Doctored Money Blog

PSLF: On IBR? Are you eligible for PAYE? Here’s a flowchart!

Should you be in PAYE?

If you have had student loans for a while, there is a good chance you originally chose the “Income Based Repayment” plan, aka IBR. But since the introduction of IBR, three new income-driven repayment plans have been introduced: REPAYE and PAYE and “new IBR”. So the original IBR is now “old IBR”. Confusing, huh? We won’t get into the pros/cons of these plans in this post, other than to note the following: PAYE is always better than any type of IBR. And so if you are on an IBR plan, you should very strongly consider switching to PAYE. Why? Because if you are on old IBR, your payments are 15% of discretionary income, while payments on PAYE are only 10%. For most, switching to PAYE will lower payments by about a third. And that means 1) more money in your pocket now and 2) more forgiveness later! Be careful however, there is a rare situation where going from IBR to PAYE is not the right thing to do. [If you are on IBR and have a much higher income that needed to have reached the maximum payment on IBR (aka the “cap”) you MAY not benefit from switching if you expect further increases in your income very soon]


Are you a “New Borrower”?

There are two criteria for entering (or switching into) PAYE. First, you have to be a “new borrower”. This can sometimes be hard to figure out, which is why we created this handy flowchart. Get a copy of your national student loan data file (or some other record of all your loans) and follow along.

A common question is whether you can consolidate a pre-2007 loan after 2011 to “get rid of it” and become eligible for PAYE. The answer is no. For example, if you consolidate a 2006 FFEL loan into a Direct Consolidation loan in 2012, you are considered to have a pre-2007 “at the time” of consolidation, and thus are not considered a new borrower.


Have a “Partial Financial Hardship”?

In addition to being a new borrower, you must have a “Partial Financial Hardship” (PFH) to enter PAYE. You have a PFH if your payments under the PAYE plan are less than you would pay if you were to have a 10-year payment period. You can use this calculator to determine if you have PFH. If your PAYE payments are less than the “cap” it means your AGI is less than the PAYE PFH income threshold and you have PFH. Combine this with being a new borrower, and that means you are PAYE eligible!


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