PAYE vs. IBR: Which Income-Driven Plan Is Better for You?

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If you can’t afford your student loan repayments, you may want to apply for an income-driven repayment plan, such as Pay As You Earn (PAYE) or Income-Based Repayment (IBR). But that said, choosing between PAYE vs. IBR can be tricky.

Let’s take a closer look at these two popular income-driven repayment plans to discover which one might work best for you and your financial situation.

PAYE vs. IBR at a glance

Both plans can reduce your monthly student loan payment based on your income (and your spouse’s income, if applicable), but each plan differs slightly.

Notably, the payment and terms for the IBR depend on whether it was borrowed before or after July 2014.

Here’s an overall look at Pay As You Earn versus Income-Based Repayment:

PAYE IBR
Payment Amount 10% of discretionary income 10% of discretionary income if borrowed on or after 7/1/14
15% of discretionary income if borrowed before 7/1/14
Payment Term 20 years 20 years if borrowed on or after 7/1/14
25 years if borrowed before 7/1/14
Borrower Requirements Payments on 10-year standard plan must exceed 10% of discretionary income;
and
Must not have borrowed federal student loans before 10/1/07;
and
Must have borrowed a Direct loan on or after 10/1/11
Payments on 10-year standard plan must exceed 10% or 15% of discretionary income
Loan Forgiveness Yes, after 20 years
(Forgiven amount may be taxable income)
Yes, after 20 or 25 years
(Forgiven amount may be taxable income)
Direct Loan Consolidation Required Sometimes Less frequently

Note that PAYE covers most federal loans but excludes private student loans and loans made to parents, such as Parent PLUS loans and PLUS loans from the Federal Family Education Loan (FFEL) program. However, you can include PLUS (including FFEL PLUS loans) if you combine them into a Direct consolidation loan first.

You’ll typically qualify for IBR if you have a high debt-to-income ratio, such as if your federal student loan debt exceeds your annual discretionary income or represents a large percentage of your yearly income.

As with PAYE, most federal student loans are eligible for IBR. However, parent and private student loans don’t qualify.

What is discretionary income?

Your PAYE and IBR payments are calculated based on your discretionary income. Here’s how to estimate it for yourself:

  1. Determine your adjusted gross income (AGI) — your tax return will have this info
  2. Refer to the annual poverty guideline for your family size and location, then multiply this number by 1.5
  3. Take the number from Step 1 and subtract the number from Step 2 to determine your discretionary income. Use this amount to determine your potential income-driven repayment rate

PAYE vs. IBR in detail

Here are some details on the key points of difference:

PAYE may lower your student loan bills more than IBR (for older loans)

PAYE may give your budget more breathing room than IBR If your student loans were issued before July 1, 2014. PAYE caps your student loan bill at 10% of your discretionary income, while IBR payments for your older loans are set at 15% of your income.

For loans dated on or after July 1, 2014, payments will cap at 10% of your income for both PAYE and IBR plans.

PAYE offers loan forgiveness up to 5 years earlier than IBR

As illustrated above, both plans offer student loan forgiveness if you have a balance at the end of your repayment term. However, if you qualify for PAYE, you can potentially release your debt five years earlier than under the IBR plan.

In other words:

  • PAYE borrowers qualify for forgiveness after 20 years of payments
  • IBR borrowers with student debt predating July 2014 will be on the hook for 25 years. Otherwise, it’s 20 years, as with PAYE.

Remember too that a forgiven loan may be treated as taxable income. Therefore, it’s worth pursuing the plan that leaves you with a lower balance after 20 or 25 years in order to avoid a hefty tax bill.

Both PAYE and IBR could help pay your interest

One nice perk of IBR and PAYE is their interest benefit for subsidized loans. If based on your income, your monthly payment is so low it doesn’t cover the interest on your loan, the government will pay the difference.

This benefit lasts up to three years from the day you begin repaying under PAYE or IBR. If you leave the program, lose eligibility or forget to renew your plan by the deadline, any unpaid interest could get added to your loan as part of the principal — known as “capitalized interest.”

IBR is easier to qualify for than PAYE

While PAYE may further reduce your student loan bills and get you out of debt faster than IBR, it imposes stricter eligibility requirements.

To get on the PAYE plan, you can’t have had any unpaid Direct or FFEL student loans as of Oct. 1, 2007, and you must have had a Direct loan disbursed on or after Oct. 1, 2011.

By comparison, IBR has no “new borrower” qualification requirement.

IBR doesn’t require you to consolidate most loans

For some student loan borrowers, IBR may be easier to apply for than PAYE. That’s because unless consolidated, the following loans do not qualify for PAYE:

  • Subsidized FFEL loans (both subsidized and unsubsidized)
  • FFEL PLUS loans made to graduate or professional students
  • FFEL Consolidation Loans that weren’t used to repay PLUS Loans made to parents

However, the rest of the above loans do qualify for IBR without consolidation.

That said, both plans require consolidation of federal Perkins loans. Note that although the Perkins Loan program expired in September 2017, they are still eligible for PAYE or IBR as long as you consolidate them first.

How to pick the best income-driven repayment plan for you

In some respects, the Pay As You Earn Plan comes out as the winner against Income-Based Repayment: It lowers your monthly payments to just 10% of your discretionary income and offers loan forgiveness after 20 years, no matter when you borrowed your loans.

But, as discussed, qualifying for PAYE can be a hurdle for some borrowers. Meanwhile, IBR tends to have an easier overall process, such as not requiring loan consolidation before applying.

Whether you opt for IBR vs. PAYE or vice versa, you’ll have to recertify your eligibility yearly. As your income rises, your student loan payments do as well. The silver lining is that your payments will never exceed the threshold set by the Standard Repayment Plan.

To see how you’d fare under each plan, crunch the numbers with our PAYE Calculator and IBR Calculator.

Refinancing may also help lower your monthly payments

PAYE and IBR are not your only options for managing student loans. If you don’t meet the requirements for these repayment plans, you may be able to lower your monthly payments with a student loan refinance.

Student loan refinancing can be a clever strategy for borrowers with a steady income and a strong credit score. When you refinance, you consolidate your student loans with a private loan servicer. Depending on your credit history, you might qualify for a lower interest rate and better terms on your remaining balance. Furthermore, you could opt for a longer repayment term if you’re looking to reduce your monthly bills.

Keep in mind that if you extend your repayment plan, you may pay more interest over the life of the loan. Luckily, once you start earning a regular salary, you can focus on ways to pay off your student debt faster.

However, refinancing federal student loans is generally not advised, since you’ll miss out on certain benefits offered by the Department of Education, like student loan forgiveness, income-driven repayment plans and deferment and forbearance. It’s worth weighing the pros and cons of each approach before proceeding.

If you’re drowning in bills, an income-driven repayment plan or refinancing your loans could help boost your financial health. Once you decide between IBR vs. PAYE, you can move ahead with applying for an income-driven repayment plan.

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