Hi Heather,

I’ve been looking into IBR and PAYE and I will most likely opt for PAYE since I qualify for it.

My question deals with: what does the monthly payments under IBR or PAYE pay for?
Does it first start paying down the principal or the total amount of principle + interest.
I understand that the interest accrues in addition to the principal, but the yearly interest doesn’t increase due to the previous interest added to the principle.

This is how I understand it and let me know if this is correct:
initial loan = $100,000
Yearly Interest = 10%  (So in one year the interest accrued is $10,000)
Now let’s say PAYE determines that I should pay $15,000.
Now does that $15,000 I pay for the year go into paying off the principle?  As in after the first year the principle will become $85k with an additional $10k interest.
So in year 2 - the loan amount = $85k (with $10k interest)
interest on year 2 becomes only $8.5k?
I still pay another $15k the second year, then does my principle become $70k with 18.5k in interest?

So basically what I’m asking is even if my payment makes any dent towards the principle or if I’m just paying the interest only each year and the principle remains unchanged?

Edited:  I think this will help in answering the question.
In other posts, you state that:
“If a borrower sends more money than what is due, the due date will be postponed by the number of full monthly payments paid, UNLESS the borrower directs otherwise IN WRITING.  Also be aware that if a borrower is in IBR, payments are directed first to any unpaid interest, then collection costs (if any), and finally principal.”

So when you send more money it first goes to unpaid interest then the principal, I understand that.  So do normal payment go first to the unpaid interest then the principal as well?

Thank you!