The REPAYE interest subsidy may not get much attention, but I’d argue that this rarely discussed benefit makes REPAYE the best federal student loan repayment plan.
Though the calculations might first appear complicated, the REPAYE interest assistance can save borrowers thousands of dollars per year.
What is the Revised Pay As You Earn Interest Subsidy?
Only certain borrowers will qualify for the REPAYE interest assistance. To qualify, a borrower’s monthly payment on REPAYE must be less than the monthly interest generated by the student loan. In other words, if your loan is growing faster than you can make payments, the government will help pay your interest.
No special enrollment is required. Borrowers just need to sign up for the REPAYE plan.
Those receiving the interest subsidy will see a monthly transaction each month labeled “interest subsidy.” As interest assistance, it does not change the principal balance. However, it does reduce the outstanding interest on the loan.
The size of the subsidy depends entirely upon the borrower’s balance and income.
REPAYE Interest Subsidy Calculations
The best way to make sense of the REPAYE interest subsidy is to look at a simple example.
Suppose a borrower has a federal student loan balance that generates $500 per month in interest. That same borrower has a monthly payment on REPAYE of $100.
In this situation, the borrower’s balance is actually going up by $400 per month.
The REPAYE subsidy covers half of the excess interest. In this case, the loan generates $500 per month of interest, but $400 of it is in excess of the borrower’s monthly payment. 50% of $400 is $200.
Thus, the borrower in this example would receive a $200 per month interest subsidy on REPAYE.
Background on the REPAYE Pan
REPAYE, full name Revised Pay As You Earn, was initially created to help borrowers ineligible for Pay As You Earn (PAYE).
At the time, PAYE was the only repayment plan that charged 10% of a borrower’s discretionary income each month. The other plans required 15% or more.
Unfortunately, borrowers with older loans were not eligible for PAYE. Then-President Barack Obama issued an executive order to create REPAYE, with the primary goal of extending 10% to all borrowers.
During the rulemaking process Revised Pay As You Earn grew into something more than just PAYE for everyone. The most notable difference from PAYE is the REPAYE interest subsidy. It is designed to help borrowers who cannot even cover the monthly interest on their federal student loans.
Why Does REPAYE Assist Borrowers with Interest?
The point of the interest subsidy is to prevent balances from spiraling out of control.
To be clear, interest will still continue to accrue while on REPAYE, but it happens at a much slower pace. Those getting the maximum subsidy, Borrowers making $0 payments, will essentially have their interest rate cut in half.
The interest assistance helps borrowers get back on track after a period of unemployment or underemployment. Before REPAYE, a prolonged job search could make successful repayment seemingly impossible. Under REPAYE, borrowers get a little more breathing room.
Interest Subsidies for IBR, PAYE, and ICR Borrowers
Sadly, the repayment plans of IBR, PAYE, and ICR do not qualify for an interest subsidy.
REPAYE is the only plan that offers this protection to borrowers who cannot afford to keep up with their federal student loan interest.
However, it is worth noting that there are some shortcomings to the REPAYE plan. Borrowers should not automatically assume that REPAYE will be the best option under any circumstance.
When Isn’t REPAYE the Best Option? The best choice for most borrowers with larger balances and lower incomes is usually REPAYE. However, there are a couple of circumstances where other IDR plans might be better.
Certain Married Borrowers – For some couples, it makes sense to file taxes separately. Unlike IBR, PAYE, and ICR, filing separately will not exclude spousal income from REPAYE monthly payment calculations. Borrowers will have to weigh the value of the interest subsidy against the value of excluding spousal income from payment calculations.
Graduate Borrowers Planning on IDR Forgiveness – On PAYE and IBR for New Borrowers, student loan forgiveness comes after 20 years. Under REPAYE, borrowers have to wait 25 years if they have graduate school debt. Borrowers in this situation will need to compare the benefit of an interest subsidy against the value of forgiveness five years earlier.
Signing Up for REPAYE
Enrollment in REPAYE works just like all of the other IDR repayment plans. No extra steps are necessary for the interest subsidy.
- First, borrowers need to visit the studentaid.gov website to Apply for an Income-Driven Repayment Plan.
- When signing up, DO NOT select the plan with the lowest monthly payment. REPAYE may be tied with PAYE or IDR for the lowest monthly payment, so there is no guarantee that picking the lowest monthly payment will mean picking REPAYE.
- Instead, specify REPAYE as the preferred repayment plan.
(Note: in the event of a tie between repayment plans, the default option is usually REPAYE. However, specifying REPAYE is the best approach to avoid any potential mistakes or issues.)