I love my loan repayment plan. Not many people can say that but not many people can also say that they are able to make $0 monthly payments with interest rates cut in half. I can and that is why I love the REPAYE plan that almost everyone with federal loans is eligible for.
REPAYE stands for Revised Pay as You Earn. It is an income-based repayment program offered for those with federal loans. It is the newer, more inclusive version of PAYE which limited eligibility to borrowers after October 2011. Regardless of when you took out your loans, you are eligible to apply for the REPAYE program as long as you have not refinanced to a private loan.
So without further ado, these are the 3 reasons why I love REPAYE and why I have recommended it to all my friends with student loans.
1. $0 monthly payment
You can apply for REPAYE at any time during your loan repayment period but the sooner you do it, the lower your monthly payment is likely to be. This is because your monthly payment is calculated based on last year’s income.
If you just graduated, you likely made very little to nothing during your last year of school which makes it possible to have $0 monthly payment for the year. In fact, this is exactly how I was able to lock in a $0 monthly payment until 2019.
Your monthly payment will be reassessed once a year so once you’ve locked in a monthly payment amount, it is good for a year even if your income increases during that year.
Just a disclaimer, I am in no way saying you should not start repaying your loans for a year! I have been aggressively paying mine down and I use the $0 monthly payment to focus all my extra payments on my loan of choice (the one with the highest interest rate) while putting the rest on hold.
Related:
- My Debt Progress
- 5 Steps to Handle Student Loans After Graduation
- Repayment Guide: Debt Snowball vs Debt Avalanche
2. Interest Subsidy
Hands down, my favorite thing about the REPAYE program is that the government will actually subsidize some or all the interest you accrue on your loans. With REPAYE, if your monthly payment is not enough to cover the interest you accrue during the month, the government will subsidize 100% of that interest on subsidized loans and 50% of that interest on unsubsidized loans.
So what does that mean? It means, if you are a new grad and likely have $0 monthly payment, all your subsidized loans will not accrue any interest for 3 years at which time it will accrue at half of your interest rate.
Your unsubsidized loans will still accrue interest but at half your interest rate! Even better, the interest you accrue will never be capitalized unless you leave the REPAYE program.
If I could do one thing differently, it would be to apply for REPAYE sooner. I didn’t apply for REPAYE until after my 6-month deferment period came to an end. While this did not change my monthly payment, as I was still not obligated to make payments during deferment, it would have changed how much interest accrued.
This would have been highly valuable, especially in the beginning of loan repayment when I had the highest amount of debt with the highest interest rates. Not having interest accrue at all for my subsidized loan and only having it accrue at 50% for my unsubsidized loan would have saved me at least $350/month since I was accruing about $700 in interest every month.
I didn’t apply for REPAYE until 2 months after my deferment ended so I missed out on saving $350/month for 8 months. This means I wasted $2,800 on paying interest by not applying for REPAYE right away.
Just be aware that if you decide to enter REPAYE right away, you will be giving up your deferment period. If I had known about REPAYE sooner, I would have done it right away, because I was making extra payments during deferment anyways.
However, if you decide to enter REPAYE right away, just know that your one year period will start ticking right away. Since I started REPAYE after deferment, technically I will have a year and a half of $0 monthly payments.
If you are unsure of your financial situation, I would hold off until after deferment ends to enter the REPAYE program.
Related:
- How I Paid Off $50,000 Debt in 7 Months
- Private Loan vs Federal Loan: to Refinance or Not?
3. Pay no more than 10% of discretionary income per month
REPAYE caps your monthly payment at 10% of your discretionary income. Discretionary income is your income minus 150% of poverty level for your state and family size.
There is no set amount that you have to pay each month but rather it will be based on your salary. This is a really nice perk because putting 10% of income to student loans should be absolutely doable.
While I am trying to be as objective as I can, I really don’t see any downside to being on the REPAYE program. The only one I can think of is that you can grow complacent and hold off on paying your debt while on the $0 monthly payment.
If you are motivated to pay off your debt as soon as possible, look at REPAYE as a tool to help you cut down on interest while you focus on making payments to the individual loan you want to pay off first.
Since I have entered the REPAYE program, I have been able to focus on paying my loan with the highest interest rate while not making any payments to all my other loans. By focusing my payments on one loan, I am able to get to my principal balance sooner rather than wasting money paying interest on all my other loans each month while not making a dent on my principal at all.
Personally, I don’t think there is anything to lose. Once you are in the REPAYE program, you can always get out of income-based repayment and go back to a term-based repayment so there is really no reason to not at least give it a try.
