What is the Difference Between a Pay As You Earn and a Revised Pay As You Earn Repayment Plan?
TL;DR: Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) are both income-driven student loan repayment plans, but they have key differences in eligibility, payment calculation, interest subsidy, and spousal income consideration. PAYE is more restrictive but can offer a lower payment cap for those who qualify, while REPAYE is more accessible and provides an interest subsidy for higher balances, which can help reduce costs in the long run.
Income-driven repayment plans (IDRs) offer borrowers a way to manage student loan payments based on their income and family size. Both Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) plans are designed to make loan repayment more manageable for borrowers with high debt-to-income ratios. However, understanding the distinctions between these two plans is essential to make the best financial decision. Let’s explore the key differences.
1. Eligibility Requirements
- PAYE: To qualify for PAYE, borrowers must demonstrate “partial financial hardship” (PFH), meaning their monthly loan payment under PAYE would be less than their payment on the standard 10-year plan. Additionally, only borrowers with federal Direct Loans disbursed after October 1, 2007, and who took out at least one disbursement after October 1, 2011, are eligible.
- REPAYE: This plan is open to any borrower with eligible federal student loans, with no PFH requirement. So even if a borrower’s income increases, they can remain on REPAYE.
Key Takeaway: REPAYE is more accessible, while PAYE is limited by financial hardship requirements and specific loan dates.
2. Monthly Payment Calculation
Both PAYE and REPAYE set monthly payments at 10% of discretionary income (income after essential costs), but how they handle spousal income differs:
- PAYE: For married borrowers filing separately, only the borrower’s income is considered in the payment calculation.
- REPAYE: Regardless of tax filing status, REPAYE considers the combined income of both spouses, potentially increasing monthly payments for married borrowers.
Key Takeaway: PAYE can be advantageous for married borrowers filing separately, as it excludes spousal income from payment calculations.
3. Interest Subsidy
Federal student loans accrue interest even when payments are reduced under IDR plans, potentially leading to “unpaid interest” that can cause loan balances to grow. REPAYE offers an interest subsidy to help counterbalance this:
- PAYE: Does not include an interest subsidy, meaning all unpaid interest will capitalize, adding to the loan balance over time.
- REPAYE: Subsidizes 50% of unpaid interest on subsidized loans and 50% of unpaid interest on unsubsidized loans, which can be especially helpful for borrowers with high-interest loans.
Key Takeaway: REPAYE’s interest subsidy can save borrowers significant amounts in the long term, especially those with substantial loans.
4. Loan Forgiveness Timeline
Both PAYE and REPAYE offer loan forgiveness after a period, though the timelines differ:
- PAYE: Forgives any remaining balance after 20 years of qualified payments for all borrowers.
- REPAYE: Offers forgiveness after 20 years for undergraduate loans but requires 25 years for loans used for graduate or professional studies.
Key Takeaway: PAYE provides a shorter forgiveness period for borrowers with graduate loans compared to REPAYE.
Which Repayment Plan Is Right for You?
Choosing between PAYE and REPAYE depends on factors like marital status, spousal income, loan balance, and your long-term financial goals. PAYE may be a better fit for borrowers who qualify for PFH, are married, and want to exclude spousal income from payment calculations. On the other hand, REPAYE’s open eligibility and interest subsidies make it a strong option for borrowers seeking a lower long-term interest burden, particularly those with larger loan balances.
Understanding these differences empowers borrowers to pick the most strategic repayment plan for their unique financial situation. Both PAYE and REPAYE provide pathways to more affordable monthly payments and loan forgiveness, helping borrowers tackle student debt while balancing other financial goals.
Disclaimer: The information provided in this post is for general informational purposes only and should not be considered financial advice. Student loan situations can vary significantly based on individual circumstances, and decisions around deferment or forbearance can have lasting financial impacts. Before making any changes to your loan repayment plan, consult a qualified financial advisor or your loan servicer to understand the best options for your unique situation.