PAYE vs REPAYE: Pay As You Earn Student Loan Repayment Plans

If you are facing a partial financial hardship, this plan offers you the lowest monthly payment amount of the repayment plans based on your income

After providing an endless supply of loan opportunities to help students solve the problem of paying for a college education, the federal government was faced with the obvious follow up: What can you do to help students pay back those loans?

The answer has been a series of income-driven repayment plans, including the Pay As You Earn (PAYE) program and its most recent offspring, the Revised Pay As You Earn program or REPAYE.

The two programs are part of income-based repayment plans that are quickly becoming popular with federal student loan borrowers. Enrollment in the income-based repayment plans quadrupled between 2012 and 2016. Nearly 25% of borrowers now use income-based repayment plans, though the ones who gain the most benefit – those with high student loan debt – are not taking full advantage of it. The Consumer Financial Protection Bureau said in 2016 that 70% of borrowers in default on student loans would qualify for the low payments offered through the PAYE and REPAYE programs, but haven’t signed up.

To sign up for the PAYE plan, you must demonstrate financial distress to the point where you can’t afford to make the payments required on a standard 10-year repayment plan.

The REPAYE program eliminated that requirement. No matter what your salary, your payments will never be more than 10% of your income based on family size.

History of PAYE and REPAYE

President Barack Obama first announced the PAYE plan in Oct. 2011 and it has become synonymous with the ‘Obama Student Loan Plan.’ The most prominent features of the plan are to cap monthly loan repayments at 10% of your discretionary income and offer loan forgiveness if you make 20 years of qualified payments.

The problem with the PAYE plan was that it limited to students who received William D. Ford Direct Loans after Oct. 1, 2007 and had funds disbursed to them on or after Oct. 1, 2011. Those loans include Direct Loans, subsidized and unsubsidized, Graduate PLUS loans and Direct Consolidation Loans made after Oct. 1, 2011, unless they include Direct or FFEL loans made after Oct. 1, 2007.

That’s a lot of qualification standards to meet so four years later, the Obama administration unveiled the REPAYE program to make things easier. The primary difference is you qualify for REPAYE regardless of when you took out your Direct Loan. You still receive loan forgiveness after 20 years of qualified payments, or 25 years, if you’re repaying Grad PLUS loans.

The REPAYE program opened the door for millions of student loan borrowers to qualify for an income-driven repayment plan they could afford.

The PAYE and REPAYE plans stem from a campaign promise Obama made as he courted young voters, telling them he would provide relief on their student loan payments and help better manage their debt.

Obama unveiled the plan at Colorado University, telling students about his own personal struggle, paying off $120,000 in student loans when he and his wife, Michelle, married. The repayment plan became effective on Dec. 21, 2012.

If you are facing a partial financial hardship, this plan offers you the lowest monthly payment amount of the repayment plans based on your income, family size and state of residency. Monthly payments under PAYE are capped at 10 percent of your discretionary income.

Once you qualify, you can continue to make payments under the plan even if your hardship no longer applies. An additional benefit of Obama’s Pay As You Earn Plan is that the remaining balance on your loan can be forgiven after 20 years, depending on certain qualifications. The forgiven amount may be taxed.

The Pay As You Earn Plan is one of the flexible repayment options available when you consolidate your student loans. If your payments increase significantly, you can switch only to the Standard Plan to complete the principal payoff of your consolidated loan.

Estimates suggest that participation in income-based repayment programs doubled between 2015 and 2017 and that more than five million borrowers are part of IDR programs. Much of the growth has come in the PAYE and REPAYE programs as graduates try to put a dent in student debt, by using the new plans.

Plan Eligibility

All Stafford, Direct Subsidized, Unsubsidized and PLUS Loans made to students and consolidation loans that do not include loans made to parents are eligible for Pay As You Earn. Uninsured private loans, Parent PLUS Loans, loans that are in default, consolidation loans that repaid Parent PLUS Loans and Perkins Loans are not eligible.

Federal Family Education Loans (FFEL) could not be repaid under Pay As You Earn, but are now eligible under REPAYE.

You would qualify as having a partial financial hardship if the monthly payment on your eligible federal student loans under a 10-year Standard Repayment Plan is larger than the monthly amount you would be required to pay using Pay As You Earn.

While this plan is similar to the Income-Based Repayment Plan, which caps monthly loan payments at 10-15% of discretionary income (based on when your loans were disbursed), Pay As You Earn caps payments at 10%. Discretionary income is determined by taking your adjusted gross income and deducting the poverty guidelines based on family size.

The following chart shows the maximum Pay As You Earn monthly payment amounts for a range of incomes and family sizes using the poverty guidelines that were in effect as of January 2017, for the 48 contiguous states and the District of Columbia. The estimates are based on owing $37,172, the average student loan debt for the Class of 2016.

Your payments may be adjusted annually based on changes to your income and family size, but it will never exceed the required payment on under the 10-year Standard Repayment Plan.

Family Size
Annual Income 1 2 3 4 5 6 7
$10,000 $0 $0 $0 $0 $0 $0 $0
$15,000 $0 $0 $0 $0 $0 $0 $0
$20,000 $24 $0 $0 $0 $0 $0 $0
$25,000 $86 $8 $0 $0 $0 $0 $0
$30,000 $149 $71 $11 $0 $0 $0 $0
$35,000 $211 $133 $55 $0 $0 $0 $0
$40,000 $274 $196 $117 $39 $0 $0 $0
$45,000 $336 $258 $180 $101 $23 $0 $0
$50,000 $399 $321 $242 $164 $85 $7 $0
$55,000 NQ $383 $305 $226 $148 $70 $0

Benefits of Obama’s Pay As You Earn Plan

If a monthly payment in this plan doesn’t cover the loan’s interest while you are still under a financial hardship, the federal government will pay the unpaid accrued interest on a subsidized Stafford Loan for up to three years from the time Pay As You Earn is implemented.

Unpaid Interest will capitalize if you are no longer facing a partial financial hardship. If that happens, the total interest that does capitalize is limited to 10% of your original principal balance.

You may be eligible for a 10-year public service forgiveness of the remaining loan balance if you are employed full-time for a public service organization and make 120 on-time, full monthly payments.

If you do not qualify for public service forgiveness, but meet certain other requirements, your remaining balance is forgiven after 20 years of repayment.

Since the Pay As You Earn Plan is based on income, you must submit income documentation each year to your loan service provider. If your income increases from year-to-year, the monthly payment may be adjusted. However, it will never be more than you would have owed with the 10-year Standard Repayment Plan.

If payments significantly increase, you can switch to a Standard Plan to finish paying off the rest of your consolidated student loan balance.

Student Examples
Students Income Owed Monthly Payment
John $30,000 $25,000 $149
Mark $25,000 $26,000 $86
Beth $19,000 $50,000 $11

You will notice that higher borrowers will benefit most from this new plan by being able to make lower payments. For example, if John owes $25,000 in loans and is making $30,000 a year could see payments lowered to only $149 a month If he owes just a little more and makes just a little less, the monthly payment will significantly decrease.

Now let’s say that Mark owes $26,600, and earned an adjusted gross income of $25,000 a year. He would pay $86 a month.

Beth receives the greatest monthly benefit from the plan, as her payments now match the capabilities of her discretionary income (the difference between your income and 150% of the poverty guideline for your family size and state of residence). Additionally, if she had been using the 10-year Standard Repayment Plan, she would owe $500 a month.

Benefits of REPAYE Plan

The primary benefit of the REPAYE plan is that it is open to anyone who borrowed from the Direct Loan program, with the exception of parents who used the PLUS loans. It doesn’t matter when you borrowed or how much you borrowed, so long as you borrowed from the list of qualified William D. Ford Federal Direct Loan programs that include Direct Subsidized and Unsubsidized Loans; Direct PLUS loans not made to parents; and Direct Consolidation Loans that do not include PLUS loans made to parents.

The other major benefit of REPAYE is that participation in this plan keeps you eligible for the Public Service Loan Forgiveness program that could forgive your loans after just 10 years.

It’s possible that your monthly payments could be zero, based on income and family size, but there is no cap on what your monthly payment would be if your income goes up every year.

Payments on the REPAYE program are recalculated every year based on your income and family size. If you are married, both you and your spouse’s income and loan debt are figured in the calculations.

If you make qualified, on-time loan payments for 20 years (25 if it’s for graduate school loans), your debt is forgiven.

Determining Which Repayment Plan is Right for You

Deciding which repayment plan is best for you can be difficult.

We can help you review your options before committing to a new repayment plan. It is important to take action and address loans immediately — before your credit report is damaged by defaulted loans and interest builds on money you have not started to pay back.

Trump May Change IBR Plans

Candidate Donald Trump pledged to change the income-based repayment plans, but President Donald Trump has not made any proposals as of the spring of 2017.

Trump proposed lumping all the income-based repayment plans together and making the maximum monthly payment 12.5% of income. That would be an increase for some borrowers, but there is a flip side.

Trump also proposed forgiving what’s left of student loans after 15 years, instead of 20.

It would make sense that if President Trump were going to change the rules on repayment, he would propose it in time for 2017 graduates to take advantage of it, but there is no real reason to wait for that. PAYE and REPAYE plans are both recalculated every year based on changes in income and family size so you could sign up right away and not miss much, if anything.

Bill Fay

Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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