PAYE vs REPAYE: Understanding These Student Loan Repayment Plans

June 17, 2019 No comments exist

By Joseph Reinke, CFA, Founder of FitBUX

There is a lot of confusion about Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE). This guide walks you through the differences so you can compare PAYE vs REPAYE. 

I also dive deeper into when you would use PAYE vs REPAYE.  If you haven’t done so already, I highly recommend reading our Student Loan Forgiveness Guide before reading this article.

PAYE vs REPAYE Table Of Contents

  1. Summary Of Similarities
  2. Difference #1: Term
  3. Difference #2: Marriage
  4. Difference #3: Interest Deferral
  5. Difference #4: Monthly Payment
  6. Calculating The Cost Difference Between PAYE and REPAYE
  7. PAYE vs REPAYE: How To Decide Which One To Use
  8. Master Comparison Chart

Summary Of Similarities

Before diving into the differences, let’s briefly summarize the similarities between PAYE and REPAYE. They are both income-driven student loan repayment plans, they cap your payments at 10% of your discretionary income, and they only apply to Federal student loans.

In addition, each forgives the amount you owe after a given period of time. For both PAYE and REPAYE, the forgiven amount is treated as regular income and taxed as such.

Also, if you are using either of these strategies, you do not want to refinance your student loans. If you do, then you will not qualify to use these plans.
FitBUX's Income Driven Repayment Tax Savings Solution

Difference #1: Term

PAYE is 20 years long for both undergrad and graduate loans.  This means if you are on this plan for 20 years, all loans are forgiven and the remaining balance is taxed.

REPAYE is 20 years long if you only have undergraduate loans.  If any of your loans are from graduate school, the term is 25 years.  This would apply to all your loans, i.e. your undergrad and graduate school loans would be on a 25 year term.

This is an extremely important when comparing PAYE vs REPAYE because the extra 5 years can cost you a lot.  I will discuss the cost later on in the article.

Difference #2: Marriage

When you are married, you may choose to file your taxes separately or jointly.

If you are on PAYE and file separately, then your monthly payment is only based on your income and your amount of Federal loans. If you file jointly however, your monthly payment is based on your combined income and Federal loans.

On REPAYE, your tax filing status doesn’t matter. When you are married, your required payments are based on your combined incomes and Federal debt levels.

When deciding on PAYE vs REPAYE, taking into account your spouses’ or future spouses’ financial situation is a must.  We often see people who know they are going to get married within a year or two.  However, they fail to take into account their spouses’ financial situation.  Such a mistake may cost a couple thousands of dollars over time.

There is also confusion when it comes to calculating monthly payments on PAYE or REPAYE if you are married.  If you want to deeper dive into these calculation, check out our married filing separately vs filing jointly article.

Difference #3: Interest Deferral

In our Student Loan Forgiveness Guide, we discuss how the difference between your interest charge and the required monthly payment is deferred onto the loan. Therefore, most will be deferring interest when they are on PAYE and REPAYE.

On PAYE, you defer 100% of the interest for unsubsidized loans. For subsidized loans, the government pays the deferred interest for you for 3 years. Thereafter, you defer 100% of the interest on subsidized loans as well.

On REPAYE, the government pays 100% of the deferred interest on subsidized loans for the first three years just like PAYE. However, the unsubsidized deferred interest is treated separately.

On REPAYE the government pays 50% of the deferred interest each month for unsubsidized loans. After 3 years, they do the same for subsidized loans.

To illustrate the difference of PAYE vs REPAYE, I’ll use the following example:

  • Your interest charge is $700 per month,
  • Your required monthly payment on both PAYE and REPAYE is $300 per month (if you need help figuring out what your payment would be check out our IDR calculator).

On PAYE you would differ $400 of interest per month ($700 – $300).

On REPAYE you would defer $200 because the government pays 50% of the deferred interest each month ($700 – $300 = $400 *.50 = $200).

Difference #4: Monthly Payment

On PAYE, your required monthly payments are capped. This cap is based on the original amount that you owed and what your payment would be on the Standard 10 year plan.  Since the payment are capped, you must qualify for partial financial hardship to qualify for PAYE.

For example, if when you entered repayment your required payment would have been $1,000 on a standard 10 year plan, then that is the highest your monthly payment would be on PAYE. This holds true regardless of how high your income goes up.

On REPAYE there is no cap. Therefore, if your income increases significantly your monthly payments will as well.

This may have a significant impact for married couples.  As we mentioned earlier, if you are married or you know you will be married relatively soon, you want to factor your spouse’s income and Federal student loan debt into the equation before deciding which plan to select.

Below is a summary of the 4 differences between PAYE and REPAYE:

PAYE vs REPAYE Summary of Differences

Calculating The Cost Difference Between PAYE and REPAYE

It is tricky to calculate the true cost difference between PAYE and REPAYE. The reason is one is a 20 year repayment plan the other is a 25 year plan. (Note: This problem only exists for Grad students. For undergrads they are both 20 year plans.)

Many are enticed to use REPAYE because of the 50% interest subsidy mentioned previously. However, because REPAYE is 5 years longer, it can become much more expensive when doing an “apple to apple” comparison.

To see how to calculate the cost difference be sure to check out our article detailing how to use our Income Driven Repayment Plan tool.

PAYE vs REPAYE: How To Decide Which One To Use

Most of the time PAYE is the better option.  It has a shorter term and cost less in the long-run. Most importantly, it also gives you options should you get married when it comes to selecting your tax filing status. The more options you give yourself financially the better you’ll be in the long-run.

Lastly, if you are pursuing PSLF, you should definitely try to use PAYE.  For more information as to why, be sure to read our Public Service Loan Forgiveness guide.

There are 3 specific circumstances were REPAYE has a major advantage:

  • If you are only going to be using a loan forgiveness plan in the short-run:
    1. Even if you’re paying off your loans, you may find yourself in a situation where you need to use an IDR plan temporarily to benefit from lower monthly payments. For example, you may be doing a residency or may be on maternity leave and only need short-term payment relief. Then once your income increases you plan on making aggressive payments and paying the loans off.
    2. In this situation, REPAYE would be a major benefit because the government is paying half the deferred interest while your income is low.
  • If you can’t afford the recommended minimum tax savings amount on PAYE to cover your tax liability at the end of your IDR plan. Switching to REPAYE would extend the timeline from 20 to 25 years, you an extra 5 years to save.
  • Are you pursuing public service loan forgiveness but might stop working at a non-profit then REPAYE may be the right choice for you.  This would be the case if you stop working at the non-profit and know you’d choose to switch plans and pay off your loans.

 If you want to learn more about maximizing your money, be sure to check out our FitBUX Blog.

Master Comparison Chart

Summary of IBR vs PAYE vs REPAYE

IDR Tax Savings Solution