Student Loans: Pay As You Earn, IBR, ICR, PSLF, and OMG This Is Confusing!

by Sophia Bera on July 24, 2013

Congrats!  You just finished college, or grad school, or law school, or business school!  Now, it’s time to figure out what student loan program you’re going to choose to pay back your student loans.  If you have a reasonable amount of student loans in relation to your income, then you will most likely want to choose the 10 year standard repayment method so that you can pay them off in a reasonable time frame, but if you’re one of those people whose student loans are HUGE in relation to your income, then you will probably want to choose a different repayment method.  This post will explore some of the special programs for federal student loans.  Keep in mind; these are NOT for private student loans.

Pay As You Earn

The newest repayment program is called Pay As You Earn.  It just went into effect as of Dec. 21, 2012.  “Pay As You Earn is designed to help recent students entering the job market for the first time in today’s tough economy.  Only those who took out their first federal loan after Sept. 30, 2007 and had at least one disbursement after Sept. 30, 2011 will qualify” according to The Institute of College Access and Success.  This usually is your most affordable option of the repayment plans that are based off of income.  If you qualify for this repayment method, you payment is capped at 10% of your discretionary income and any balance remaining at the end of 20 years may be forgiven as long as you meet the requirements.  Click here for more information.  If you think you may qualify, contact your loan service provider to see if this is an option for you and to make sure it’s the best plan for your situation.

Income Based Repayment (IBR)

If you don’t meet the requirements for Pay As You Earn, you may still be eligible for Income Based Repayment (IBR).  Under this loan program, your monthly payments are capped at 15% of your discretionary monthly income and any balance remaining at the end of 25 years may be forgiven as long as you meet the requirements.  Here’s a calculator to estimate how much your student loan payments might be under IBR.  There is a ton of valuable information on www.ibrinfo.org.  They also have started to streamline this process and now there is an online application tool available on www.studentloans.gov.  If you are already on IBR and you think you may qualify for Pay As You Earn, you may be able to switch from one to the other if you meet the qualification requirements.  “The Department of Education reports that more than 1.3 million borrowers are already enrolled in IBR, and nearly 90% of them have incomes under $50,000” according to this article from the Institution of College Access & Success.

Income Contingent Repayment (ICR)

If you don’t qualify for Pay As You Earn or IBR, there is another program available and that is the Income Contingent Repayment (ICR) program.  Under this program, your monthly payments are capped at 20% of your discretionary monthly income and any balance remaining at the end of 25 years may be forgiven as long as you meet the requirements.

Public Service Loan Forgiveness (PSLF)

This is a program that is available for people who work in the public sector such as a non-profit or for the government (federal, state or local).  For example, if you are an employee at a public school district you can qualify for Public Service Loan Forgiveness (PSLF).  Under this program, after making 10 years of qualifying payments, the balance of your loans may be forgiven.  This is the one program where your income does not determine your eligibility; it has to do with your place of employment.  It also does not have to be consecutive, so if you work for the government for five years and then the private sector for two, and then you work for a school district for five years, that would qualify as 10 years, so make sure you submit the required paperwork.  However, to maximize your forgiveness under PSLF, you should repay your loans under one of the loan programs mentioned above: Pay As You Earn, IBR, or ICR.  Make sure you submit your forms annually to the Department of Education to track your repayment history.  There is a seven-step process for keeping track of your eligibility here.

Cliffs Notes Version of Information Mentioned Above

  • Pay As You Earn – Capped at 10% of discretionary income.  Forgiven after 20 years.
  • IBR – Capped at 15% of discretionary income.  Forgiven after 25 years.
  • ICR – Capped at 20% of discretionary income. Forgiven after 25 years.
  • PSLF – Can be used in conjunction with one of the payment methods mentioned above.  Forgiven after 10 years.

Really Important Information That No One Tells You

  • Your payment is recalculated every year.  As your income goes up, your payment goes up.
  • If you qualify for one of these special loan programs, you must NEVER miss a payment otherwise you’ll be disqualified from the program.  That means SET UP AUTOMATIC PAYMENTS so you are NEVER late.  That is what they mean by “qualifying payments.”  This is a really good deal, so don’t mess it up by paying late!
  • If the government FORGIVES the balance of your Federal student loans it is often viewed as TAXABLE income (PSLF is not taxable).  This means that you will have to pay taxes on the amount that is forgiven.  For example: If you had $60,000 in Federal student loans and are using IBR to repay your loans, after 25 years of on time payments the balance on your student loans might be $50,000.  If the government forgives this amount, you’ll have to pay the tax on $50,000 of income.  You could easily end up owing over $10,000 in taxes!
  • The government could change any of these student loan programs and how they’re taxed at any time, so who knows what the government will decide to do once all of these programs start to come due.  Regardless, student loans are already hugely impacting Gen Y and will continue to do so for many years to come.

Stay On Top of Your Student Loan Situation

If you have student loans, it’s really important to call up your student loan providers and find out if you qualify for one of these programs and what other options are available to you (consolidating, extending your repayment, etc.).  Student loans are just one piece of the pie, so make sure you take care of high interest rate credit card debt right away and build an emergency fund.  You also don’t want to sacrifice saving for retirement just so you can pay your student loans off at a rapid rate.  Finding a balance between all your financial priorities is really important.  Since student loans are often a huge stressor for Gen Y, make sure you learn all you can about the options that are available to you so that you can make an informed decision with your money.

 

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