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If you’re struggling to make your federal student loan payments, signing up for an income-driven repayment plan might be a good idea.
There are four plans available, including Pay As You Earn (PAYE) and its newer counterpart Revised Pay As You Earn (REPAYE). It’s typically easier to qualify for REPAYE, but PAYE might be a better option for you, depending on your situation.
Here’s what you need to know about choosing PAYE vs. REPAYE:
- What are PAYE and REPAYE?
- PAYE vs. REPAYE: What’s the difference?
- Making the choice between PAYE and REPAYE
- Can you switch between PAYE and REPAYE?
- PAYE and REPAYE alternatives
What are PAYE and REPAYE?
Both PAYE and REPAYE lower your monthly student loan payment to just 10% of your discretionary income. Each of them is also a qualifying repayment plan under student loan forgiveness programs like Public Service Loan Forgiveness. Here are some of the most important details about each plan.
PAYE can be harder to qualify for than REPAYE. But if you have graduate student loans or are married, it also offers benefits that REPAYE doesn’t.
Things to know about PAYE
- Monthly payment: Your monthly payment will be capped at 10% of your discretionary income. This payment can’t be higher than what you’d pay monthly on the standard 10-year repayment plan. Also keep in mind that if you’re married but file your taxes separately, your spouse’s income won’t be included when calculating your payment.
- Qualifications: Most federal Direct Loans taken out since Oct. 1, 2011, qualify for PAYE. You must also demonstrate a partial financial hardship to qualify.
- Repayment period: You’ll have 20 years to pay off your loans.
These terms sometimes make PAYE a better option, since you might have a lower monthly payment and shorter repayment period than with REPAYE. But remember that you won’t qualify for PAYE unless you can demonstrate a partial financial hardship.
Most people who have borrowed federal Direct Loans are eligible for REPAYE. This is mainly because there’s no requirement to show financial hardship. However, REPAYE’s benefits aren’t as generous as what you’d get with PAYE.
Things to know about REPAYE
- Monthly payment: Your monthly payment will be capped at 10% of discretionary income — but unlike PAYE, these payments can be higher than your standard 10-year monthly payment. Also, your spouse’s income will count toward your overall income, even if you file your taxes separately.
- Qualifications: Any borrower with qualifying loans can sign up for REPAYE.
- Repayment period: If you have undergraduate loans, your repayment term will be 20 years. With graduate student loans, your term will be 25 years.
But keep in mind that if you leave the REPAYE Plan, any accrued interest that hasn’t been paid will capitalize — meaning it will be added to your student loan balance. Under PAYE, only 10% of the outstanding interest is capitalized if you leave the plan.
Learn More: Federal Student Loan Repayment Options
PAYE vs. REPAYE: What’s the difference?
Both PAYE and REPAYE calculate your monthly payment similarly. But there are some key differences to consider, too.
Here’s what to keep in mind when choosing between PAYE vs. REPAYE:
|Eligible loan types||Most federal Direct loans issued since Oct. 1, 2011|
(Parent PLUS Loans not eligible)
|Most federal Direct loans
(Parent PLUS Loans not eligible)
|Eligible income||Partial financial hardship required||No income requirement|
|Monthly payment||10% of your discretionary income |
(can’t be higher than your standard 10-year payment)
|10% of your discretionary income
(can be higher than your standard 10-year payment)
Repayment period for student loan forgiveness
|Spouse’s income counted||No|
(if taxes are filed separately)
|Interest capitalization limit||Up to 10% of your original principal balance||0% as long as you remain on the REPAYE Plan|
Making the choice between PAYE and REPAYE
When deciding between PAYE and REPAYE, consider the following circumstances:
- You have a partial financial hardship: If so, PAYE could give you more relief than REPAYE. If you don’t have a partial financial hardship, you’re only eligible for REPAYE, making this an easy choice.
- You expect your income to go up in the future: If your income rises, you might lose eligibility for PAYE and be forced to switch plans. This could lead to consequences like interest capitalization. In this case, it might be prudent to sign up for REPAYE.
- Your student loans are mostly unsubsidized: If so, the numbers could work out better if you choose REPAYE, as you’ll get interest subsidies even with unsubsidized loans.
- You qualify for both PAYE and REPAYE: If you qualify for both, you’re usually better off with PAYE, since you’ll get more generous relief for your monthly payments.
- You’re married and file your taxes separately: Single borrowers get the same treatment with both plans. But if you’re married, you’ll need to consider how your spouse’s income affects your plan. Under PAYE, your spouse’s income won’t be counted when calculating your monthly payment if you file taxes separately. Under REPAYE, your spouse’s income will be counted regardless of how you file your taxes.
How to sign up for PAYE or REPAYE
- Decide which plan makes the most sense for you.
- Contact your loan servicer to apply for the income-driven repayment plan you choose.
- Continue making your loan payments as scheduled until you received confirmation that your income-driven repayment application has been approved.
- Make your new monthly payments as required.
- Recertify your income annually.
Learn More: Private Student Loan Repayment Options
Can you switch between PAYE and REPAYE?
You may be able to switch between PAYE and REPAYE if you’re eligible. But you’ll need to contact your loan servicer.
It may be beneficial to switch to the REPAYE Plan if you anticipate an increase in your income. The PAYE Plan sets your payments at 10% of your discretionary income, but if your income goes up, you may no longer be eligible.
When you submit an application to the Department of Education for an income-driven repayment plan, you can use its loan simulator to see what repayment options you’re eligible for and choose which plan works best for you.
PAYE and REPAYE alternatives
If you aren’t eligible for the PAYE or REPAYE Plans, or you’re looking for other ways to repay your student loan debt, here are a couple other options to consider:
- Federal loan consolidation: If you have Parent PLUS Loans, they aren’t eligible for either PAYE or REPAYE. But if you consolidate your Parent PLUS Loans into a Direct Consolidation Loan, you’ll be eligible for Income-Contingent Repayment (ICR), which is another income-driven repayment plan. Keep in mind that any changes to either your family size or income might increase (or decrease) your monthly payment amount.
- Private student loan refinancing: You might also consider refinancing your student loans. When refinancing with a private lender, you can choose a new repayment term. Instead of having multiple loan payments, you’ll have just one — and if you qualify for a lower interest rate, your monthly payments will be smaller. You’ll likely need good credit to qualify for private student loan refinancing. And think carefully before refinancing federal student loans into private ones: You’ll lose protections that come with federal loans, such as income-driven repayment plans.
Learn More: Student Loan Consolidation
If you decide that refinancing is right for you, be sure to shop around and consider as many private student loan lenders as possible to find the best deal. Credible makes comparing multiple lenders easy — all you have to do is fill out a single form (instead of multiple applications) and you’ll be able to see your rates in two minutes.
See Your Refinancing Options
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Kathryn Pomroy contributed to the reporting for this article.