How Does Revised Pay As You Earn (REPAYE) Work?

Last updated Feb. 18, 2025 by Charles Zemub

In the landscape of student loan repayment plans, the Revised Pay As You Earn (REPAYE) plan stands out as a unique option for borrowers seeking a manageable and affordable repayment path. Initiated by the federal government to make college debts less burdensome, REPAYE builds on the foundation of the original Pay As You Earn (PAYE) plan by expanding eligibility and offering extended benefits.

At its core, REPAYE is an income-driven repayment (IDR) plan that adjusts monthly student loan payments according to your income and family size, rather than the total amount owed. Here, we delve into the intricacies of REPAYE, analyzing how this plan functions and its impacts on borrowers.

The Origins and Purpose of REPAYE

The REPAYE plan was introduced by the Obama administration in December 2015, aimed at assisting borrowers by making federal student loan debt more sustainable. Its goal was to extend income-driven repayment benefits to a wider spectrum of borrowers, addressing some of the limitations found in existing IDR plans like Income-Based Repayment (IBR) and PAYE.

Key to REPAYE is its intent to make payments more predictable and aligned with a borrower’s financial capability. This is achieved by calculating payments as a percentage of discretionary income, which is essentially income left after subtracting basic living costs.

Mechanics of REPAYE

Eligibility Criteria

One of the significant advantages of REPAYE is its broad eligibility criteria. Unlike the PAYE plan, which only applies to borrowers who took out their first loan after October 1, 2007, REPAYE is available to all Direct Loan borrowers regardless of when they took out their loans. It covers:

• Direct Subsidized Loans
• Direct Unsubsidized Loans
• Direct PLUS Loans made to students (not parents)
• Direct Consolidation Loans without underlying PLUS loans made to parents

Private loans and Parent PLUS Loans are not eligible under REPAYE.

Payment Calculation

Under REPAYE, monthly payments are set at 10% of your discretionary income. Discretionary income is calculated using the following formula:

[
\text{Discretionary Income} = \text{Adjusted Gross Income (AGI)} – (\text{Poverty Guideline} \times 1.5)
]

By tying payments to income and family size, REPAYE ensures that your payments are always manageable within the context of your personal financial situation.

Interest Subsidy

A distinctive feature of REPAYE is its interest subsidy, designed to prevent ballooning loan balances. If your calculated payments do not cover the interest accruing on your loans, the government will pay:

• The remaining interest on subsidized loans for up to three consecutive years.
• 50% of the remaining interest on subsidized loans after the initial three years.
• 50% of the remaining interest on unsubsidized loans throughout the life of the repayment plan.

Loan Forgiveness

After making 20 years of qualifying payments for undergraduate loans, or 25 years for graduate loans, any remaining balance is forgiven under REPAYE. It’s important to note, however, that the forgiven amount is considered taxable income in the year it is forgiven, potentially resulting in a substantial tax liability.

Reevaluating Payments: Annual Recertification

Participants in REPAYE must annually recertify their income and family size. Failing to do so could lead to your payments being set to cover the full outstanding balance over the standard 10-year plan, potentially increasing your monthly payment significantly.

Pros and Cons of REPAYE

Benefits

• Expanded Eligibility: Making REPAYE accessible to nearly all federal loan borrowers opens the door for many who were ineligible under other plans.
• Affordable Payments: By capping payments at 10% of discretionary income, REPAYE minimizes financial stress and adapts to changes in financial circumstances.
• Interest Subsidy: Helps mitigate accruing interest, especially beneficial to those whose incomes result in low monthly payments relative to their loan balance.
• Forgiveness Opportunity: Ultimately, REPAYE offers a clear pathway to loan forgiveness, critical for borrowers with significant debt.

Drawbacks

• Tax Implications: Forgiven debt at the end of the repayment term is taxable as income, potentially resulting in a substantial tax bill.
• Longer Repayment Period: While payments might be lower, extending payment terms to 20-25 years could mean that you pay more over time if significant interest accrues.
• Marital Influences: REPAYE considers both spouses’ incomes when calculating payments if you file jointly, which could increase your monthly obligations.

Implementing REPAYE: A Sample Scenario

Consider Jane, a recent graduate working in a non-profit with an annual income of $40,000. Jane lives alone, leading to a discretionary income calculation as follows:

• Poverty guideline for a single individual: $13,590 (as of 2023).
• Discretionary income: $40,000 – (13,590 x 1.5) = $19,615.

Thus, Jane’s annual payment would be 10% of $19,615, translating to monthly payments of around $163.

Jane’s situation illustrates how REPAYE can ease monthly burdens, allowing her to focus on essential living expenses while also serving her federal loan obligations.

FAQs About REPAYE

1. Can Parent PLUS Loans be included in REPAYE?

No, Parent PLUS Loans are ineligible for REPAYE. However, they can qualify if consolidated into a Direct Consolidation Loan, then enrolled under the Income-Contingent Repayment (ICR) plan.

2. Does REPAYE treat married borrowers differently?

Yes, REPAYE considers your spouse’s income for payment calculations if you file taxes jointly. Filing separately generally doesn’t impact payment calculations under REPAYE.

3. How often must I provide income information?

Borrowers must submit updated income and family size information annually. Missing this recertification deadline results in a recalculation of payments based on a 10-year standard plan.

4. Are there alternatives to REPAYE?

Yes, depending on individual circumstances, options like PAYE, IBR, and ICR may better suit different financial situations or loan types.

5. What happens if my financial situation changes?

REPAYE can adjust to fluctuations in your income or family size, as long as you promptly recertify your status.

Concluding Thoughts

Navigating the complexities of student loan repayment can be daunting, but plans like REPAYE offer a tailored approach that aligns repayments with financial capacity. By understanding its mechanics, benefits, and potential drawbacks, borrowers can make informed decisions that suit their financial landscapes, ultimately easing the journey towards loan repayment and financial freedom.