REPAYE: How it works and is it right for you?

The Revised Pay as You Earn plan can help provide relief for borrowers struggling with student loan payments. (iStock)

When comparing income-based repayment options for student loans, REPAYE (Revised Pay as You Earn) might catch your eye if you're looking for low monthly payments.

This program bases your monthly payments on your income, potentially allowing some much-needed breathing room in your budget. Compared to other income-driven repayment plans, there are several features that make REPAYE attractive when you're overwhelmed by student loan payments.

If you have private student loans, however, you should head to a multi-lender marketplace Credible to see if you can lower your monthly payments with a student loan refinance. Insert some simple information (like your loan balance) into Credible's free online tools to see if you can reduce your payment and cut down your loan debt quicker today.

For those with federal loans considering alternative loan repayment plans like REPAYE, here are some simple questions you should ask.

  • How does the REPAYE plan work?
  • Is REPAYE a good idea?
  • Is REPAYE right for me?
  • Should I consider other loan repayment plans?

How does the REPAYE plan work?

The REPAYE (Revised Pay as You Earn) option is designed primarily to help you lower your monthly loan payments.

It's similar to other income-driven repayment plans but with some key differences:

  • For eligible loans, the monthly payment is 10% of income over 150% of the poverty line. "In other words, if you earn less than 150 percent of the poverty line, you don't pay anything," said Robert Farrington, creator of The College Investor. 
  • REPAYE also subsidizes interest on student loans for some borrowers. If your monthly payment doesn't cover the interest that accrues on your loans, the federal government picks up the tab during your first three years of enrollment in the program. "After that, the government will pay for half of that interest," said Farrington. "If you have unsubsidized loans, the government will pay for half of the interest that's due." 
  • Revised Pay as You Earn allows you 20 years to pay off undergraduate loans and up to 25 years for graduate loans. 

Here's an example of what your payment might look like under REPAYE. Assume that you graduated with $26,946, which is the average debt load for students attending four-year public schools, according to the Department of Education. Your starting salary is $40,000 a year and you're not expecting to get a raise any time soon. 

If you choose the REPAYE program, your monthly payments would be $177 and you'd pay your loans off in 20 years. The standard repayment program would help you become student debt-free in 10 years, but your monthly payment would be almost $100 more, at $272 per month.

If this loan repayment plan doesn't make sense in your situation, consider checking out your student loan refinance options via Credible. A student loan refinance can help private student loan borrowers lower their monthly student loan payments and make loan debt more manageable.

WHAT IS A STUDENT LOAN INCOME-DRIVEN REPAYMENT LOAN

Is REPAYE a good idea?

REPAYE may be better suited to some borrowers than others for managing student loans.

You may consider using this program if:

  • You took out Direct Loans or consolidated Stafford and Federal Family Education Loans into a Direct Loan.
  • You're single and don't expect your household income to increase significantly in the long-term. 
  • You're interested in Public Service Loan Forgiveness
  • You have graduate school debt but don't want to take 25 years to pay it off. 
  • You don't qualify for other income-driven repayment options. 

Keep in mind that not every loan is eligible for REPAYE. Direct Parent PLUS loans, Direct Consolidation loans that include PLUS loans and Perkins loans aren't covered by this repayment option. Whether it makes sense for you can depend on how much debt you have, your income and your primary goal in managing student loans.

Is REPAYE right for me?

"The program can be great for some, but there are some drawbacks," said Farrington. "For one, you must always use your combined adjusted gross income if you're married, which may raise your monthly payment."

In that scenario, you'd be better off considering other income-driven repayment plans, such as Income-Based Repayment or Income-Contingent Repayment.

The key is understanding what you can realistically afford to pay. Income-Contingent Repayment, for instance, limits payments to 20 percent of your discretionary income so using the numbers from the earlier example, your monthly payment would be $195.

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Should I consider other loan repayment plans?

Aside from income-based repayment plans, there are other ways to lower monthly student loan payments, such as:

  1. Student loan refinance
  2. Debt consolidation loans
  3. Graduated repayment

1. Student loan refinance

A student loan refinance can help you secure a lower interest rate (especially given today's low loan rates) and reduce your monthly payments. A student loan refinance can help make your loan debt easier to deal with and can potentially even cut the life of your loan. Just remember: This is a better option for those with private student loans. If you have federal student loans, make sure to do your research (as you could lose some federal benefits) before you refinance.

Keep in mind that loan rates vary greatly between lenders, so be sure to use a tool like Credible to shop around.

WHAT ARE STUDENT LOAN REFINANCING RATES? 

2. Debt consolidation loans

Debt consolidation allows you to combine multiple loans into one, which can help make monthly payments for federal loans more manageable. Comparing loan consolidation and refinancing can help you figure out which one yields the most benefit.

You can visit Credible to find the best loan rates and decide what debt it makes sense to pay.

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3. Graduated repayment

Graduated repayment starts your payments off low using your current income, then increases them as you earn more money. Extended repayment does something similar, with payments increasing periodically every two years.

"There is no one-size-fits-all program, so make sure you do your research and decide what’s best for you," said Farrington.

HOW TO RECERTIFY YOUR STUDENT LOAN INCOME-DRIVEN REPAYMENT PLAN