Revised pay as you earn

What Is Revised Pay As You Earn?

Revised Pay As You Earn (REPAYE) was a federal student loan repayment program designed to make monthly loan payments more affordable for borrowers by capping payments at a percentage of their discretionary income. It falls under the broader category of Income-Driven Repayment (IDR) plans, which adjust payment amounts based on a borrower's financial circumstances rather than a fixed loan balance. The goal of REPAYE was to prevent financial hardship and potential loan default for individuals with lower incomes relative to their student loan debt. In 2023, REPAYE was superseded by the Saving on a Valuable Education (SAVE) Plan, which offers even more favorable terms to borrowers.²⁸ However, understanding REPAYE provides crucial context for the evolution of federal student loan policy.

History and Origin

The concept of income-driven repayment plans for federal student loans emerged in the early 1990s as a response to the increasing burden of student loan debt and the growing number of borrowers struggling to afford standard repayment schedules.²⁷,²⁶ The first such plan, Income-Contingent Repayment (ICR), was introduced in 1994.²⁵ Over the years, several other IDR plans were developed, including Income-Based Repayment (IBR) and Pay As You Earn (PAYE), each with distinct features regarding payment calculations, eligibility, and loan forgiveness periods.²⁴

Revised Pay As You Earn (REPAYE) was launched in December 2015, building upon the framework of existing IDR plans. It aimed to expand eligibility and offer more generous terms, particularly by capping monthly payments at 10% of discretionary income for all eligible federal Direct Loan borrowers, regardless of when they took out their loans.²³ This represented a significant shift, as some prior IDR plans had more restrictive eligibility criteria or higher payment percentages. The development of REPAYE reflected ongoing efforts by the U.S. Department of Education to make student loan repayment more manageable and accessible, leading to its eventual evolution into the SAVE plan.²²

Key Takeaways

• Revised Pay As You Earn (REPAYE) was a federal income-driven repayment plan for student loans.
• It capped monthly payments at 10% of a borrower's discretionary income.
• REPAYE offered loan forgiveness after 20 or 25 years of qualifying payments, depending on whether the loans were for undergraduate or graduate study.
• A key feature of REPAYE was an interest subsidy that could prevent loan balances from growing due to unpaid interest.²¹
• In 2023, the REPAYE plan was replaced by the Saving on a Valuable Education (SAVE) Plan, with borrowers automatically transitioned.²⁰

Formula and Calculation

The monthly payment under the Revised Pay As You Earn (REPAYE) plan was calculated based on a borrower's adjusted gross income (AGI) and family size. The formula determined the discretionary income, which was then used to calculate the payment.

The steps for calculating the REPAYE monthly payment were as follows:

1. Determine Annual Discretionary Income:
   Discretionary Income = AGI - (150% of the Poverty Line for your family size)

2. Calculate Annual REPAYE Payment:
   Annual REPAYE Payment = 10% of Discretionary Income

3. Calculate Monthly REPAYE Payment:
   Monthly REPAYE Payment = Annual REPAYE Payment / 12

For example, if a single borrower had an AGI of $40,000 and the poverty line for a single individual was $15,650¹⁹, their discretionary income calculation would be:

Then, the annual REPAYE payment would be:

And the monthly REPAYE payment would be:

It is important to note that the specific poverty guidelines are updated annually by the Department of Health and Human Services.¹⁸,¹⁷

Interpreting the Revised Pay As You Earn

Interpreting the Revised Pay As You Earn (REPAYE) plan involved understanding how it aimed to provide financial relief and eventual student loan forgiveness. The core idea was that payments would adjust to a borrower's income, ensuring affordability. If a borrower's income was low, their payment could be as little as $0 per month. Crucially, even $0 payments counted towards the required number of payments for loan forgiveness.

A significant aspect of REPAYE was its interest subsidy. If a borrower's monthly REPAYE payment did not cover the full amount of interest accruing on their loans, the government would pay a portion of the unpaid interest. For subsidized loans, the government paid 100% of the remaining interest for up to three years, and then 50% thereafter. For unsubsidized loans, the government paid 50% of the remaining interest from the start.¹⁶ This feature helped prevent the loan balance from growing excessively due to unpaid interest rate accumulation, a common concern with other income-driven plans where low payments might not cover interest.

Hypothetical Example

Consider Maria, a recent graduate with $35,000 in federal Direct Loans for undergraduate study. Her initial annual salary is $38,000. She lives alone, and the federal poverty guideline for a single individual is $15,650.¹⁵

1. Calculate Discretionary Income:

   • Maria's adjusted gross income (AGI) is $38,000.
   • 150% of the poverty line for a single person is 1.50 x $15,650 = $23,475.
   • Discretionary Income = $38,000 (AGI) - $23,475 = $14,525

2. Calculate Annual REPAYE Payment:

   • Annual payment = 10% of Discretionary Income = 0.10 x $14,525 = $1,452.50

3. Calculate Monthly REPAYE Payment:

   • Monthly payment = $1,452.50 / 12 \approx $121.04

Under the REPAYE plan, Maria's initial monthly student loan payment would be approximately $121.04. This payment would be recalculated annually based on her updated income and family size. If her income decreased or increased, her payment would adjust accordingly, ensuring it remained manageable. If Maria consistently made these payments, her loans would be forgiven after 20 years of repayment, assuming all her loans were for undergraduate studies.

Practical Applications

Revised Pay As You Earn (REPAYE) had several practical applications for federal student loan borrowers, primarily offering a safety net for those facing economic challenges.

• Affordable Payments: For individuals with low incomes relative to their debt, REPAYE provided manageable monthly payments, which could even be as low as $0. This was particularly beneficial for graduates entering fields with lower starting salaries or those experiencing periods of unemployment or financial hardship.
• Interest Benefit: The interest subsidy feature of REPAYE helped prevent loan balances from ballooning due to unpaid interest, a common issue with other income-driven plans where minimum payments might not cover interest accrual. This offered a significant advantage, as it reduced the overall debt burden over time.
• Path to Forgiveness: Like other Income-Driven Repayment plans, REPAYE offered loan forgiveness for any remaining balance after 20 or 25 years of qualifying payments. This provided a clear endpoint for repayment, regardless of the initial loan amount.
• Public Service Loan Forgiveness (PSLF) Eligibility: Payments made under REPAYE (and its successor, SAVE) counted as qualifying payments for Public Service Loan Forgiveness, which can lead to forgiveness after just 10 years for eligible public service workers. The lower monthly payments under REPAYE could make PSLF more accessible by reducing the financial strain during the qualifying period.¹⁴
• Consolidation Eligibility: REPAYE was available for most federal Direct Loans. Borrowers with other types of federal student loans, such as Federal Family Education Loan (FFEL) Program loans or Perkins Loans, could consolidate them into a Direct Consolidation Loan to become eligible for REPAYE.¹³ Information on eligible loans and the consolidation process can be found on the Federal Student Aid website.¹²

Limitations and Criticisms

While Revised Pay As You Earn (REPAYE) offered significant benefits, it also had limitations and faced criticisms.

One primary concern for many borrowers on REPAYE was the potential for a longer repayment period compared to the Standard Repayment Plan. While lower monthly payments offered immediate relief, extending the repayment term to 20 or 25 years meant that borrowers would be in debt for a much longer time. This extended period could lead to a higher total amount paid over the life of the loan for some borrowers, even with the interest subsidy, if their income grew significantly over time.

Another point of contention, common to all income-driven plans, was the tax implications of loan forgiveness. While the remaining balance is forgiven after the designated period, the forgiven amount may be considered taxable income by the Internal Revenue Service (IRS) in the year of forgiveness, unless the forgiveness is through Public Service Loan Forgiveness. This potential "tax bomb" could create a substantial tax liability for borrowers at the end of their repayment term, negating some of the benefit of forgiveness.¹¹

Furthermore, the annual income recertification process could be cumbersome for some borrowers. Failure to recertify income and family size on time could lead to a recalculation of payments based on the original loan amount, potentially increasing the monthly payment significantly and causing accrued interest to capitalize (be added to the principal balance).¹⁰ This administrative burden could cause borrowers to fall out of the plan or face unexpected payment increases. The complexity of multiple Income-Driven Repayment plans, including REPAYE, has been a long-standing criticism of the federal student loan system, often leading to confusion for borrowers.⁹

Revised Pay As You Earn vs. Pay As You Earn

Revised Pay As You Earn (REPAYE) and Pay As You Earn (PAYE) were both federal income-driven repayment plans designed to make student loan payments affordable based on a borrower's income. While sharing a similar goal, they had key differences:

The main distinction often came down to eligibility and the payment cap. PAYE offered a payment cap, meaning a borrower's monthly payment would never exceed what they would pay under the Standard Repayment Plan. REPAYE, conversely, had no such cap, which could lead to higher payments than the standard plan if a borrower's income significantly increased. However, REPAYE's broader eligibility and more generous interest subsidy made it a favorable option for many, especially single borrowers or those with higher debt loads relative to income.

FAQs

Who was eligible for Revised Pay As You Earn (REPAYE)?

REPAYE was generally available to all federal Direct Loan borrowers. This included Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans made to students. Parent PLUS loans and Federal Family Education Loan (FFEL) Program loans were not directly eligible but could become so by being consolidated into a Direct Loan Consolidation Loan.⁴

How often did I need to recertify my income for REPAYE?

Borrowers on the REPAYE plan were required to recertify their income and family size annually. This ensured that their monthly payment remained accurate and reflected their current financial situation.³ Failure to recertify on time could lead to a recalculation of payments based on the original loan balance, potentially increasing them significantly.

What happened to REPAYE when the SAVE Plan was introduced?

In 2023, the U.S. Department of Education launched the Saving on a Valuable Education (SAVE) Plan, which effectively replaced REPAYE. Borrowers who were enrolled in REPAYE were automatically transitioned to the SAVE Plan.² The SAVE Plan builds upon REPAYE, offering even more favorable terms such as a lower percentage of discretionary income for undergraduate loans (5% vs. 10%) and an enhanced interest rate subsidy.¹

Did REPAYE affect my credit score?

Enrollment in REPAYE itself did not directly affect your credit score. However, consistent on-time payments, whether they are $0 or a higher amount, contributed positively to your payment history, which is a significant factor in credit scoring. Conversely, missing payments or defaulting on the loan, regardless of the repayment plan, could negatively impact your credit.

Could my REPAYE payment be $0?

Yes, if your discretionary income was low enough, your monthly REPAYE payment could be $0. This occurred when your adjusted gross income (AGI) was less than or equal to 150% of the federal Poverty Line for your family size. Even a $0 payment counted towards the required payments for loan forgiveness.