Get To Know The Differences Income Based Repayment And Pay As You Earn Loan Methods


Due to increasing cases of unemployment and underemployment rocking the current economy, many students with loan balances are finding it hard to repay their loans which are averagely to be about $29,000 per grad. However, recent grads have something to smile about. The latest repayment loan methods which include Pay As You Earn and Income Based Repayment provide an easier way for grads to repay the loans especially those that are financially restrained.

Since the loans have to be repaid within a period of 10 years or less, grads that are financially stable may opt for the normal way of repaying. However, for those who are financially unstable, IBR and PAYE offer different options that help in keeping them in a stable condition till they regain their financial muscle. Although these two ways work toward a common goal, they have different terms and thus one may qualify for either of them or sometimes miss out on both.

Differences between Income Based Repayment and Pay As You Earn

In Terms Of Repayments, PAYE offers 5% Cheaper Repayment than IBR.

Getting into the two ways above requires one to show a financial hardship that needs to be cushioned to avoid unnecessary financial crises on their sides. If one meets this criterion, the next factor taken into consideration is the discretionary income of the applicant which is arrived at by looking at the disparity between the applicant’s income and 150% of the poverty line for the size of the applicant’s family.

The difference between IBR and PAYE is that IBR payments are 15% of the applicant’s income while PAYE offers payment at 10% of the applicant’s income. Another point to be noted is that filing taxes as an individual, only the applicant’s income counts but filing the taxes jointly as married, both incomes count unless both of you have student loans.

Calculation: For example, a family of two breadwinners who make $40,000, deducting $23,265 which is 150% of the poverty line results to $16,735 as the discretion income. Thus, under IBR, you would pay $2,510 annually which is equivalent to $209 monthly payment while under PAYE; you would pay $1,673 annual repayment which equals to $139 in a month.

Loan forgiveness comes earlier with PAYE compared to IBR

Sometimes due to misfortunes, many grads land poorly paying jobs or totally miss out on employment. Unfortunately, many of the victims have high loan balances of which they cannot finish repaying them in the stipulated time. When this happens, PAYE is very flexible in terms of loan forgiveness as compared to IBR although both do prolong their repayment period. Sometimes, PAYE and IBR payments do not cover the cost of interest on loans and this leads to increase in the loan balances. When such happens, IBR and PAYE offer loan forgiveness at 25 years and 20 years respectively.

Calculation: Considering the situation outlined above, if one is owes an amount like $60,000 with IBR, they will be paid off in 20 years without loan forgiveness. However, with PAYE, because of low payments, about $40,000 will be forgiven. This could lead to a tax burden of about $6,000 or even a higher amount.

Certain loans are ineligible under PAYE but not IBR

It is true that majority of the people qualify for income based repayment as compared to pay as you earn. This is because:

Income Based Repayment

IBR offers

· unsubsidized and subsidized loans

· Stafford loans

· direct consolidation loans without involving parental loans

· consolidation and FFEL loans provided they are not meant for parents

· Student plus loans.


The only loans that are illegible for IBR are consolidation loans which include parental and private loans and plus loans to parents.

PAYE

When it comes to pay as you earn, the following loans are eligible

· Direct subsidized and unsubsidized loans

· Plus loans for students

· Stafford loans

· Direct consolidation loans without parental plus loans being involved.

However, the following loans are illegible

· FFEL loans

· Plus loans to parents

· Consolidation loans including all parents and private loans

Also, in order to qualify for PAYE, one must be a fresh borrower as of 1st October 2007 and had no loan balance as of 10th January 2007. Besides this, one must have had a direct loan pay-out on or after 1st October 2011.

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