REPAYE vs. PAYE, Which Is Right for You?
By Jared Andreoli, CFP®, CSLP®
Are you a recent medical school graduate with substantial student loan debt? Are you struggling to make the monthly payments? If so, you’re not alone. Many physicians find themselves in this predicament, but there are options available to ease the burden. One of those options is to enroll in an income-driven repayment plan, such as Pay As You Earn (PAYE) or Revised Pay As You Earn (REPAYE), which can help reduce your monthly payment and even forgive your remaining loan balance after a set period.
However, choosing the right plan can be overwhelming, especially when the nuances of PAYE and REPAYE are involved. In this article, we’ll break down the differences between the two plans, and help you make an informed decision.
Eligibility
Both Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) are federal income-driven repayment plans for student loans. To be eligible for PAYE, you must have a partial financial hardship, which means your payment on PAYE would be lower than it would be on the standard repayment plan. You also need to have received a federal loan on or after Oct. 1, 2007, and have had no outstanding federal loans at that time.
In addition, you must have received a loan disbursement on or after Oct. 1, 2011, or consolidated on or after that date. On the other hand, anyone with qualifying federal loans is eligible for REPAYE, regardless of income or when they borrowed.
Payment Amount + Repayment Period
PAYE and REPAYE set payments at 10% of your discretionary income, but there are some differences in the payment amount and repayment period. PAYE payments are never more than what you’d pay on the standard, 10-year plan. The repayment period is 20 years, regardless of your loan type.
REPAYE payments are also 10% of discretionary income, but there is no cap on income, which means that payments could be higher than they’d be on the standard plan. The repayment period is 20 years if you only have undergraduate loans and 25 years if you have any graduate school loans.
Family Situation and Spousal Income
Your family situation, like your tax filing method as well as spousal income, can play a significant role in choosing between PAYE and REPAYE. With PAYE, your spouse’s income doesn’t count if you file taxes separately. In contrast, with REPAYE, even if you file taxes separately, your spouse’s income is taken into account. This means that married borrowers who file taxes separately will see higher monthly payments on REPAYE if their spouse has an income. PAYE is likely a better option for married borrowers or those anticipating getting married in the future. If you’re single or expect to pay your loans off, REPAYE is often the better choice.
Interest Subsidy and Capitalization Limit
Both PAYE and REPAYE offer an interest subsidy. The government pays 100% of unpaid interest that accrues on subsidized loans in the first three years of repayment. However, REPAYE goes a step further by subsidizing 50% of unpaid interest that accrues on subsidized loans after the first three years of repayment and on unsubsidized loans during all periods.
There are also differences in the capitalization limit between PAYE and REPAYE. If you no longer qualify for PAYE because your income becomes too high, or you fail to recertify your income annually, the amount of unpaid interest that can be capitalized is limited to 10% of your loan balance when you enter the plan. However, there is no limit to the amount that can be capitalized under REPAYE.
Ready to Tackle Your Student Debt?
If that’s not enough information for you, don’t worry, we’ve got you covered: there are actually new REPAYE details that will soon be released, but it hasn’t been finalized yet. Before you make a decision, check to see if anything has changed.
Student loans can be a stressful burden, but that doesn’t mean you should avoid putting a plan in place to address them. In fact, that’s one of the biggest mistakes new physicians make when it comes to their finances.
If you are looking to plan for paying down your student loans while still working toward all your other financial goals, I’d love to see if I can help. To get started, you can schedule a free consultation, or reach out to us by emailing jared.andreoli@simplicityfinancialllc.com or calling 414-207-6473.
About Jared
Jared Andreoli, CFP®, CSLP®, is president and financial planner at Simplicity Financial, a fee-only RIA dedicated to helping early-career physicians conceptualize their financial picture and achieve their financial goals. Jared specializes in devising individualized financial road maps for clients, and he loves nothing more than a full day meeting with clients who value his partnership to solve problems—big and small.
After college, Jared spent six years working as a mutual fund administrator for a large company. While he learned an immense amount about the financial world, he was missing the personal connection of working with individual clients. Combining his passion for finance and personal connection, he established Simplicity Financial in 2017.
Jared has a degree in finance with a concentration in financial planning from Western Kentucky University, along with the CERTIFIED FINANCIAL PLANNER™ (CFP®) and a Certified Student Loan Planner (CSLP®) certifications. Outside of work Jared enjoys cooking and traveling. He played baseball in college and still coaches occasionally. He and his wife recently welcomed a daughter, who occupies most of their time. To learn more about Jared, connect with him on LinkedIn.