PAYE stands for “Pay As You Earn”. It’s a repayment option for four types of federal student loans. Namely:
- Subsidized Direct Loans.
- Unsubsidized Direct Loans.
- Direct PLUS Loans for Students.
- Direct Consolidation Loans.
Monthly Payments For PAYE
When looking at PAYE vs REPAYE, always note this. When you choose a PAYE repayment plan, you should know this. Your monthly payment will be capped at 10% of your discretionary income. However, if your payment amount would be more than the monthly payment required under the standard plan, you won’t be eligible for PAYE.
Forgiveness for PAYE
When looking at PAYE vs REPAYE, always note this. In PAYE, you will be eligible for student loan forgiveness. However, this is after 20 years of qualifying payments under PAYE.
Eligibility for PAYE
When looking at PAYE vs REPAYE, always note this. Eligibility is determined based on when you borrowed. As such, your first Direct Loan must have been issued after October 1, 2007. Also, you must have also received a Direct Loan after October 1, 2011.
What is REPAYE?
REPAYE stands for “Revised Pay As You Earn”. Also, the same four types of Direct Loans may be eligible for this repayment plan.
Monthly Payments for REPAYE
When looking at PAYE vs. REPAYE, always note this. Under this plan, you will make payments. These payments will be capped at 10% of your discretionary income.
Forgiveness for REPAYE
When looking at PAYE vs REPAYE, always note this. REPAYE, like PAYE, will also result in forgiveness of your outstanding loan balance. But this is after 20 years of payments.
However, your repayment timeline could be stretched out to 25 years. This is if you have professional or graduate school loans. Also, it will be before you’re able to get the remaining balance discharged.
Eligibility for REPAYE
When looking at PAYE vs REPAYE, always note this. The big difference between PAYE and REPAYE plans is this. You can still qualify for REPAYE plan if your payment under this plan is greater than the payment would be under the standard plan.
This provides you with more flexibility in choosing your repayment plan. Also, it gives you the opportunity to lengthen your repayment timeline. You can lengthen it beyond the standard repayment plan if you need to.
PAYE vs REPAYE
When looking at PAYE vs REPAYE, always note this. Choosing between them can be difficult for loan borrowers. This is because PAYE and REPAYE plans are very similar. However, REPAYE plans are more flexible than PAYE plans.
Thus, if you have a higher income, PAYE may not be an option for you. This is because your capped monthly payment would exceed your payment under the 10-year standard repayment plan.
Also, if that’s the case, REPAYE may be your best option. However, if you have just a small amount of debt and your main focus is on getting the lowest possible payments, PAYE could be the right choice.
Before you choose PAYE or REPAYE, note. You need to be aware that both are generally going to result in this. You’ll be paying more in total interest. This is going to be over the life of your loan.
Also, it’ll be more than you would pay if you stuck with the standard repayment plan. Thus, don’t assume the capped monthly payments are always going to make REPAYE or PAYE the cheapest option, even with loan forgiveness.
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PAYE vs. REPAYE: How to Determine Which is Better
When looking at PAYE vs REPAYE, always note this. You’ll need to do the math when debating PAYE vs REPAYE. This is to determine which plan is better. However, here are guidelines for making the decision:
- Make sure IDR fits for you.
- Check if you qualify for PAYE.
- Run the numbers.
Also, before you make a final decision on PAYE vs REPAYE, make sure you know these details:
Consequences of Switching Repayment Plans
Once you choose a repayment plan, avoid switching. When you leave an income-driven repayment plan, the unpaid interest is capitalized. This increases the total interest you pay over time.
Impact of Losing PAYE Eligibility
When looking at PAYE vs REPAYE, always note this. If your income increases to the point where you no longer qualify to make payments on PAYE, you’ll technically remain on the plan but your payment won’t be based on your income.
Thus, it will be equal to what you’d pay on the standard plan. Unpaid interest will capitalize, but the capitalized amount is limited to 10% of your original loan balance when you entered PAYE.
Tax Treatment of Forgiven Student Loans
When looking at PAYE vs REPAYE, always note this. If you’re projected to get income-driven repayment forgiveness. Please note. keep in mind that the forgiven amount will be taxed as income.
In that case, choosing the plan that gives you the lowest monthly payment would do this. It would maximize the amount you get forgiven. But increase your future tax burden. However, f you’re pursuing PSLF, you don’t have to worry about this. This is because loans forgiven through PSLF aren’t taxed as income.
Differences in Repayment Timelines
When looking at PAYE vs REPAYE, always note this. If you have any loans from graduate school, your repayment schedule is 25 years on REPAYE. Otherwise, the repayment period on REPAYE is 20 years. The repayment term on PAYE is 20 years. This is regardless of your loan type.
Please Note This About PAYE vs REPAYE
When looking at Pay As You Earn vs REPAYE, always note this. Also, it’s pertinent you know that if you have a portion of your loan balance forgiven under Pay As You Earn or REPAYE, you will be taxed on the amount that is forgiven as if it were income.
This could leave you facing a substantial tax bill. This is not just because you have to pay tax on this discharged amount. But also because the big amount of “income” could bump you up into a higher tax bracket.
If you want to compare what your payments would be under Pay As You Earn vs REPAYE, you can use the repayment estimator on the Federal Student Aid website. Knowing what your payments will be can help you to make the most informed choice regarding which plan is best.
In a Nutshell
In a nutshell, please know this about PAYE and REPAYE. They both extend your student loan term. Also, they set payments at 10% of your discretionary income. Furthermore, they forgive any balance remaining after the repayment period.
PAYE and REPAYE are both good choices if you are interested in income-driven repayment. Also, if you want to make sure your monthly student loan payment is affordable, try PAYE and REPAYE.
Just be sure you understand you could end up paying a substantial amount of interest. That is if you stretch out your loan repayment over two decades. Also, you could get hit with a big tax bill in the end.