What is the difference between pay as you earn and income-based repayment plans?
PAYE limits monthly payments to 10% of the borrower's discretionary income, while IBR limits it to 15% for loans issued before July 1, 2014.
PAYE offers loan forgiveness after 20 years of qualifying payments, while IBR offers forgiveness after 25 years.
PAYE has more stringent eligibility requirements than IBR, so some borrowers may only qualify for the IBR plan.
PAYE is generally better for borrowers with lower incomes or higher debt levels, as it provides a lower monthly payment and faster forgiveness.
IBR uses a more complex formula to calculate discretionary income, taking into account the borrower's family size and the federal poverty line.
PAYE requires the borrower to have a partial financial hardship, meaning their standard 10-year payment would exceed 10% of their discretionary income.
PAYE payments can increase or decrease each year based on changes in the borrower's income and family size, while IBR payments are more stable.
Under PAYE, any remaining loan balance is forgiven after 20 years of payments, but that forgiven amount is considered taxable income.
IBR allows for spousal income to be excluded from the discretionary income calculation, which can result in a lower monthly payment.
PAYE is only available for newer federal student loans disbursed on or after October 1, 2007, while IBR is available for most federal student loan types.
Switching between PAYE and IBR is possible, but can be complex and may impact the borrower's repayment timeline and forgiveness eligibility.
Both PAYE and IBR require the borrower to recertify their income and family size annually to ensure their monthly payments remain accurate.
The choice between PAYE and IBR can have significant long-term financial implications, so borrowers should carefully consider their individual circumstances.
PAYE and IBR both offer protections for borrowers who experience financial hardship, such as the ability to temporarily pause or reduce payments.
The interest that accrues on a borrower's loans under PAYE and IBR can be capitalized, potentially increasing the total amount owed over time.
PAYE and IBR both require the borrower to provide documentation of their income and family size, which can be a burdensome annual process.
Switching from a standard 10-year repayment plan to PAYE or IBR may result in paying more interest over the life of the loan, but can provide immediate relief for those struggling with payments.
Borrowers who anticipate higher future earnings may benefit more from IBR's longer forgiveness timeline, as it can result in a lower overall tax burden on forgiven debt.
PAYE and IBR can be combined with other federal student loan repayment and forgiveness programs, such as Public Service Loan Forgiveness (PSLF).
The decision to enroll in PAYE, IBR, or another repayment plan should be carefully evaluated based on the borrower's unique financial situation and long-term goals.