs. REPAYE: Interest Subsidy
Both PAYE and REPAYE offer you an interest subsidy.
Under both plans, if your monthly payment won’t pay towards interest, the federal government pays the interest that accrues on your Direct Subsidized Loans for the first 3 years of your student loan repayment plan.
- For PAYE plans, you’re on the hook for interest that accrues after the first 3 years.
- For REPAYE plans, the government will cover 50% of the interest that accrues after the first three years. You'll still be responsible for the interest that accrues on any Direct Unsubsidized Loan.
In the area of interest subsidy, REPAYE wins out over PAYE. Except when your REPAYE monthly payment is so high (because there’s no payment cap) that your monthly payment amount covers interest.
PAYE vs. REPAYE: Loan Forgiveness
Both PAYE and REPAYE are eligible for 2 different types of student loan forgiveness:
- Public Service Loan Forgiveness Program (PSLF)
- Debt forgiveness that comes at the end of an income-driven repayment plan
Public Service Loan Forgiveness
Both PAYE and REPAYE are eligible repayment plans for the Public Service Loan Forgiveness (PSLF) program.
Quick refresher: To qualify for PSLF, you need to make 120 months of on-time voluntary payments.
- Garnishment for defaulted loans doesn’t count toward PSLF.
- Late payments don’t count toward PSLF.
- Deferred payments count in some circumstances.
- Payments made on PAYE and REPAYE plans do count toward PSLF.
The monthly payments you make under either plan are considered qualifying payments towards that magical 120 months so long as the payment is made on time. Your federal student loan payment is considered “on-time” if you make it within 15 days of the due date.
Is PAYE or REPAYE better for PSLF? A PAYE plan is better for PSLF because you’re incentivized to pay the lowest monthly payment possible, and PAYE is more likely to give you that lower monthly payment for several reasons.
If you're eligible for the PSLF program, you want to pay as little as possible towards your loan balance. If you're a married borrower and you're eligible for the PAYE plan, choose that plan. It won’t count your spouse’s income if you file taxes separately.
The REPAYE plan counts your spouse’s income even if you file separately, meaning your monthly payment will not be as low as possible.
The PAYE plan gives you the lowest student loan payment if you file taxes separately from your spouse. If you file jointly, your payment will be the same under both plans.
In either case, the PAYE plan is still the better repayment option.
Repayment plan loan forgiveness
Both PAYE and REPAYE forgive your remaining loan balance at the end of the repayment period. Again, this means PAYE is a better option.
The PAYE plan forgives your remaining federal loan debt at the end of the repayment period, which would be 20 years/240 months. This forgiveness includes your undergraduate study loans and your graduate school loans.
The REPAYE plan, on the other hand, will forgive your federal undergraduate loans after 20 years of repayment. If you borrowed student loans for grad school, the remaining balance would be forgiven after 25 years/300 months of payment.
Under either plan, the forgiven amount used to be treated as taxable income. Not anymore. In 2021, Congress passed the American Rescue Act, which made forgiven student debt non-taxable until 2026. (The plan may be renewed, but that is the current limit.)
No more worrying about a tax bomb later in life.
Is PAYE better than REPAYE?
In the battle of income-driven repayment plans, the PAYE plan is the clear winner, due to the monthly payment cap, tax filing, and shorter repayment period for graduate students. For most people, PAYE is better than REPAYE.
What are the benefits of REPAYE? REPAYE does have an advantage over PAYE when it comes to interest subsidy and eligibility.
Unfortunately, most student loan borrowers don't qualify for the superior PAYE plan. So they end up choosing the REPAYE plan or the Income-Based Repayment plan (IBR).
What is the difference between PAYE, REPAYE, and IBR? The differences between PAYE, REPAYE, and IBR boil down to eligibility. Typically, the better the terms of an income-driven repayment plan, the harder it is to qualify.
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