Is REPAYE Right or Wrong for You?

Is-REPAYE-the-Right-Student-Loan-Repayment-Plan

If you can’t afford your payments on your federal student loans, applying for an income-driven repayment (IDR) plan can be a smart way to make them more affordable.

It’s a popular choice for many. According to the U.S. Department of Education, approximately 45% of federal Direct loans were being repaid under an IDR plan.

There are four different IDR plans to choose from, but the most popular in terms of recipients and dollars outstanding is Revised Pay As You Earn (REPAYE). If you’re considering an IDR plan and REPAYE in particular, here’s what you need to know before applying.

What is REPAYE?

REPAYE is the newest of the IDR plans. It was launched in 2015 as part of the Obama Administration’s efforts to help student loan borrowers manage their debt.

Under REPAYE, the Department of Education extends borrowers loan terms. Instead of the standard 10-year repayment plan, you’ll have 20 years if all your loans were used for undergraduate study. If you took out loans for a graduate or professional degree, your repayment term will be 25 years.

With REPAYE, your monthly payment is generally capped at 10% of your discretionary income. For the purposes of federal student loan payments, your discretionary income is the difference between your annual income and 150% of the poverty guideline for your family size and state of residence.

Benefits of REPAYE

Signing up for REPAYE offers several advantages:

  1. You may qualify for partial loan forgiveness: After 20 to 25 years of making payments under REPAYE — depending on whether you had student loans for undergraduate or graduate study — the remaining balance of your debt is forgiven. Because REPAYE can dramatically reduce your monthly payment, the amount of the forgiven balance can be significant.
  2. You can dramatically reduce your monthly payment: Under REPAYE, your payment will be just 10% of your discretionary income. That’s lower than you’d pay under some other IDR plans, and much less than you’d pay under a standard 10-year repayment plan.
  3. More loans are eligible for REPAYE than other IDR plans: REPAYE was specifically designed to make IDR plans available to more borrowers. For example, REPAYE is available to borrowers who took out student loans before October 1, 2011. Some other plans, such as Pay As You Earn (PAYE), are only available to borrowers who took out loans after that date.

Drawbacks of REPAYE

  1. You may pay more in interest charges over time: With REPAYE, you can have up to 25 years to repay your loan. With a longer repayment period, you may end up paying more in interest charges than you would under a 10-year term.
  2. You must recertify your income every year: It’s important to recertify your income every year by your loan servicer’s specified annual deadline. If you miss it, your loan servicer will place you on an alternative payment plan that isn’t based on income. Instead, your payments will be the amount necessary to pay off your loans within 10 years or the ending date of your REPAYE repayment period, whichever is sooner.
  3. You’ll have to pay taxes on the forgiven amount: While you can qualify for partial loan forgiveness after making 20 to 25 years of making payments under REPAYE, there is one major catch: the forgiven balance is taxable as income. If the forgiven amount is large, you could be left with a huge tax bill for that year.

Who is eligible for REPAYE?

To be eligible for REPAYE, you must have qualifying federal student loans which include:

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Direct PLUS Loans for graduate students
  • Direct Consolidation Loans not made to parents
  • Subsidized Federal Stafford Loans from the FFEL Loans (Eligible if consolidated)
  • Unsubsidized Federal Stafford Loans from the FFEL Program (Eligible if consolidated)
  • FFEL PLUS Loans made to graduate or professional students (Eligible if consolidated)
  • FFEL Consolidation Loans that did not repay any PLUS loans made to parents (Eligible if consolidated)
  • Federal Perkins Loans (Eligible if consolidated)

Federal Stafford Loans from the FFEL program, FFEL PLUS Loans, and Perkins Loans can qualify for REPAYE if they are first consolidated with a Direct Consolidation Loan (which can be done online).

Is PAYE or REPAYE better for you?

A key difference between REPAYE and PAYE and other IDR plans is that any borrower with eligible federal loans can make payments under REPAYE. To qualify for PAYE and Income-Based Repayment (IBR), you must be considered a “new” borrower — meaning you took out your Direct loans on or after October 1, 2011.

Other IDR plans to consider

There are three other IDR plans to choose from. Each one differs in terms of who qualifies, how much you have to pay each month, the repayment term, and the loans that are eligible.

  • IBR: For new borrowers on or after July 1, 2014, the repayment term is 20 years and your monthly payment will be 10% of your discretionary income.
  • PAYE: You have 20 years to repay your loan. Your monthly payment is 10% of your discretionary income, but cannot exceed what it would be under a standard 10-year term.
  • Income-Contingent Repayment: The repayment term is 25 years. Your monthly payment is either 20% of your discretionary income or what you pay with a repayment term of 12 years, whichever is less.

You can use the Federal Student Aid Loan Simulator to compare IDR plans and identify the plan that would give you the lowest monthly payment.

For example, let’s say you were single, had $35,000 in federal Direct Unsubsidized Loans at 4.53% interest, lived in Florida, and earned $30,000 per year.

Under a 10-year Standard Repayment Plan, your monthly payment would be $363 per month.

But with REPAYE, your monthly payment would start at just $94 per month.

Assuming your income grew by 2% every year, your payment would never exceed $119, and you’d even qualify for partial loan forgiveness.

 Standard RepaymentIncome-Contingent RepaymentRevised Pay As You Earn
Monthly Payment (Start)$363$223$94
Monthly Payment (Maximum)$363$223$119
Total Repaid$43,589$53,617$25,385
Final Payment DateMarch 2030September 2040March 2040
Forgiveness Amount$0$0$38,162

Once you find an option that works for you, you can apply for REPAYE or another IDR Plan online.

What to do if you don’t qualify for REPAYE or other IDR plans

Now that you know the difference between REPAYE and PAYE and the other IDR plans, you can figure out a course of action for your student loans.

However, not everyone will qualify for REPAYE or the other three IDR plans. If you have private student loans rather than federal, you’re ineligible for an IDR plan.

If that’s the case and you’re struggling to keep up with your monthly payments, another option is student loan refinancing. When you refinance your debt, you can opt for a longer repayment term and reduce your monthly payments.

Use Purefy’s Compare Rates tool to see multiple rates and terms from top student loan refinancing lenders with no impact on your credit score.

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