PAYE: Pay As You Earn Student Loan Repayment

What is Pay As You Earn Student Loan Repayment?

The Pay As You Earn (or PAYE) student loan repayment program was passed in December of 2012, and is President Obama’s spin on income driven repayment. Understanding that student borrowers faced significant challenges once they entered repayment, the President used PAYE to improve on the preexisting Income Based Repayment in several different ways.

Although it has rather strict qualification standards (only the classes of 2012 and later qualify), PAYE is a terrific option for those who can use it.

How it Works

Pay As You Earn is just like Income Based Repayment in how your monthly payments are calculated. Monthly payments under PAYE are 10% of your discretionary income, which is the difference between your adjusted gross income and 150% of the poverty line in your area.

Again, poverty guidelines are set by the Department of Health and Human Services, and are updated annually. You can look up the poverty line in your area here.

Like IBR, PAYE has an interest subsidy component and forgiveness of any remaining balances after 20 years of qualifying payments. But, remember that any amount forgiven is taxable as income unless under the public service loan forgiveness program. If you’re counting on forgiveness outside of PSLF, it’s best to plan for the resulting tax bill.

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ICR: Income Contingent Student Loan Repayment

What is Income Contingent Student Loan Repayment?

Income contingent repayment (or ICR) is the oldest of the four income driven student loan repayment options. Originally passed by Congress in 1994, ICR was the government’s first attempt to reduce the burden of student loans by tying monthly payments to borrowers’ adjusted gross income.

While helpful when it was first introduced, ICR has been overshadowed by the other four options rolled out since then. Today, ICR is all but obsolete unless there is a Parent PLUS Loan involved.

How it Works

ICR gives borrowers another option if the monthly payments from the 10 year standard repayment plan are too costly. When borrowers enter ICR, their monthly payment is calculated based on their adjusted gross income and the amount they’d otherwise pay over a 12 year repayment plan.

More specifically, monthly payments under ICR are the lower of:

20% of your discretionary income, or
the amount you’d pay under a standard 12-year repayment plan, multiplied by an income percentage factor

This income percentage factor ranges from 55% to 200% based on adjusted gross income: the lower your AGI, the lower the income factor and the lower the output. It’s updated each July 1st by the Department of Education, and can be found with a quick Google search.

An interesting point to note here is that the income percentage factor ranges all the way up to 200%. It’s possible (whether using 20% of discretionary income or the second calculation) for your monthly payment under ICR to exceed what it would be under a standard 10 year repayment plan. This differs from IBR and PAYE, where your payment is capped when this happens (at what it would have been under the standard 10-year plan).

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IBR: Income Based Student Loan Repayment

Income based student loan repayment (or IBR) is one of the four income based repayment options that the federal government offers to help borrowers reduce monthly payments on their debt. IBR is a great option if you don’t qualify for the Pay as You Earn (PAYE) program, and aren’t a good fit for the Revised Pay as You Earn (REPAYE) program. While only available on certain federal student loans, the program is a wonderful benefit to many lower income borrowers.

What is Income Based Student Loan Repayment?

The income based repayment option (IBR) was originally passed by Congress in 2007, but didn’t become effective until 2009. It’s objective was to provide a more affordable student loan repayment option to low income borrowers. The plan improved on the preexisting income contingent repayment option (ICR) by lowering minimum monthly payments from 20% of discretionary income to 15%.

Then in 2014, IBR was revised. For new borrowers as of July 1st, 2014, monthly minimum payments were reduced from 15% of discretionary income to 10%, and the forgiveness period was shortened from 25 years to 20.

IBR was a significant improvement over the ICR repayment option. But today, there are two additional income driven repayment options (REPAYE and PAYE) that are a better choice for most borrowers. But due to PAYE‘s qualification standards and REPAYE’s mandatory inclusion of spousal income, IBR remains a viable option for many others.

How it Works

Like all income based repayment options, IBR gives borrowers an alternative if the minimum monthly payment on the 10 year repayment plan is too much. For example, let’s say you’re a new graduate and have accumulated $100,000 in federal student loan debt. You’re about to start work at job that pays $50,000 per year, and the interest rate on your loans is 6%.

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