If you interested in income-driven repayment plans Paye and Repaye are great options as they work based on your discretionary income. Student loan repayment is an important phase for every borrower.
Both Paye and Repaye is an income-driven repayment program. The main difference is that Paye depends only on federal loans and Repaye is most associated with private loans.
The income Driven Repayment plan helps the person to repay the principal amount by capping 10% of his discretionary income of the person. This increases with the increase in income and the family size.
What is Paye?
The Paye (Pay-as-you-Earn) is a repayment plan which withholds or deducts the payment for the loan interest from the payment. The deducted amount is also refundable if the amount exceeds the interest amount.
It was introduced by US President Barack Obama in October 2011. Back then it was commonly known as the Obama student loan repayment. It’s considered most suitable for married couples because they both can have an income.
When you choose a PAYE repayment plan, your monthly payment will be capped at 10% of your discretionary income.
However, you won’t be eligible for PAYE, if your payment amount is more than the monthly payment.
After 20 years of qualifying payments under PAYE, you will be eligible for student loan forgiveness.
Eligibility is determined based on when you borrowed, as your first Direct Loan must have been issued after October 1, 2007. You should receive a Direct Loan after October 1, 2011.
What is Repaye?
The Repaye (Revised-Pay-as-you-Earn) is a plan which caps about 10% of the discretionary income of a person and pays off the interest loan amount with it and it also forgives the rest of the amount if the person has paid about 20 years of repayment.
It was a golden door for millions of students because in Paye there were many restrictions about the loan taken by the student and it was limited only to William D Ford Direct loan, It also included Direct loans, Subsidised loan, and unsubsidized loans.
Under this plan, you will make payments capped at 10% of your discretionary income.
REPAYE, like PAYE, will also result in forgiveness of your outstanding loan balance after 20 years of payments.
However, if you have professional or graduate school loans, your repayment timeline could be stretched out to 25 years before you’re able to get the remaining balance discharged.
The big difference between PAYE and REPAYE plans is that you can still qualify for the 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 and gives you the opportunity to lengthen your repayment timeline beyond the standard repayment plan if you need to.
Paye and Repaye: The Similarities
Both PAYE and REPAYE are IDR plans that set your monthly payment at no more than 10% of your discretionary income.
The government determines your discretionary income by taking the difference between your annual income and 150% of the poverty level guideline for your family size and state.
And both PAYE and REPAYE set the same repayment timeline for loans taken out for your undergraduate degree. If you haven’t completed your undergraduate loan repayment after 20 years for either PAYE or REPAYE, your loans are forgiven.
If you have loans that you took out for graduate or professional school, REPAYE adds an extra 5 years to that figure.
PAYE and REPAYE plans allow the same types of loans to qualify. Parent PLUS loans aren’t eligible for either plan, but the following loan types are qualified:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Also, Direct PLUS Loans (not made to parents)
- Direct Consolidation Loans (no loans that include PLUS Loans to parents)
Some Federal Stafford Loans might be eligible if they’re consolidated first.
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Paye and Repaye: The Differences
While the names are quite similar, these plans have some big differences to look out for:
REPAYE has extra repayment time
If you received qualifying loans during graduate or professional study, you have 25 years before you get forgiveness, compared to 20 years with PAYE. If you took out loans for grad school, PAYE may be a better option.
PAYE is for new borrowers only
Your eligibility for PAYE is directly tied to when you took out your federal student loans. Generally speaking, if you received your loans after October 1, 2011 you qualify.
PAYE will cap your repayment amount
If you’re set to owe more each month under PAYE than you would under the Standard Repayment Plan, you wouldn’t qualify for PAYE in the first place. Under PAYE, you’ll never owe more than you would on the standard plan.
REPAYE considers both spouses incomes
Unless you are separated from your spouse, REPAYE will look at your spouse’s income if you are married – even if you file taxes separately.
If your spouse’s income is significant, it will increase your monthly payment. With PAYE, you can avoid having your spouse’s income considered by filing taxes separately.
As such, it can be a better option for married individuals.
PAYE has an income requirement to qualify
For PAYE, you need a low income relative to your total student debt load to qualify. REPAYE has no such requirement.
PAYE and REPAYE cover your unpaid interest differently
With PAYE, the government will cover all unpaid interest that accrues on your subsidized loans in the first 3 years of repayment.
REPAYE covers that as well, but there’s an extra bonus – the government will pay 50% of your unpaid interest on unsubsidized loans during all periods, and 50% of the interest on your subsidized loans after the first three years of full coverage are up.
Alternative Plans to Paye and Repaye
In general, IDR plans are crafted to help you make your monthly payments on time without falling behind, crushing your credit score, and putting your loans in default.
But PAYE and REPAYE aren’t the only options around. Here are a few alternatives:
Direct Consolidation Loan
You can consolidate your loans and have one manageable payment each month rather than many. These loans are only offered to federal student loan borrowers; private student loans don’t qualify.
When you consolidate student loans, you can extend your repayment term up to 30 years total, which will lower your monthly payment.
Student Loan Refinancing
If you have a mix of private and federal student loans, or you have strong credit and you’re looking to get a lower interest rate, you can try refinancing. With refinancing, you take a new loan out to pay off your outstanding loans.
You’ll then have one payment each month for the new loan, with a new interest rate and term based on your credit score and income.
But keep in mind that refinancing doesn’t guarantee you a lower interest rate or better loan terms than what you currently have.
PAYE and REPAYE are both good choices if you have an interest in income-driven repayment in order to make sure your monthly student loan payment is affordable.
Just be sure you understand you could end up paying a substantial amount of interest if you stretch out your loan repayment over two decades—and you could get hit with a big tax bill in the end.
You should compare all of your repayment options, including the total cost of repayment as well as the affordability of monthly payments, to determine which payment plan is best for you.
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