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One of the special benefits of federal student loans versus private loans is that you can adjust your payments or term by switching repayment plans.
The question is, how do you choose the right plan?
There are eight options available, including the 10-year Standard Repayment Plan you were handed when you initially borrowed.
It can be challenging to decide between the remaining options, even if you’ve narrowed it down to just a couple. How do you pick between Income-Based Repayment (IBR) and Income-Contingent Repayment (ICR) or between IBR and Pay As You Earn (PAYE)?
One particularly common — and difficult — choice involves deciding whether to join the PAYE plan or its successor, Revised Pay As You Earn (REPAYE). Fortunately for you, we’ve done all the homework on PAYE versus REPAYE so that you can make an easier choice.
PAYE vs. REPAYE: How are they similar?
PAYE and REPAYE are both “income-driven repayment plans,” meaning that they adjust your monthly payment based on changes you report annually about your income and family size.
While earning a raise at work might increase your monthly payment, for example, having a baby would decrease it.
In fact, your payment would be calculated as a percentage of your discretionary income — that is, the amount of cash you have left after accounting for taxes and other routine expenses such as rent.
Both PAYE and REPAYE would max out your monthly payment at 10% of your discretionary income.
Four types of federal loans are eligible for PAYE and REPAYE:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans made to students
- Direct Consolidation Loans (not including PLUS Loans made to parents)
Additionally, PAYE and REPAYE both span 20 years if you borrowed your loans for undergraduate study. After two decades of making timely payments, your remaining balance would be forgiven under both of these plans.
You could cut down that time frame to 10 years if you also qualify for Public Service Loan Forgiveness by working at a nonprofit, for example.
Keep in mind that with these longer repayment terms, more interest will accrue on your loan amount. You’ll also likely be stuck paying income tax imposed on any forgiven amount.
What’s unique about PAYE?
Although PAYE would cap your monthly payment at 10% of your discretionary income, that amount must also be less than what you’d pay under the Standard Repayment Plan.
Say your monthly payment under PAYE would be $350, and your monthly payment under your standard plan is $300. You wouldn’t benefit from the break of the repayment plan and thus would be ineligible for PAYE.
There’s one more unique eligibility rule for PAYE: It’s only for those who borrowed for the first time on or after Oct. 1, 2007, and received a Direct Loan on or after Oct. 1, 2011.
What’s unique about REPAYE?
Unlike with PAYE, your monthly payment under REPAYE can be more than what you shell out through the Standard Repayment Plan. So if your REPAYE monthly dues are $50 more than your original plan payment, for example, you’d still be eligible for REPAYE.
Still, most borrowers who access REPAYE end up paying significantly more over 20 years than they would over 10 years under the Standard Repayment Plan. Blame accruing interest for that fact.
With REPAYE, your loan term could extend to 25 years if you borrowed federal loans for graduate or professional school.
PAYE vs. REPAYE: Which is right for you?
If your debt is starting to dwarf your income and you’re seeking the lowest possible monthly payment, PAYE is likely your best option. It’ll cap your monthly payments at 10%, never asking you to pay more than what you’d owe via a Standard Repayment Plan.
But perhaps you like the idea of tying your loan payments to a proportion of your income (or adjusting it for your increasing family size) — and want to pay down your debt more promptly. In that case, you might opt for REPAYE.
Since REPAYE allows you to pay more each month than under the Standard Repayment Plan, you could zero out your debt more quickly than if you went the PAYE route.
Before choosing PAYE or REPAYE, calculate your potential payment amount for each plan using Federal Student Aid’s repayment estimator.
Also consider the long term, including your career trajectory, family plans, and financial goals. If they shift over time, you could always switch your repayment plan again.
Another way to lower your monthly payment: Student loan refinancing
Before contacting your federal loan servicer about how to apply for income-driven repayment, consider one more option.
Like income-driven repayment, student loan refinancing could allow you to lower your monthly payment, either by extending your repayment term or lowering your interest rate. To qualify, you typically need to have a strong credit history and debt-to-income ratio.
Refinancing also comes with benefits similarly offered by federal student loan consolidation. You could trade in all your loans for one new loan, and you’d receive the convenience of making one monthly payment to one lender. The key difference from the programs above, however, is that you can also refinance private student loans, not just federal loans.
Just remember that once you go private, you can’t go back. For one, you’d lose that important ability to switch repayment plans — say, between PAYE and REPAYE.
But if you have strong credit or owe private student loans, then it’s worth checking what refinance offers are available besides PAYE, REPAYE, and other federal programs.
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