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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) can 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 preferred repayment period and whether or not you’re married. PAYE is typically the better option for married borrowers, while REPAYE is usually better for single borrowers.

PAYE vs. REPAYE: Key differences

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 cannot exceed what you would pay under the standard 10-year repayment plan.

Additionally, if you’re married but file separate tax returns, your spouse’s income will not be included in the calculations. According to student loan expert Mark Kantrowitz, PAYE yields the lowest monthly loan payments for most borrowers. After 20 years of payments, your student loan balance will typically be eligible for forgiveness.

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), and your loans must have been disbursed on or after Oct. 1, 2011.

With PAYE, your monthly payments might be too small to cover the interest your loan accrues each month. This is known as negative amortization. Under PAYE, surplus interest charges on subsidized loans are not 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, some amount of interest may be capitalized.

What is Revised Pay As You Earn (REPAYE)?

Revised Pay As You Earn is an income-driven repayment plan that limits the size of your federal student loan payments to 10 percent of your discretionary income. However, there is no cap on monthly payments. If your income grows too high, you may pay more than what you would on the standard repayment plan.

Also, 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, the remaining student loan balance may be forgiven.

There are fewer eligibility requirements for REPAYE than PAYE; you must have an eligible loan, which includes Direct Loans and FFEL or Perkins Loans consolidated into a Direct Consolidation Loan.

If your adjusted payments are too small to cover the interest your loan accrues each month, the Department of Education covers the surplus interest charges on subsidized loans for up to three years. After three years, the interest subsidy will continue to cover 50 percent 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.

Which is better: PAYE or REPAYE?

There are several factors to consider when deciding whether you should choose REPAYE or PAYE:

  • 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 would 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 become eligible for forgiveness of any graduate debt.

Can you switch from REPAYE to PAYE?

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

Michael Micheletti, director of corporate communications at Freedom Financial Network, says that switching from REPAYE to PAYE might benefit borrowers who are about to receive a raise.

“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,” he says. “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. It can explain how your monthly payment may change.

Alternatives to PAYE and REPAYE

The Department of Education offers five total income-driven repayment plans. Depending on your income, family size and loan type, a different plan may work best for you. The official Federal Student Aid website offers a loan simulator that can show what your monthly payment would be under each repayment plan. Thankfully, you only need to submit one application to be considered for all IDR plans.

If you don’t think that an income-driven repayment plan is right for you, you can also lower your student loan payments by refinancing your loans to a lower interest rate with a private lender.  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.

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Written by
Michelle Black
Contributing writer
Michelle Lambright Black is a credit expert with over 19 years of experience, a freelance writer and a certified credit expert witness. In addition to writing for Bankrate, Michelle's work is featured with numerous publications including FICO, Experian, Forbes, U.S. News & World Report and Reader’s Digest, among others.
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Student loans editor