PAYE vs. REPAYE: Key Differences | Which Repayment Plan is Better ?
Under the US Federal Student Loans, there are two different types of repayment plans. A student who has taken a loan can follow the PAYE or the REPAYE to clear the dues to the Federal Government. The acronym PAYE stands for Pay As You Earn. The full form of REPAYE is Revised Pay As You Earn. You can follow any of these two educational loan repayment modes. You can go for either of the two depending on your earnings and repayment capacity.
What is Pay As You Earn (PAYE)?
PAYE is an income-linked system of repaying the student loan taken by you in the USA. Under the PAYE system, your employer will calculate and deduct loan repayments due each pay period. For this, your employer will take into consideration your income for that period. To qualify to avail of the PAYE benefit, a student must prove a partial financial hardship.
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What is Revised Pay As You Earn (REPAYE)?
REPAYE is an educational loan repayment plan. This is based on the incomes of you and your spouse. This is applicable even if your spouse files the tax return on a separate individual basis. This scheme is subject to Mortgage Penalty.
This income-driven repayment plan is allowed for/up to 25 years for Graduates and 20 years for Undergraduates. On repaying the loan amount for these two respective periods, the balance loan is forgiven by the Federal Government.
PAYE vs. REPAYE: Key Differences
There are certain differences between these two student loan repayment processes. These differences are explained below:
1) PAYE is 20-year repayment while REPAYE is a 25-year repayment system for Graduate school and a 20-year term loan for Undergraduate school.
2) One major difference is that PAYE is a good option for married students whereas REPAYE will ideally suit single borrowers (who don’t qualify for PAYE).
3) REPAYE’s interest subsidy rate is better than PAYE.
4) Conditions for qualifying REPAYE loan are simpler than that of the PAYE.
5) Terms for availing REPAYE are easier than that of PAYE.
Which is Better: PAYE or REPAYE?
Before taking a student loan in the USA, you must weigh the relative merits and demerits of both PAYE and REPAYE. This will help you to understand which one is better: PAYE or REPAYE.
There are certain plus and minus factors associated with both PAYE and REPAYE. You have to compare the two on merits. After this, you should make a decision whether you should go for PAYE or REPAYE.
We are Giving Below a Picture of a Comparative Study Between PAYE and REPAYE:
1) PAYE is judged the better option for a student taking a loan. REPAYE is no doubt good but PAYE is better.
2) PAYE’s loan servicing costs less in the long run. It should always be preferred against REPAYE.
3) PAYE gives you concessions in repayment plus interest servicing if you are a married person whereas REPAYE does not enjoy this benefit.
Can You Switch From REPAYE to PAYE?
Yes. You can switch from REPAYE to PAYE. You are allowed for this change at any given time for loan repayment. It depends on your repayment plans. Once you have decided to reschedule your repayment plan, you can easily switch from REPAYE to PAYE.
This switching is likely to benefit you as a borrower. If your income increases, this switching might be ideal for you. The Standard Repayment Plan (SRP) of PAYE is 10 years.
If your income rises, you can switch to PAYE from REPAYE to quickly repay the loan and interest servicing, whatever it may be. However, you know that the SRP cap may not be of much help to you if the principal loan amount is very high.
In such a case, it would be unwise to switch to PAYE from REPAYE.
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Alternatives to PAYE and REPAYE
As a student in the USA pursuing your Undergraduate and Graduate studies, you have several options or alternatives to avail of educational loans on long terms besides the PAYE and REPAYE.
The US Federal student loans run as follows:
- Direct subsidized federal loan.
- Direct unsubsidized federal loan.
- Direct Grad PLUS loan.
- Direct Parent PLUS loan.
- Direct Consolidation Loan.
These loans belong to the category of income-driven repayment plans which mainly depends on your income, family size and repayment capacity. You may select the loan type depending on your convenience.
You must note that you need to submit just one application for all the Income-Driven Repayment (IDR) plans.
FAQs (Frequently Asked Questions)
1. What is The Salary Cap for PAYE?
To qualify for PAYE, you don’t need a maximum cap of income. Your annual salary factor is not taken into consideration to qualify for PAYE. There is no strict salary cap as such for PAYE but your monthly repayment amount is usually 10% of your discretionary income. This can be divided into 12 (months). But it cannot be more than the 10-year Standard Repayment amount.
2. How Do You Know If You Qualify for PAYE?
The US Federal Student loan plan PAYE has some requirements which you must follow to avail of the loan. To qualify for this loan, you have to meet the under-mentioned norms or conditions:
i. You need to have borrowed your first Federal student loan after October 1, 2007, and borrowed a Direct Loan or a Direct Consolidation Loan after October 1, 2011.
ii. You need to have borrowed for college for the first time in the academic year 2008-09 and still been in school during the 2011-12 academic year.
iii. You don’t need to have any maximum income limit to qualify for PAYE.
3. Is REPAYE Eligible for Loan Forgiveness?
Yes, REPAYE loans are eligible for loan forgiveness under the Public Service Loan Forgiveness program of the US Federal government. Your remaining balance after regular repayment will be forgiven after 20 or 25 years. However, you qualify for forgiveness after 20 years.
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PAYE and REPAYE are loan types among other loan options. To meet your financial requirement to finance your studies. This is a major benefit provided to the students pursuing Undergraduate and Graduate studies. Such loans like PAYE or REPAYE will be beneficial for you as the repayment duration is quite long, running up to a maximum period of 25 years.
After getting a job, you can keep on paying the loans in installments from the salary you draw per month. This is known as the Income-Based Repayment Plan. You also get the benefit of an interest waiver on the principal amount you have borrowed.