PAYE vs. REPAYE: Which is better to pay off student loans?

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If you’re having a hard time making your federal student loan payments, an income-driven repayment (IDR) plan like Pay As You Earn (PAYE) or Revised Pay As You Earn (REPAYE) could help. PAYE and REPAYE are repayment plans for federal student loans that set your payment at 10 percent of your discretionary income. After 20 or 25 years of payments, your remaining balance is forgiven.

The choice of PAYE versus REPAYE comes down to your level of financial hardship, your desired repayment period and your marital status. PAYE is typically the better option for married borrowers, while REPAYE is usually better for single borrowers.

What is income-driven repayment?

Income-driven repayment (IDR) plans are programs that base your monthly student loan payments on your actual income. An IDR can slash the size of your monthly payment and may result in partial forgiveness of your federal student loan debt after 20 or 25 years of payments.

Your monthly payment will be a percentage of your “discretionary income,” or the difference between your annual income and 150 percent of your state’s poverty benchmark (determined by family size). In other words, it’s the money left over after you pay standard expenses for a family of your size (rent, utilities, food, taxes, etc.).

The catch with IDR Plans is that not everyone can use this benefit; they’re available only for certain types of federal student loans. Eligibility may also be based on your income and family size. Often, though not always, you need to demonstrate financial hardship on an IDR application in order to qualify.

You must also recertify your continuing eligibility each year if you’re using an IDR Plan. Should your income or family size change, the Department of Education may need to adjust your repayment terms, or you may no longer qualify to participate in your chosen IDR Plan.

How has the coronavirus affected income-driven repayment plans?

In response to the coronavirus pandemic, federal student loans held by the U.S. Department of Education are eligible for a payment pause and interest waiver through Sept. 30, 2021. If you are currently in an income-driven repayment plan, suspended payments during this time will still count toward income-driven repayment forgiveness. If your income has been affected by the coronavirus pandemic, you can also update your information to qualify for a lower monthly payment amount once the administrative forbearance period ends.

Key differences between REPAYE and PAYE

PAYE REPAYE
Eligible loans Direct Loans; FFEL and Perkins Loans if consolidated (loans made to parents are ineligible) Direct Loans; FFEL and Perkins Loans if consolidated (loans made to parents are ineligible)
Repayment term 20 years 20 years for undergraduate loans, 25 years for graduate loans
Qualification  May have to prove financial hardship All borrowers with qualifying loans are eligible
Payment cap 10% of discretionary income, no more than what you’d pay on the standard 10-year repayment plan 10% of discretionary income
Interest subsidy  Government pays surplus interest charges on subsidized loans for three years Government pays surplus interest charges on subsidized loans for three years, 50% in subsequent years; Government pays 50% of surplus interest charges on unsubsidized loans at all times
Marriage penalty Spouse’s income is not considered if married filing separately Spouse’s income is considered in all cases

What is Pay As You Earn (PAYE)?

Pay As You Earn is an income-driven repayment plan that generally bases your monthly payment on 10 percent of your discretionary income, though your payments can’t exceed what you would pay under the standard 10-year repayment plan. Additionally, if you’re married but file a separate tax return, your spouse’s income will not be included. According to student loan expert Mark Kantrowitz, PAYE yields the lowest monthly loan payments for most borrowers.

After 20 years of repayment, your student loan balance will typically be eligible for forgiveness. But if you also qualify for Public Service Loan Forgiveness, your remaining loan balance may be forgiven after just a decade.

Only Direct Loans made to students are eligible for PAYE, though certain FFEL and Perkins Loans are eligible if they’re consolidated. In order to qualify, you must be a new borrower (having no outstanding loan balance prior to Oct. 1, 2007), with a disbursement of a Direct Loan on or after Oct. 1, 2011.

What is Revised Pay As You Earn (REPAYE)?

Revised Pay As You Earn is an income-driven repayment plan that paved the way for millions of federal student loan borrowers ineligible for other IDR Plans to lower their monthly payments.

Like PAYE, REPAYE limits the size of your federal student loan payments to 10 percent of your discretionary income, although there is no cap — so if your income grows too high, you may pay more than what you would on the standard repayment plan. Additionally, REPAYE is subject to a “marriage penalty”; your loan payments are based on the income of both you and your spouse, even if you file a separate tax return.

Repayment terms for the REPAYE plan are 20 years for eligible undergraduate loans and 25 years for eligible graduate loans. Once you complete the repayment period, your remaining student loan balances may be forgiven. And if you qualify for Public Service Loan Forgiveness, you can use it alongside REPAYE to potentially see your remaining balance wiped out after just 10 years of income-adjusted payments.

There are fewer eligibility requirements for REPAYE. As long as you have an eligible loan — Direct Loans made to students, as well as FFEL and Perkins Loans if consolidated — you may qualify.

What is the interest subsidy?

With PAYE and REPAYE, your adjusted payments might be too small to cover the interest your loan accrues each month. This is known as negative amortization. But both plans offer help for borrowers facing this problem in the form of an interest subsidy.

Under PAYE, surplus interest charges on subsidized loans aren’t capitalized. (Capitalized interest means that the unpaid interest is added to your loan principal balance.) Instead, the federal government covers the bill for the first three years of your plan. If you leave the plan, limited interest capitalization may occur.

With the REPAYE plan, the Department of Education also covers the surplus interest charges on subsidized loans for up to three years if your payment is too small to pay it. After three years, the interest subsidy will continue to pick up the tab for half of any excess interest fees that add up on your loan.

Eligible unsubsidized loans may receive a 50 percent interest subsidy from day one under REPAYE. Overall, the REPAYE interest subsidy is the clear winner for most borrowers.

How to choose which is right for you

There are several factors to consider when considering REPAYE versus PAYE to alter your student loan payments.

  • REPAYE features easier qualification standards. For example, you don’t have to prove financial hardship to participate in the plan. If you’re worried that you won’t qualify for PAYE, REPAYE may be a viable alternative.
  • PAYE caps your payment size. If your monthly payment is more than what you’d pay under the standard 10-year repayment plan, you won’t qualify for PAYE.
  • REPAYE is generally better for single borrowers. If you’re married or plan to marry in the future, your spouse’s income could increase the size of your monthly payment under REPAYE.
  • PAYE forgives remaining graduate debt sooner. Eligible loans for graduate studies may be forgiven after 20 years under PAYE. With REPAYE, you must participate in the plan for 25 years before you’re eligible for forgiveness of eligible graduate debt.

Can you switch from REPAYE to PAYE?

You can change repayment plans on federal student loans whenever you need to, and you can switch among any of the repayment plans, says Kantrowitz. He suggests contacting your loan servicer if you want to change repayment plans.

However, when looking to switch plans, you must still satisfy the eligibility criteria for the program. You will also want to review the pros and cons of each program and consider carefully whether it makes financial sense to switch from one to the other. In some cases, it may be beneficial.

“For some people it may make sense to switch from REPAYE to PAYE if they’re expecting a major bump in income,” says Michael Micheletti, director of corporate communications at Freedom Financial Network. “In that case, they could take advantage of PAYE’s 10-year Standard Repayment Plan payment cap, which lowers the total amount of the loan, including interest, when the income increases. But for someone with a very large loan, and who may never hit that 10-year Standard Repayment Plan cap, it doesn’t make sense to switch.”

Crunch the numbers with a loan calculator or talk to your loan servicer about your plan to switch programs, as there are many variables to consider.

PAYE and REPAYE vs. other income-driven repayment plans

The Department of Education offers five income-driven repayment plans in total. If you think an IDR Plan is the best option for you, you should compare the benefits of each plan based on your personal situation (income, family size, loan type, etc.). Whether you can satisfy each plan’s eligibility requirements will be a key component in deciding which IDR Plan is the ideal fit. Thankfully, you can submit one IDR application to be considered for all plans.

Federal Student Aid offers a loan simulator online that can help you crunch the numbers, and the Bankrate student loan calculator lets you compare monthly payments, interest rates and total interest paid. Your student loan servicer may also be able to assist you.

Income-driven repayment plan Best for
Income-Sensitive Repayment (ISR) If you want a short repayment timeline
Income-Contingent Repayment (ICR) If you have parent PLUS loans
Income-Based Repayment (IBR) If you have FFEL loans
Pay As You Earn (PAYE) If you don’t anticipate an increase in income
Revised Pay As You Earn (REPAYE) If you have graduate loans

When to consider refinancing as a better option

Income-driven repayment plans can be a good solution for many federal student loan borrowers. But PAYE, REPAYE and other IDR Plans aren’t right for everyone.

For example, private student loans are not eligible for federal IDR Plans. Also, if you have federal student loans but your income is too high to qualify for PAYE (or too high for REPAYE to make sense), you may want to consider refinancing your student loans instead.

When you refinance your student loans through a private lender, there’s a chance that you could secure a lower interest rate – especially now, with the coronavirus pandemic driving interest rates to near record lows. A lower rate might save you money and could potentially help you pay off your debt sooner.

However, refinancing with a private lender also means giving up government benefits and COVID-19 relief if you’re a federal student loan borrower. Income-driven repayment plans, student loan forgiveness and the student loan forbearance period, for example, will no longer be an option.

You should take time to review the pros and cons of refinancing federal student loans before you make a final decision.

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Written by
Michelle Black
Contributing writer
Michelle Lambright Black, founder of CreditWriter.com and HerCreditMatters.com, is a leading credit expert with nearly two decades of experience in the credit industry. She specializes in credit reporting, credit scoring, financing (business, mortgages, credit cards, loans), debt eradication, budgeting and identity theft. Michelle is also a certified credit expert witness and personal finance writer who has been published by numerous outlets including Experian, Forbes, U.S. News & World Report, and Reader’s Digest, among others.
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Student loans editor