PAYE vs. REPAYE: Which Is Better?

You’ve entered the workforce after graduating from college, and you’re starting to get student loan bills. However, you’re struggling with entry-level income levels, high debts, or taking care of your family. You need an income-driven repayment plan for your federal student loans, and the U.S. Department of Education (DOE) offers several.

Two of the most popular plans are the Pay As You Earn (PAYE) and the Revised Pay As You Earn (REPAYE) plans. REPAYE is a newer income-driven plan that is based on PAYE, so the two plans have several similarities.

Depending on your circumstances, one plan may work better for you than the other. By comparing PAYE vs. REPAYE, you can decide which income-driven option is best for you.

Similarities Between PAYE and REPAYE

Since REPAYE is based on PAYE, there are several similarities between these income-driven student loan repayment plans. 

• Both cap out at 10% of your discretionary income per month.
• Both use your income and family size to determine a reasonable monthly payment.
• Both require recertification every year, so you must reapply with your current income tax information.
• Both adjust if your income or family size changes.
• Both allow you at least 20 years to repay your loan rather than the standard repayment plan’s term of 10 years.
• Both have interest subsidies for the first three years of repayment, so 100% of unpaid interest is forgiven rather than capitalized into the principal of your loan.
• Both plans apply to loans from the now-ended Federal Family Education Loan (FFEL) program and the current William D. Ford Federal Direct Loan program.
• Both PAYE and REPAYE are eligible income-driven plans to help you while you pursue Public Service Loan Forgiveness (PSLF).

These attributes make both plans an attractive alternative to standard, graduated, or extended student loan repayment plans with the DOE. However, there are important differences between the two. 

Major Differences Between PAYE and REPAYE

REPAYE has a similar foundation to the PAYE program, but there are crucial differences between the two, which makes one more feasible for some borrowers compared to the other. These include:

• Date you borrowed the loan. PAYE only covers newer loans. FFEL program loans must have been disbursed on or after Oct. 1, 2007, and direct loans must have been disbursed on or after Oct. 1, 2011. In contrast, REPAYE is open to older loans, since many people are still paying their FFEL loans from before 2007.
  
  
• Financial hardship. To qualify for PAYE, you must prove partial financial hardship. Under REPAYE, you do not need to prove that you struggle financially.
  
  
• Amount of your income. Both PAYE and REPAYE are about 10% of your discretionary income. However, monthly income-based payments under the PAYE option will never go higher than what you would pay each month under the standard repayment plan. If your income goes up, your payments cap out after a certain point.
  
  With REPAYE, however, payments remain 10% of your income, even if that is higher than the standard repayment plan.
  
  Additionally, married couples are treated differently under the two programs. In PAYE, your spouse’s income does not count toward your annual income for tax purposes if you file taxes separately. Under REPAYE, your spouse’s income is considered part of your income, even if you file separate taxes.
  
  
• Amount of time paying the loan. Both PAYE and REPAYE spread your payments over 20 years. REPAYE also allows graduate and professional students with higher debts, compared to undergraduates, to spread their payments over 25 years.
  
  
• Interest repayment. The federal government forgives all the accrued interest in the first three years you pay both PAYE and REPAYE. After three years, REPAYE continues to subsidize 50% of accruing interest for very low-income borrowers.
  
  
• What happens if you miss recertifying. If you do not recertify your PAYE loan by the deadline, you remain on PAYE, but your monthly payments are no longer based on your income. Instead, your required monthly payments will revert to the amount you would pay on the standard repayment plan. You can provide your loan servicer with updated income and family size information to get back on this plan.

Under REPAYE, failing to recertify means you cannot be on this program anymore. You will be placed on an alternative payment plan with monthly payments that are not based on your income. Instead, these payments revert to the amount needed to pay your loan in full within 10 years or by the REPAYE deadline, whichever is sooner.

You can get onto another income-driven payment plan if you qualify for it, but you cannot return to the REPAYE program.

The Pros and Cons of PAYE & REPAYE

The big pro is that PAYE or REPAYE can offer financial relief for those who are starting families, working entry-level jobs, or struggling with finances for another reason.

Like with other income-driven plans, there are some downsides. 

• You will pay more on the loan because more interest accrues over the longer payment period.
• Accrued interest will be capitalized into the principal of your loan if you switch plans.
• If you qualify for loan forgiveness after a certain amount of time, the Internal Revenue Service (IRS) considers this amount taxable income.
• You spend twice as long paying off your loan, which can be stressful.

Income-Driven Help Eases Your Financial Burden

To apply for either REPAYE or PAYE, or to see which one you are eligible for,  start an online application or contact your student loan’s servicer. You can also use the DOE’s online repayment calculator to see if either plan would ease your financial burden.

Working with your loan servicer also allows you to see if other repayment options work better for you, like consolidation or refinancing.