Does paying off your student loans seem daunting? I can imagine, as the average graduate owes $35,205 and total student debt approaches $1.5 Trillion. Fortunately, there are many ways to repay your student loans including programs available to help borrowers. These programs can vary depending on your degree, but the most common programs are income based and include IBR, PAYE, and REPAYE.
IBR (Income Based Repayment)
As the name suggests IBR, or Income Based Repayment is a program that caps your loan payment based on your discretionary income. This program was initiated in 2009 and caps your payment at 15% of your discretionary income, which is defined as your income over 150% of the federal poverty rate. Luckily, if you make qualified payments for 25 years, your remaining loan balance will be forgiven. Thus, you won’t need to spend a large portion of your monthly income towards loans with IBR. Luckily, the government altered IBR’s term to 20 years for borrowers on or after July 1, 2014.
However, forgiveness comes with a caveat because the IRS considers it taxable income. Thus, it’s important to be aware of this and plan for a potentially significant tax bill. Speaking of taxes, borrowers can also deduct up to $2,500 of their interest. Once you reach a certain AGI, ($80,000 Single, $160,000 Married Filing jointly), you will phase out of this deduction. Also, if you file jointly, your wife’s income will be used to calculate your IBR payments.
To benefit from IBR, your payments must be less than what your payment would be under the Standard Repayment Plan. The Standard Repayment Plan varies based on the amount of debt, but generally a fixed amount of at least $50 per month and made for a term of between 10 and 30 years. Thus, it’s relatively easy to fulfill this condition if you have a large debt load relative to your income. In addition, it’s imperative to know that only loans under the student’s name can qualify for IBR. So loans like the Parent Plus won’t qualify, but here are some ways to help Parent Plus borrowers.
Sometimes, your IBR payment will not cover your loan interest. However, the government will assist you by paying the interest on Subsidized Stafford Loans for your first three years in IBR. After this period, the interest will be included in the total amount you owe. While this may sound daunting, anything you still owe after 25 years of qualifying payments will be forgiven.
If you qualify for this program, you can sign up for free at studentloans.gov. This is important to be aware of as many unscrupulous lenders take advantage of borrowers by collecting a fee for this free service. Once you’ve done this, use this government sponsored Repayment Estimator tool to calculate your payments with or without an account.
PAYE (Pay As You Earn)
Like IBR, PAYE, or Pay As You Earn, is an income based repayment system dedicated toward borrowers who graduated in 2012. The specific cut off dates are October 1, 2007 for your first federal loan and October 1, 2011 for a Direct Loan or a Direct Consolidation Loan. Fortunately, borrowers who qualify for PAYE could have monthly loan payments two thirds of what they would be under IBR. Use this free Pay-As-You-Earn calculator created by the U.S. Department of Education, to see if you qualify.
This program also includes others who received loans for graduate school. Two main differences that PAYE has in comparison to IBR are capping payments at 10% of discretionary income and having a 20 year term instead of a 25 year term.
In addition to restrictions on the year you borrowed loans, PAYE has two additional requirements:
Loan types: Only federal direct loans apply and you could potentially consolidate Perkins loans along with FFELP, or Federal Family Education Loan Program, debts to make them qualify. You should know that Perkins loans have forgiveness options which can be lost through consolidation.
Income Rules: Similar to IBR, you must show financial hardship to use PAYE. This means that your bill on PAYE must be less than what you’d owe with the 10-year plan. Provided you qualify, the payment will be 10% of the difference between your monthly income and 150% of the poverty guideline. It’s important to note that your payment would never be higher than what you would pay on the standard plan, even if your income increases.
REPAYE (Revised Pay As You Earn)
Just when you thought the government couldn’t create enough income based programs, it created REPAYE or Revised Pay As You Earn. However, it introduced other restrictions that make it less desirable, if you can use PAYE instead. For example, you can’t sign up if you had any debt before Oct. 1, 2007 and only direct loans qualify.
Timing is everything with REPAYE and you should look into this program if you took out earlier than July 1, 2014 but later than October, 1 2007. Both plans cap your payments at 10% of discretionary income. Also, REPAYE extends repayment to 25 years for graduate school borrowers and you must include your spouse’s income, even if you file separately.
REPAYE isn’t perfect and unlike IBR and PAYE, there’s no cap on your monthly payment amount. So, your payment will be fixed at 10% of your discretionary income, regardless of income growth. Thus, this payment plan could have you making payments higher than what your 10 – year plan payments would have been. However, REPAYE has an important benefit because it pays more of your interest than PAYE or IBR. Thus, it would potentially stop your loan balance from ballooning uncontrollable and limit total loan costs.
While student loans may seem unconquerable, there is help available including programs like IBR, PAYE and REPAYE. These programs are helpful, but it’s always important to understand the pros and cons of each specific program to and how they can help your specific situation. I hope this guide was helpful and are there other ways to help struggling borrowers? Please tell us below!