REPAYE vs. PAYE: Which Student Loan Payment Plan is Better?

Michael Lux Blog, Student Loans 4 Comments

A few months ago the Department of Education unveiled the newest federal student loan repayment plan, known as Revised Pay As You Earn (REPAYE).  This plan comes just a few years after the Pay As You Earn (PAYE) Repayment plan was created.  So what exactly did REPAYE revise, and which plan is better?

Why was REPAYE Created?

For years we have said that PAYE was the best repayment plan.  The reason that PAYE was better than all of the others is that it only required borrowers to pay 10% of their discretionary income towards student loans.  Other federal repayment plans forced borrowers to pay 15 to 20%, so PAYE was a major step forward.

The problem with PAYE was that only recent student loan borrowers were eligible to sign up.  If any of your student loans were too old, IBR was your best option.  That meant 15% of your income instead of 10%.  Many borrowers cried foul arguing that this treatment was unfair.  If two people have the same income, why should one person pay $150 per month while the other only has to pay $100?

REPAYE was created to fill this gap.  In theory, people on IBR can now sign up for REPAYE and get the same 10% treatment.

Applying some basic logic, one would think that means REPAYE and PAYE are almost identical, and the plan you sign up for just depends upon how old your loans are.

Unfortunately, this isn’t the case.

The Government Fix

When REPAYE was being created many people put out different ideas about how the Revised PAYE plan should work.  These tweaks can make major differences for many borrowers.  As a result, in some cases REPAYE is a better option, in other cases PAYE is the best choice, while some people should stick with IBR.

There are two major changes with REPAYE that can have a major impact on borrower choices.

  1. REPAYE for Married Couples – REPAYE treats spousal income dramatically different than PAYE and IBR.  With PAYE and IBR, if your spouse had income that you did not want factored into your payments, you could file taxes separately.  The reasoning behind this treatment was to avoid a marriage penalty.  REPAYE will include your spouse’s income when determining your monthly payments.  For some couples this can be very expensive.  For more on this subject, be sure to check out our article on REPAYE for Married Couples.
  2. Treatment of Excess Interest – If you have a high level of student debt relative to your income, it is possible that the monthly interest will be higher than your monthly payment.  To help borrowers in this situation, REPAYE borrowers will have 50% of that extra interest forgiven each month.  That means if your monthly payments are $0 per month, your interest rate will essentially drop in half.  The balance of the account will still grow over time, but it won’t grow as fast with REPAYE.

So which plan is best?

The best plan will really depend upon individual circumstances.  If your spouse doesn’t have student loans but has a huge income, you may want to avoid the marriage penalty associated with REPAYE.

On the other hand, if your payments are not touching the interest that shows up on your account each month, REPAYE is worth a very close look.

The key is to understand the factors at work here. Discuss your options with your loan servicer to figure out the plan that works best for you.  Just be sure to focus on the long run.  Attacking student debt isn’t about getting the lowest payment next month or next year.  It’s about putting together a workable plan that gets student debt out of your life.  Do the math on the various options and see which plan adds up for your needs.