PAYE vs. REPAYE: Which plan should you choose?

Updated November 13, 2017 – PAYE and REPAYE are the two main “income-driven” payment plans offered to pay off your federal student loans. The goal of these payment plans is to make sure that you pay back your student loans at a payment you can afford based on your income.

PAYE was established first; REPAYE is a revised version. PAYE is only for those who have high loan payments in relation to monthly income, while REPAYE can be used by anyone. Remember these programs are only for federal student loans, not private bank loans.

You must choose to be put into the PAYE or REPAYE program. You will not be put into either program automatically. If you don’t choose one of them, you’ll be put into the Standard Repayment Plan, which could mean higher monthly payments (though it might also mean your loan gets paid back faster).

To change to PAYE or REPAYE, you must contact your loan servicer (the organization that actually takes your monthly payments). If you don’t know your loan servicer, you can call 1-800-433-3243 or log in to your account at https://studentaid.ed.gov/sa/?login=true to find out.

Your loan could be forgiven (eventually)

Before we look at each plan and tell you the advantages and disadvantages of each, it’s important to note this: with either plan, you have a “repayment period.” If you do not pay off your full loan within that repayment period, but have made the required payments under the program, the remainder is forgiven. As in, you don’t have to pay it. (Before you get too excited, the repayment period will be at least 20 years. Also, you may have to pay tax on any loan amount that is forgiven.)

PAYE

Eligibility:

  • Your loan must have been taken out on or after October 1, 2011. In addition, you can not have any previous Direct Loans or FFEL loans taken out before October 1, 2007 that still have outstanding balances.
  • Your calculated payment must be less than what the payment would be under the Standard Repayment Plan. (More on this below.)

How payments are calculated:

  • Your payment is 10% of your monthly “discretionary income,” but the payment will never go higher than what you would pay under the Standard Repayment Plan. (This is an important difference vs. REPAYE.) If your income gets too high to qualify, you would simply be moved to the Standard Repayment Plan. (Note that “discretionary income” is defined as the difference between your Adjusted Gross Income and 150% of the poverty guidelines based on your family size and where you live. Don’t worry; your loan servicer will calculate this for you.) If married, only the actual borrower’s income is considered, provided you file your taxes separately.
  • If your payments are not high enough to at least cover the interest accruing on the loan, the government will pay the difference between your payment and the interest due for the first 3 years on subsidized loans but not beyond that point.

Repayment Period:

  • 20 years

REPAYE

Eligibility:

  • Any borrower of a Federal student loan is eligible, regardless of income, loan size, or when you took out your loan.

How payments are calculated:

  • Your payment is 10% of your monthly “discretionary income.” Note that this means your payment could actually go higher than it would be under the Standard Repayment Plan if your income increases beyond a certain level. Note also that if you are married, the combined income of the spouses is considered when calculating your payment.
  • If your payments are not high enough to at least cover the interest accruing on the loan, the government will pay the difference between your payment and the interest due for the first 3 years on subsidized loans, and half of the difference beyond that point. Also, the government will pay half the difference on any unsubsidized loans you have.

Repayment Period:

  • 20 years if you only have undergraduate loans; 25 years if you have loans from post-graduate study.

How do I choose?

For most people, the choice is really not PAYE vs. REPAYE. Instead it is a choice between one of those programs and the Standard Repayment Plan. Here is how to look at these choices:

  • If you are eligible for the PAYE plan, it makes sense to enroll. This way, you know that your payments will always be the lowest they can possibly be — there is no downside to this program, other than the fact that you may pay more interest over the course of the loan than with the Standard Repayment Plan. However, if you don’t have the income to make the payments under the Standard Repayment Plan, that doesn’t matter anyway. You need to get your payments down as low as possible, and this is the way to do it.
  • If you don’t qualify for the PAYE plan, we would suggest you enroll in REPAYE. Here’s why: your payments under REPAYE will be based on your current income, so you are guaranteed to always have a payment that you can afford. If your income dips, your payment dips along with it. And, when your income rises and you are in a better position to pay more, your loan payment will increase as well. It is true that your payment under REPAYE could go higher than with the Standard Repayment Plan if your income increases. However, that is a risk you should be willing to take. It is more important to protect yourself from defaulting on your loans if your income is low than it is to worry about having to pay a greater amount if your income rises. If your income does rise and your payment rises, try to be happy that you are making more money instead of worrying about the size of your loan payment.

You must “re-up” every year

With either PAYE or REPAYE, you will be required to report your income at least once per year to see if your payment amount should be re-calculated up or down.

If your income decreases in between the times you are required to report, you can contact your loan servicer earlier than the yearly report to have your payments lowered accordingly. However, if your income increases due to a raise or other reason, you are not obligated to report that any earlier than the standard yearly reporting time.