The following table summarizes qualification criteria and general program terms:
IBR
PAYE
Income Based Repayment
Pay As You Earn
Who Qualifies?
Who Qualifies? 1. You cannot have an outstanding balance • IBR monthly payments must be less than on Direct or FFEL loan as of October 1, the 10-‐year standard monthly payment, otherwise known as Partial Financial 2007, or 2. You must not have an outstanding balance Hardship (PFH) on a Direct or FFEL loan when you received a new federal loan on or after October 1, 2007, and 3. PAYE monthly payments must be less than the 10-‐year standard monthly payment, otherwise known as Partial Financial Hardship (PFH). Eligible Loans: Direct and FFEL Loans Eligible Loans: Direct Loans Only Repayment Amount: Repayment Amount: • Annual payment is Adjusted Gross Income • Annual payment is Adjusted Gross Income less a modest living allowance multiplied less a modest living allowance multiplied by 15% by 10% Repayment Period: Up to 25 years Repayment Period: Up to 20 years Loan Forgiveness: Loan Forgiveness: • If there is balance after the 25 year • If there is balance after the 20 year repayment period, the balance is forgiven. repayment period, the balance is forgiven. But, the balance forgiven is considered But, the balance forgiven is considered taxable income. taxable income You must apply annually by submitting tax You must apply annually by submitting tax documentation. documentation. If you opt-‐out, do not re-‐apply, or no longer demonstrate a Partial Financial Hardship, all unpaid interest (negative amortization) will be capitalized to the principal.
If you opt-‐out, do not re-‐apply, or no longer demonstrate a Partial Financial Hardship, unpaid interest (negative amortization) capitalization is limited to no more than 10% of the original principal balance.
The significant differences between IBR and PAYE are the criteria as to who can participate, the repayment period and percentage, and perhaps most significantly, the treatment of negative amortization. Negative amortization occurs when your loan payments are less than the interest charged. This event is highly possible given the loan amounts and initial income we are discussing. As mention in the table above, negative amortization can be capitalized (add to the loan principal) if you either opt-out, do not annually re-apply, or you no longer demonstrate a partial financial hardship. The treatment under IBR repayment is more severe than PAYE, as PAYE limits the capitalization of negative amortization to no more than 10% of the original principal balance. For example, let’s assume a year 1 AGI $80,000 with annual increases of $10,000 for 5 years resulting in a year 5 AGI $120,000. This would result in IBR negative amortization of approximately $122,566. With PAYE, negative amortization is limited to no more the 10% of the original principal balance. Borrowers under IBR must be aware of this treatment and develop strategies to avoid the triggering events.
For more information concerning federal student loan repayment options, please visit http://studentaid.ed.gov/repay-loans/understand/plans.
FALL 2013
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USC 925
Student Loans | Page 18
In today’s economic environment of more modest income expectations and higher educational debt levels, accomplishing financial goals such as purchasing a home and/or dental practice becomes more achievable with Income Based Repayment and Pay As You Earn. IBR & PAYE have attractive repayment terms, but due diligence is required in evaluating all the federal student loan repayment options.