Paye vs. Repaye: Which Repayment Plan Should You Pick?
Deciding how to pay your loans off is important for your financial planning. This article will breakdown some of the repayment options you may have.
Signing up for an income driven repayment plan may be a smart choice if you find you’re having a hard time keeping up with your student loan payments. Currently, there are four plans available to you, including Pay As You Earn (PAYE) or Revised Pay As You Earn (REPAYE). In most cases, you may be able to qualify for REPAYE much easier. However, depending on your situation, PAYE may be the better option.
Considering both can help you lower your monthly payments, there are several differences that could affect which one you want to pick. Here, we dive into the difference between PAYE and REPAYE and how to apply for either plan.
What are the Pay As You Earn (PAYE) or Revised Pay As You Earn (REPAYE) Plans?
PAYE and REPAYE are income driven repayment plans that will lower your monthly loan payment to 10% of your discretionary income. They also count as a qualifying payment if you want to enroll in a student loan forgiveness program — Public Service Loan Forgiveness is one of them.
Though PAYE may be harder to qualify for, it might offer better benefits to those who are married or have graduate loans. For one, you’ll not only pay a maximum of 10% of your discretionary income, you won’t be required to pay more than what you’d have to pay each month on a standard 10-year repayment plan. Plus, your spouse’s income isn’t included in your discretionary income if you file your taxes separately.
Other features include the ability to extend your loan term to 20 years and needing to demonstrate some financial hardship to qualify. What this means is that your annual loan payments are higher than 10% of the difference between your adjusted gross income from your taxes and 150% of the poverty line for your family size in your state of residence.
In most cases, federal Direct loans that were disbursed on or after October 1, 2011 will qualify.
Though the benefits for REPAYE aren’t as aren’t as plentiful as PAYE, you won’t have to show financial hardship. Your monthly payment will also be capped at 10% of your discretionary income. However, your payments may be higher than a standard 10-year monthly payment. Plus, even if you file taxes separately with your spouse, their income will count towards yours.
The good news is that anyone who has a qualifying loan can apply for REPAYE. Your repayment terms will be 20 years for undergraduate loans and 25 for graduate ones. Once your
For both loans, you won’t have to pay any interest if you’re on Direct Subsidized Loans for the first three years. For REPAYE, however, you’ll also get a 50% subsidy for the entirety of your loan if you’re on a Direct Unsubsidized Loan.
When you decide to leave the REPAYE plan, any unpaid interest will be capitalized. In other words, the unpaid interest will be added to your loan balance. If you leave a PAYE plan, then only your outstanding interest will be capitalized.
PAYE vs. REPAYE: What’s the difference?
Here are some more details about the differences between both types of income driven repayment plans:
Partial financial hardship
Most federal Direct loans issued on or after October 1, 2011
Most Federal Direct loans
10% of discretionary income but can’t be higher than standard 10-year repayment
10% of discretionary income but may be higher than standard 10-year repayment
Student loan forgiveness repayment period
20 years for undergraduate loans and 25 years for graduate loans
Keep in mind that Parent PLUS loans aren’t eligible for either PAYE or REPAYE. However, you can qualify for a Direct Consolidation Loan and be eligible for income-contingent repayment (ICR).
Choosing Between PAYE and REPAYE
When it comes to choosing between PAYE and REPAYE, you’ll want to keep in mind your financial situation, now and in the future. For instance, if you’re struggling with payments and have what is considered a partial financial hardship PAYE may be the better choice. You’ll be able to lower your monthly payments.
However, if you think your income will rise down the line, then signing up for REPAYE may be the smarter option because you could lose eligibility for PAYE. If this happens, you might have any accrued interest added to your loan balance.
The type of loan you have should also be taken into consideration. For unsubsidized loans, choosing REPAYE may be better since you’ll get interest subsidies. However, if you qualify for either type of repayment plan, then PAYE is generally better since you’ll get more relief for your monthly loan payments.
If you’re married, you’ll want to think about how your spouse’s income will affect your income driven repayment plan. Since your spouse’s income won’t affect a PAYE plan, it might be the better choice if you file your taxes separately.
Before choosing either plan, contact your loan servicer to talk through your options. They may be able to help you and walk you through scenarios that might help you qualify for the lowest monthly payments.
How to sign up for PAYE or REPAYE
Here are the general steps to take when signing up for either repayment plan:
- Decide on a plan and contact your loan service to apply.
- Make sure that you’re continuing to make your loan payments until you’ve received a notification that you’re approved for the income driven repayment plan. Not doing so could put you at financial risk.
- Make your new monthly payments.
Reduce Your Monthly Payments by Refinancing Your Student Loans
There are other options to lower your monthly loan payments instead of being on an income driven repayment plan. Refinancing your student loans is a possibility, especially if you have good credit. If you can get a new loan with a significantly lower interest rate, your monthly payments will go down and you’ll pay less overall for your loan.
That being said, you may lose federal benefits, so make sure you first shop around for lenders and weigh all the pros and cons before making a decision. If you want to find the best deal, Juno helps you by negotiating the lowest rates to help you save as much as possible on your student loans. You can sign up for free.
Sarah Li Cain
Sarah Li Cain is a finance writer and a candidate for the Accredited Financial Counselor designation whose work has appeared in places like Bankrate, Business Insider, Financial Planning Association, Investopedia, Kiplinger, and Redbook. She’s the host of Beyond The Dollar, where she and her guests have deep and honest conversations about money affects their well-being.
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