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PAYE vs REPAYE for Student Loans: which one is the best to choose?

In PAYE vs REPAYE, in situations where both partners have a salary, PAYE is stronger for married borrowers.

Pay As You Earn (PAYE) and Revamped Pay As You Earn (REPAYE) are both federal revenue-driven repayment programmes that extend the duration of your student loan, set 10% of your disposable income payments and waive any residual balance after the repayment period.

Generally speaking, in cases where both partners have an income, PAYE is a better choice for married borrowers. For single borrowers and people who don’t apply for PAYE, REPAYE is usually better.

But making sense of the subtle distinctions of PAYE vs REPAYE will make your mind spin:

REPAYE vs PAYE

PAYE vs REPAYEPAYEREPAYE
RequirementsShould have a partial financial challenge.

Must receive a federal loan on or after Oct. 1, 2007 and at that time did not receive unpaid federal loans. The loan disbursement must either have been issued on or after Oct. 1, 2011, or combined on or after that date.
Qualified individuals with federal loans are eligible.
Payment amount10 percent of income at discretion, but never more than the regular 10-year contract you will pay.With no limit, 10% of net income. Payments can be higher than in the regular package.
Does your spouse’s income count?No, if you file taxes separately.Yes, even if you file taxes separately.
Repayment period20 years20 years if you only have undergraduate loans.
25 years if you have any graduate school loans.
Interest SubsidyIn the first three years of settlement, the government pays 100 per cent of outstanding interest on subsidised loans.In the first three years of repayment, the Government pays 100% of the outstanding interest on subsidised loans.
 
It pays 50% of the outstanding interest on subsidised loans for the first three years and on non-subsidized loans for all periods.
Capitalization limitWhen you no longer qualify for PAYE because your revenue is too high — if you don’t annually re-certify your revenue — the amount of interest you will cover is limited to 10% of your loan balance when you start the plan. When you enter the plan.No limit to the amount that can be capitalized.

When debating PAYE vs REPAYE, you’ll need to do the calculations to decide which plan nets out in your favour, but here are guidelines for making the decision.

» MORE: Income-driven repayment: For you, is it right?

1. Make sure that IDR matches you while doing REPAYE vs PAYE

For any of the four income-driven repayment (IDR) programmes, including PAYE vs REPAYE, private student loans are not eligible.

There are two main reasons for preferring PAYE vs REPAYE for the repayment of federal student loans:

Your target is likely to provide the lowest possible monthly payment in either case, so an income-driven repayment plan makes sense.

» MORE: Estimate the IDR payments for you

You can if you don’t follow PSLF and can afford to make contributions on the regular repayment plan. By sticking with the regular plan, you’ll save on interest and become debt-free quicker. To get a better interest rate and save money, if you have good credit, you can go a step further and refinance student loans.

It’s also perfectly perfect to temporarily go on income-driven repayment. Doctors, for example, may want to make payments during residency and refinancing on PAYE vs REPAYE when they become a participant.

» MORE: 5 medical school debt repayment strategies

2. Check, If you qualify for PAYE while comparing PAYE-vs-REPAYE

You have to fulfil all of these conditions to be eligible for PAYE:

  • On or after Oct. 1, 2007, they obtained a federal loan and did not have any unpaid federal loans at that time.
  • On or after Oct. 1, 2011, or combined on or after that date, have obtained a loan disbursement.
  • Have a partial financial hardship, meaning that the PAYE rate will be smaller than the regular repayment plan would be.

» MORE: PAYE: How and for whom it works best

The income eligibility condition of PAYE essentially means that you qualify only if you get a lower payment to benefit from the package. Your payment would never be greater on PAYE than it would be on the regular repayment schedule.

If you do not meet the criteria of PAYE, your decision is simple: select REPAYE.

Both federal loan holders, regardless of income or when they have lent, qualify for REPAYE. But if your income is sufficiently high, your REPAYE payment could be greater than it would be on the regular repayment plan.

» MORE: REPAYE: How and for whom it works best

3. Perform the numbers when comparing PAYE-vs-REPAYE

Use the Loan Simulator tool from Federal Student Aid to compare monthly payments for REPAYE vs PAYE, as well as all other repayment options for federal student loans. The tool also displays overall interest rates and the potential for loan repayment on each plan. Require all of the following information to get the most reliable results:

  • Student loan forms, balances and interest rates for you and your partner.
  • Your status for tax filing, family size and state of residence.
  • Adjusted gross profits for you and your family.

Compare the monthly payment amounts and select the one with the lowest monthly payment for each repayment plan.

If their partner has a salary, married borrowers who file taxes separately will see higher monthly payments on REPAYE. That’s because REPAYE payments are often based on the combined income of a couple, while if you file taxes separately, PAYE will use only your income.

» MORE: Tax reporting guide for student loans

This versatility means that if you are married or plan to get married in the future, PAYE is probably a better choice. REPAYE is often the better choice if you’re single or expect your income to grow. Due to the plan’s expanded interest subsidy, you will accrue less interest on REPAYE.

Under both PAYE vs REPAYE, during the first three years of repayment, the government subsidises 100% of the unpaid interest that accrues on subsidised loans. In other words, even if your payment isn’t enough to cover all the interest that accrues, those loans won’t accrue interest.

REPAYE goes a step further by subsidising 50 percent of the unpaid interest accumulated after the first three years of repayment on subsidised loans and for all periods on unsubsidized loans.

4. Keep these things in mind

Make sure you know these details before you make a final decision on PAYE vs REPAYE:

  • Consequences of switching repayment plans: Avoid switching once you choose a repayment plan. The unpaid interest is capitalised when you abandon an income-driven repayment plan, which increases the total interest you pay over time.
  • Impact of losing PAYE eligibility: If your income increases to the point where you no longer qualify to make PAYE payments, you will remain on the plan technically, but your payment will not be based on your income; it will be equal to what you would pay on the standard plan. Unpaid interest will be capitalised, but when you enter PAYE, the capitalised amount is limited to 10 percent of your initial loan balance.
  • Forgiven student loans tax treatment: If you are expected to receive revenue-driven repayment forgiveness (the Repayment Estimator shows this), keep in mind that the amount forgiven will be taxed as income. In that scenario, it will maximise the amount you get forgiven but raise the potential tax burden by selecting the package that gives you the lowest monthly payment. You don’t have to think about this if you’re doing PSLF; debts forgiven by PSLF aren’t taxed as profits.
  • Differences in repayment schedules: If you have any graduate school loans, the repayment plan is for REPAYE for 25 years. Otherwise, REPAYE’s repayment period is 20 years. Regardless of your loan form, the repayment period on PAYE is 20 years.

Compare the income-driven plans

PlanBest if you
Revised Pay As You EarnAren’t married.Don’t have graduate loans.Have high earning potential.
Pay As You EarnAre married with two incomes.Have graduate loans.Have low earning potential.
Income-Based RepaymentDon’t qualify for PAYE.Have FFELP student loans.
Income-Contingent RepaymentHave parent PLUS loans.Want to reduce payments slightly.

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