For most doctors, the burden of student loan debt is a simple fact of life.
With the average student loan balance close to $200,000 following medical school, the resulting debt at the end of training is enormous. Fortunately, there are federal programs designed to ease the burden.
Most students seeking their medical degree can borrow the funds needed to complete their education requirements and defer repaying until the graduate begins to earn an income. For most newly licensed physicians, however, the excitement from that first attractive offer can be dampened by the thought of paying back that huge sum of money you borrowed and the interest that has accumulated.
Over time, the government and lending institutions have offered several methods of student loan repayment in an attempt to help doctors repay it in terms that would be more bearable. The most popular plan based on income, IBR, allowed federal loan borrowers to pay 15% of their income and then offered forgiveness after 25 years.
Let's take a closer at look at the PAYE and REPAYE student loan repayment programs to determine which is the best fit for your needs.
What is PAYE?
PAYE is short for Pay As You Earn. It's an income-driven debt repayment program for borrowers of federal direct student loans.
Although the requirements for PAYE are difficult to understand, the plan is worth consideration for doctors who borrowed federal student loans beginning October 1, 2007, and later, and took out another loan after September 30, 2011. With the PAYE program, your payments could be as low as zero if you have no earnings after graduation.
The PAYE program was designed and targeted to borrowers who graduated in 2012. The target market was considered to be graduates who started borrowing college loans in 2008 and then graduated in 2012. It was also intended for those who took out additional loans for graduate school afterward.
In addition to the timing requirements for the year you borrowed money, there are two additional requirements for PAYE:
1. Type of loan: In order to use the PAYE program, the student must have used federal direct loans. You can, however, combine Perkins or Federal Family Education loans to have them qualify for PAYE. You should consider, however, that you will lose the forgiveness option available in the Perkins loan program.
2. Income guidelines: Similar to the income-based repayment program, PAYE requires the borrower to demonstrate a partial financial hardship and your bill with PAYE must be less than what you would owe under the standard 10-year plan. If qualified, your monthly installment would be calculated to be 10 percent of the difference between your monthly income and 150% of the federal poverty guideline. When your income increases, your adjusted payment cannot be more than what you would normally pay on the standard plan.
What is REPAYE?
REPAYE is short for Revised Pay As You Earn. As its name suggests, REPAYE is the new-and-improved version of the PAYE repayment program that was launched by the Department of Education in 2015 to further address the student loan debt crisis. Think of it as PAYE 2.0.
The REPAYE plan makes the burden of repaying student loans easier for graduates, as the monthly installment depends on the income of the borrower.
Although similar to the PAYE program, REPAYE does not contain the time restrictions that the PAYE program contains. REPAYE does contain the 20-year forgiveness provision but goes further in allowing borrowers for graduate studies to be forgiven after 25 years. It also does not require the borrower to prove that repaying a student loan is a burden so virtually anyone will qualify.
REPAYE also provides for the government to pick up unpaid interest on subsidized and unsubsidized Direct loans. Where PAYE allows for the government to cover unpaid interest on subsidized student loans for three years if the monthly installment didn’t cover all of the interest, REPAYE matches this and expands the subsidy to unsubsidized federal loans, as well as the unpaid interest on subsidized loans over the designated three years.
This makes REPAYE a better choice for borrowers who are low-income earners because the 10 percent monthly installment cap typically will not cover the entire interest payment.
Simply put, the PAYE plan has more restrictive eligibility requirements than income-based repayment and REPAYE. But if you are a candidate for the PAYE plan and its restrictions, it will give you the most beneficial monthly installment and other additional perks.
An example of PAYE vs. REPAYE
Let’s consider a college graduate who is single and living in California. The graduate is earning $50,000 a year and owes $75,000 in federal loans at an interest rate of 6.8%.
According to the standard plan, the grad would pay $863 a month for ten years.
On the PAYE plan, however, the monthly installment would be only $270, and the loan balance would be forgiven after 20 years.
The downside is that the IRS will consider the amount forgiven as taxable income.
For a deeper dive, we highly recommend reading:
The Ultimate Guide to Student Loan Refinancing in 2019