Pay As You Earn is even hotter than Income-Based Repayment
President Obama’s new Pay As You Earn (PAYE) repayment option is yummy. Thank you, Mr. President!
Except, um, lots of us don’t qualify for PAYE and will have to settle for its somewhat less attractive (but still good looking) older sibling--Income-Based Repayment (IBR).
Here’s a short list of some of the similarities and differences between Pay As You Earn and Income-Based Repayment:
- Only “new borrowers” are eligible to choose Pay As You Earn Only federal Direct Loans are eligible for repayment under Pay As You Earn
- Only federal Direct Loans are eligible for repayment under Pay As You Earn
- Pay As You Earn payments are lower than payments under Income-Based Repayment
- Pay As You Earn forgiveness is faster than Income-Based Repayment Forgiveness, but both are taxable as income
- Pay As You Earn and Income-Based Repayment are qualifying repayment plans for Public Service Loan Forgiveness
- Both Pay As Your Earn and Income-Based Repayment include an interest subsidy
- To choose either Pay As You Earn or Income-Based Repayment, you must demonstrate a Partial Financial Hardship
Only “new borrowers” are eligible to choose Pay As You Earn
You are not eligible to choose PAYE unless you are a “new borrower”.
You are a new borrower if and only if you:
- didn’t owe any money on any federal student loan as of Oct. 1, 2007, and
- received a disbursement of a Direct Loan on or after Oct. 1, 2011.
Is there anything you can do to be eligible for PAYE if you owed money on a federal loan on October 1, 2007?
Nope. Nothing. Sorry. (It’s a budget thing; the government is broke too).
Only federal Direct Loans are eligible for repayment under Pay As You Earn
Only loans made under the Direct Loan Program are eligible for PAYE, but both Direct Loans and Federal Family Education Loans (FFEL) are eligible for IBR.
Parent PLUS Loans (and consolidation loans that repaid Parent PLUS loans) are not eligible for either PAYE or IBR.
Private student loans aren’t eligible for anything. Sigh.
Pay As You Earn payments are lower than payments under Income-Based Repayment
Under both Pay As You Earn (PAYE) and Income-Based Repayment (IBR), the amount you are required to repay each month is based on your adjusted gross income (AGI) and family size. If you are married and file a joint federal tax return with your spouse, your AGI includes both your income and your spouse’s income.
The annual PAYE repayment amount is 10 percent of the difference between your AGI and 150 percent of the Poverty Guideline for your family size.
The annual IBR payment amount is 15 percent of the difference between your AGI and 150 percent of the Poverty Guideline for your family size.
Pay As You Earn forgiveness is faster than Income-Based Repayment Forgiveness, but both are taxable as income
If you repay under PAYE, any remaining balance will be forgiven after 20 years of qualifying payments.
If you repay under IBR, any remaining balance will be forgiven after 25 years of qualifying payments.
Forgiveness under both PAYE and IBR is taxable as income under current law (but Public Service Loan Forgiveness is not).
Pay As You Earn and Income-Based Repayment are qualifying repayment plans for Public Service Loan Forgiveness
Public Service Loan Forgiveness (PSLF) can be earned after 120 qualifying payments. Both PAYE and IBR are qualifying repayment plans for PSLF. PSLF is not taxable as income. Sweet.
Both Pay As You Earn and Income-Based Repayment include an interest subsidy, but Pay As You Earn takes it to eleven
Under either PAYE or IBR, if your monthly payment amount does not cover the full amount of interest that accrues on your loans each month, the government will pay your unpaid accrued interest on your subsidized loans (and on the subsidized portion of your consolidation loans) for up to three consecutive years from the date you begin repaying your loans.
Under PAYE only, capitalization of interest is limited to 10 percent of the original balance. Nice.
To choose either Pay As You Earn or Income-Based Repayment, you must demonstrate a Partial Financial Hardship
To choose either PAYE or IBR, you must have a relatively high debt to income ratio, called a Partial Financial Hardship. It is easier our income, family size, and state of residence to calculate your Pay As You Earn monthly payment amount. If that amount is lower than the monthly payment you would be required to pay on your eligible loans under a 10-year Standard Repayment Plan, then you are eligible to repay your loans under the Pay As You Earn plan. Although only Direct Loans may be repaid under PAYE, your eligible FFEL loans will also be taken into account when determining whether you have a Partial Financial Hardship.
Want even more about Pay As You Earn?
About PAYE from the Department of Ed: http://studentaid.ed.gov/repay-loans/understand/plans/pay-as-you-earn
Department of Ed's Pay As You Earn calculator