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Pay As You Earn, along with its newer cousin Revised Pay As You Earn, is an income-driven repayment plan for student loans that adjusts your payment to 10% of your discretionary income. While both PAYE and REPAYE can help you get relief on your student loans, each works a little differently. Read on for a full comparison of Revised Pay As You Earn vs. Pay As You Earn so you know which plan, if either, is better for you.
- Revised Pay As You Earn vs. Pay As You Earn: Quick comparison
- Which student loans are eligible?
- What you need to know about Pay As You Earn
- What to know about Revised Pay As You Earn
- PAYE vs. REPAYE for student loans: Which is better?
- Applying for income-driven repayment: Final thoughts
Revised Pay As You Earn vs. Pay As You Earn: Quick comparison
|
Pay As You Earn |
Revised Pay As You Earn |
|
| Payment amount | 10% of your discretionary income (and never more than you’d pay on the standard 10-year plan) | 10% of your discretionary income. Payment could be higher than what you’d pay on the standard plan if your income increases. |
| Repayment terms | 20 years | 20 years for undergraduate student loans; 25 years for graduate school loans |
| Takes both incomes into account for married couples | Not if you file separately | Yes, regardless of whether you file separately |
| Eligibility requirements |
Partial financial hardship. Your payments must be less than what they’d be on the standard 10-year plan. You must have borrowed loans after Oct. 1, 2007 and had a loan disbursement after Oct. 1, 2011 |
Anyone with eligible federal loans can qualify. |
| Interest subsidy | Government covers 100% of unpaid interest on subsidized loans for first 3 years. | Government covers 100% of unpaid interest on subsidized loans for first 3 years and 50% after 3 years. It also covers 50% of unpaid interest on unsubsidized loans throughout repayment. |
As income-driven repayment plans with a 10% payment calculation, PAYE and REPAYE have a lot in common. But they also have some key differences, so it’s important to figure out which one is more beneficial for you as you repay your student loans.
PAYE was introduced in 2012 to help cash-strapped borrowers who couldn’t afford payments on the standard repayment plan. It’s available to borrowers who received a loan disbursement after 2011, and it has an income requirement to qualify.
REPAYE came onto the scene in 2015 as a way to expand the benefits of PAYE to even more borrowers. Anyone can apply for REPAYE, regardless of when they borrowed or what their income is.
But unlike on the PAYE plan, your REPAYE payments could potentially be higher than what they’d be on the standard 10-year plan if your income increases.
Which student loans are eligible?
For both PAYE and REPAYE, the following student loans are eligible:
- Direct subsidized loans
- Direct unsubsidized loans
- Direct PLUS loans made to graduate students
- Subsidized FFEL loans, if consolidated and not made to parents
- Unsubsidized FFEL loans, if consolidated and not made to parents
- FFEL PLUS loans made to graduate students, if consolidated
- Perkins loans, if consolidated
As you can see, parent loans aren’t eligible for either plan. Let’s take a closer look at both plans, PAYE vs. REPAYE, so you understand the key differences.
What you need to know about Pay As You Earn
PAYE is an income-driven plan that adjusts your monthly payments while extending your repayment terms. Here are the details:
- Limits your monthly payments to 10% of your discretionary income. (Discretionary income is the difference between your gross income and 150% of the poverty guideline for your family size.)
- Extends your loan terms to 20 years
- Requires that you received a federal loan on or after Oct. 1, 2007 and had no outstanding federal loans at that time.
- Further requires that you received a Direct loan disbursement on or after Oct. 1, 2011 (or consolidated on or after that date)
- Is only available to borrowers with a partial financial hardship, meaning that your PAYE student loan payment has to be lower than it would be on the standard 10-year plan
- Subsidizes 100% of the unpaid interest that accrues on your subsidized loans during the first three years of repayment. Note that you’ll still have to pay the interest during this time on any unsubsidized loans.
- Doesn’t take your spouse’s income into account if you file separately
To stay on PAYE, you’ll need to re-certify your income and family size every year. As long as you continue to qualify, your payment will never be more than what you’d pay on the standard 10-year plan.
What to know about Revised Pay As You Earn
REPAYE has pretty similar terms to PAYE, but there are some key distinctions when it comes to eligibility and the interest subsidy.
- Sets your monthly payments at 10% of your discretionary income.
- Extends your loan terms to 20 years for undergraduate loans and 25 years for graduate school loans
- Doesn’t matter when you borrowed or what your income is
- Takes both incomes into account for married couples, even if you file your taxes separately
- Requires that you re-certify your income every year
- Covers 100% of unpaid interest on subsidized loans for the first three years and 50% of unpaid interest after three years. It also covers 50% of unpaid interest on unsubsidized loans throughout repayment.
REPAYE has less stringent eligibility requirements than PAYE, but it could make your student loan payments more expensive if you’re married, since it takes both incomes into account regardless of whether you file your taxes separately.
And while it has a better interest subsidy than PAYE, it also adds five years to repayment if you have loans from graduate school.
PAYE vs. REPAYE for student loans: Which is better?
If your head is spinning a bit at this point, don’t worry! For a lot of borrowers, it probably won’t make much difference whether you choose PAYE or REPAYE for your student loans. But if any of the below details apply to your situation, you’ll know which one to choose.
If you don’t qualify for PAYE…
As you just read, PAYE has stricter requirements than REPAYE. Your income needs to be relatively low compared to your student loan debt. Essentially, your PAYE payment needs to be lower than what you’d pay on the standard 10-year plan.
Plus, you need to have had a loan disbursement after Oct. 1, 2011. If you don’t meet these requirements, consider REPAYE instead. Not sure if you qualify? It’s worth reaching out to your loan servicer to discuss your options.
If you’re married…
If you want the lowest possible payment, don’t forget to take your marriage status into account. The REPAYE plan always takes both spouses’ incomes into account when determining your student loan payment.
But PAYE will only consider yours if you file taxes separately from your spouse, potentially resulting in a much lower student loan bill. So if you’re married and want the lowest payments, PAYE might be better than REPAYE.
If you have graduate student loans…
REPAYE extends your loan terms to 25 years if you have graduate school loans, whereas PAYE maxes out at 20 years. So if you have loans from graduate school, PAYE is probably the better option and will lead to loan forgiveness sooner.
If you want the biggest interest subsidy…
A final consideration when comparing Revised Pay As You Earn vs. Pay As You Earn is the interest subsidy. The REPAYE plan offers a bigger break on interest than the PAYE plan.
Speaking of interest, be careful not to change your repayment plan too many times, as each change can trigger interest capitalization. This means that interest gets added on to your principal, so you end up paying interest on top of interest.
If you get kicked off the PAYE plan because you no longer meet income requirements, the amount of interest that gets capitalized can’t exceed 10% of your balance. But with the REPAYE plan, there’s no limit to the amount of interest that can be capitalized.
This consideration is really getting into the weeds, and it probably won’t matter for most borrowers. Just remember to keep up with paperwork and re-certify your plan every year so you don’t accidentally get kicked off and trigger interest capitalization.
Applying for income-driven repayment: Final thoughts
While it’s important to compare Revised Pay As You Earn vs. Pay As You Earn, remember that these are just two of the income-driven repayment plans. The other two are Income-Based Repayment and Income-Contingent Requirement.
In the end, you probably want to pick the plan that gives you the lowest student loan payment. If you’re not sure what that is, speak with your loan servicer. Your servicer should help you select the plan that makes most sense for your unique situation. When you apply online, the Federal Student Aid website can also show you which plan will give you the lowest monthly payment.
If you can afford to stay on the standard plan, however, that’s probably the better option. By sticking with the 10-year plan, you’ll get out of debt sooner and pay less interest overall. You might even be able to make extra payments to get out of debt ahead of schedule.
Learn more: Head to this guide for a full comparison of all four income-driven repayment plans for student loans.
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