If you have remaining loans and cannot pay every month currently, you qualify for an income-driven repayment (IDR) package.
IDR plans will lower your monthly contributions. They are based on your discretionary income and stretching your repayment period.
The question is, which IDR plan suits you the best?
Two of the four IDR plans are Revised Pay As You Earn (REPAYE) and Pay As You Earn (PAYE).
They vary in terms of how much you would be able to afford for a certain amount of time, as well as available student loan types.
Read further to know more about these two opportunities for repayment. You can also check this video for a visual presentation:
What is Income-Driven Repayment, And How Does it Work?
In an income-driven repayment (IDR) plan, your annual student loan contributions are based on your real income.
After paying for at least 25 years, an IDR may reduce your monthly payment amount, resulting in half of your debt repayment in student loans.
Your payment for every month would be based on a proportion of your “discretionary salary.” This is the disparity between your paycheck every year and 150% of your state’s poverty level.
Conclusively, it’s the cash left over after paying your regular family expenses, including taxes, food, utilities, and rent. However, there is a catch.
IDR plans aren’t open to everyone; they’re just for those particular forms of federal student loans. Eligibility can also be determined by the size of your family and your household income.
To apply for an IDR, you must, although sometimes, show financial difficulty on your application.
What is Pay As You Earn (PAYE)?
PAYE is a known plan under IDR in which your payment every month is usually based on 10% of your taxable income. However, they must not surpass what you will pay under a regular plan that lasts ten years.
Your partner’s salary would not be counted if you’re married but file a different tax form. For certain borrowers, PAYE results in the lowest monthly loan fees.
Your student loan debt will usually be repaid after 20 years. If you apply for Public Service Debt Forgiveness, though, the loan balance you have left will be repaid in as little as ten years.
What is Revised Pay As You Earn (REPAYE)?
REPAYE is another IDR plan that has empowered a significant number of federal student loan borrowers.
Frequently, they once didn’t have the qualifications for other repayment plans to decrease their monthly scheduled installments.
REPAYE, like PAYE, caps your federal student loan contributions at 10% of your net income. However, if your salary rises higher than expected, you’ll pay for more than you will on the regular repayment plan.
Furthermore, there are often talks about the “marriage penalty” in REPAY. This means that the loan contributions are dependent on both you and your partner’s wages, despite filing different tax returns.
The REPAYE package has 20-year repayment terms for undergraduate loans with eligibility and an additional five years for eligible graduate loans.
Your unpaid student loan balances will be forgiven after completing the repayment term.
If you apply for Public Service Loan Forgiveness, you can join it with REPAYE. What’s left of your balance is pardoned after only ten years of payments adjusted by income.
What is Interest Subsidy?
The payments you adjusted under REPAYE and PAYE can be insufficient. This offsets the interest that increases your loan every 30 days. Negative amortization is the term for this.
However, both plans provide borrowers with assistance through interest subsidies.
PAYE usually doesn’t capitalize the additional rates on subsidized loans. (Unpaid debt is capitalized and credited to the primary balance of the loan.)
Instead, within your plan’s first three years, the federal government will cover the expenses. Restricted interest capitalization may happen if you abruptly exit the plan.
What if your wage is too insufficient to pay the subsidized loans and their excessive interest rates? Then, the Department of Education will reimburse them for up to three years under the REPAYE plan.
The interest subsidy will cover half of any further interest fees accumulated on the debt after three years.
Choosing the Best Option for You
When deciding between PAYE and REPAYE, you’ll need to do the calculations and see which plan is better for you, so here are some general rules to follow.
See if IDR is a Good Match for You
The four IDR plans, including REPAYE and PAYE, do not apply to private student loans.
For federal student loan repayment, there are two major considerations to use REPAYE or PAYE:
- You’re considering Public Service Loan Forgiveness
- You can’t handle installments on the regular, 10-year installment schedule.
In this case, having the lowest monthly cost is likely to be your target, so an IDR plan makes sense.
If you don’t want to pursue PSLF but have enough for the standard repayment plan, take the chance. By staying with that type of plan, you can save a lot of interest and get out of debt quicker.
Having good credit is also a plus. You can get your student loans refinanced to decrease your interest rate for more savings.
Check if You Qualify for PAYE
You must fulfill all of the following conditions to be qualified for PAYE:
- Have had a loan disbursement on or after October 1, 2011. You may have had a loan combined on or after that date.
- Have earned a government loan on or after October 1, 2007, and had no federal loans pending at the moment.
- You are experiencing a partial financial burden. This means the PAYE rate would be lower than it will be on a standard IDR plan.
The wage eligibility condition for PAYE effectively ensures that you only apply if you will benefit from a reduced salary. You will not have a higher payment on PAYE than it will be on the standard plan.
Run The Numbers
To calculate monthly installments for PAYE vs. REPAYE, use the Loan Simulator tool provided by Federal Student Aid. This also counts in other federal student loan repayment plans.
Each plan’s overall interest rates and debt repayment potential are also shown in the tool. Gather all of the data below to get the correct results:
- You and your partner’s adjusted gross income
- Your residing state, family size, and tax filing status
- You and your partner’s interest rates, balances, and student loan types
Look at the monthly payment for every IDR plan and select the one with the most minimal payment. Over 100 percent of lacking interest will get subsided by the government for the first three years of repayment. It will be under REPAYE and PAYE.
Conclusively, although your payment is insufficient to pay off the interest, your loan will still not accrue them.
After repayment for three years, REPAYE takes one rung up the ladder. This happens through subsidizing 50% of the remaining interest on subsidized loans. Additionally, it also includes unsubsidized loans in the entire time frame.
Have the Following Points in Mind
The Impact of Transferring Repayment Plans
Avoid swapping plans until you’ve decided on one. They will capitalize your remaining interest as you abandon an IDR plan, increasing the average interest you have in the future.
Losing PAYE Eligibility
If your payment does not qualify you for PAYE benefits, you will still stay on the plan. However, your wage will no longer be the basis of your payment.
Neglected revenue will capitalize. But, there is a limit of 10% on the amount of the underlying loan balance when you join PAYE.
How Forgiven Student Loans are Taxed
Bear in mind that the forgiving balance would be taxed as revenue if you’re expecting IDR redemption. In that scenario, a plan with the smallest monthly contribution will raise the amount forgiven. At the same time, without increasing the potential tax burden.
You don’t have to think about this while you’re doing PSLF; they do not tax as wage the debts repaid by PSLF.
Disparities in Repayment Schedules
If you have some graduate school debt, you still have 25 years for the REPAYE repayment schedule. Otherwise, REPAYE has 20 years.
No matter what type of loan you have, the PAYE repayment period is 20 years.
Consider the Following Factors
- REPAYE has a streamlined certification process
You don’t have to show financial difficulty to enroll in the plan, for example. If you’re concerned that you won’t apply for PAYE, REPAYE might be a good option.
- PAYE sets a limit on the amount you will pay.
You won’t be eligible if your monthly contribution is more than what you’d pay under a regular 10-year installment contract.
- For sole borrowers, REPAYE is usually preferable.
If you’re married or planning to get married, your spouse’s income will increase the size of your REPAYE monthly payment.
- PAYE reduces the amount of time it takes for outstanding graduate loans to be forgiven.
Under PAYE, eligible graduate student loans may be repaid after 20 years. Before you are relieved of qualifying graduate debt with REPAYE, you must stay in the program for 25 years.
What About Refinancing Student Loans?
IDR plans such as PAYE and REPAYE can help you save money on your monthly bills. Still, you’ll always have to pay for decades.
You can pay more in interest charges if you take out a longer loan period. IDR programs are therefore ineligible if you have private student loans.
Understudy loan renegotiating is another alternative for dealing with the school obligation.
At the point when you renegotiate your obligation, you’re consolidating numerous credits into a solitary, reasonable advance.
You could be qualified for new credit terms. For example, a diminished loan fee and home loan cost that helps you set aside cash over the long haul. Borrowers with solid wages and great to-superb FICO assessments ought to think about this other option.
Final Thoughts
In total, the Department of Education provides five IDR plans. If you believe an IDR Plan is a good choice, you should weigh the pros and cons. Every plan depends on unique circumstances (loan type, family size, income, and others).
The ability to meet each plan’s eligibility criteria determines which IDR Plan is the best fit for you. Fortunately, you only need to fill out a single IDR application to be eligible for any plan.
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Letting your family and friends know will also help them with loan problems if they have remaining balances.
