PAYE vs. REPAYE

Many borrowers have questions about which income-driven repayment plan is best for them. Two popular options are PAYE and REPAYE (formerly known as Saving on a Valuable Education or SAVE). These plans lower your monthly student loan payment based on your income. But how do they compare? Both PAYE and REPAYE are capped at 10% of your discretionary income. However, REPAYE includes an interest subsidy while PAYE does not. And if you’re pursuing IBR loan forgiveness, switching to REPAYE can extend the timeline for that from 20 years to 25 years. As a result, both of these options can make it difficult to predict the true cost of your student loans. We recommend evaluating your financial situation and consulting with a student loan expert to determine which plan is right for you.

What is PAYE?

PAYE is an acronym for Pay As You Earn and refers to HM Revenue & Customs’s method for collecting income tax. Employers deduct PAYE taxes from employee paychecks, which are then remitted to the government. This is one of two main methods for paying income tax, the other being self-assessment. When deciding between PAYE and REPAYE, it is important to consider your current and future financial situation. For example, if you have a low student loan balance and short training period, then PAYE may be the best option as it can reduce your monthly payments.

However, if you think your income will rise, then REPAYE may be a better option as it allows for loan forgiveness after 20 years. Additionally, REPAYE is easier to qualify for than PAYE and does not require you to demonstrate partial financial hardship. However, REPAYE does not provide interest subsidies like subsidized loans. Lastly, if you file taxes jointly, your spouse’s income will also affect your PAYE payment amount.

What is REPAYE?

Revised Pay As You Earn is another income-driven repayment plan that helps you manage your student loan payments. It offers some advantages over PAYE, including a payment cap and an interest subsidy. However, there are also some disadvantages to REPAYE. One big downside is that it closes the married-filing-separately loophole that allowed residents with high-earning spouses to use an income-driven repayment plan at a lower cost than other plans. This change can significantly increase your total loan costs over time.

Like other income-driven repayment plans, REPAYE requires borrowers to recertify their income every year. Failing to recertify can cause your monthly payments to go back up to what they would be on the Standard 10-Year Repayment Plan. Also, unlike PAYE, REPAYE does not offer loan forgiveness after 20 years of qualifying payments for undergraduate loans and 25 years for graduate loans. This means that if you are PSLF-bound, REPAYE may not be the right choice for you.

What is IBR?

If you don’t qualify for PAYE or REPAYE, IBR may be a better option for you. The new version of IBR (which replaced Old IBR) caps monthly payments at 10% of your discretionary income and, like PAYE, doesn’t allow your monthly payment to rise higher than you would pay under the standard 10-year plan. However, with new IBR, interest capitalized during a repayment period is added to your principal balance rather than being paid down immediately, which can result in more total interest over the life of your loan.

Also, unlike REPAYE, IBR doesn’t require that you demonstrate partial financial hardship to apply. And it’s the only IDR plan that accepts Parent PLUS loans, though they must be consolidated into a Direct Loan before enrolling. The only drawback to IBR is that your payments will last 25 years. The upside is that you’re eligible for Public Service Loan Forgiveness after 10 years of payments. That forgiveness is taxable, though.