What's the difference between PAYE, IBR, REPAYE, and SAVE plans?

Understanding the Differences Between PAYE, IBR💡 Definition:An income-driven repayment plan requiring 10-15% of discretionary income with forgiveness after 20-25 years, ideal for borrowers whose debt exceeds their income., REPAYE, and SAVE Plans

Navigating student loan repayment options💡 Definition:Options are contracts that grant the right to buy or sell an asset at a set price, offering potential profit with limited risk. can be daunting, especially with so many different Income💡 Definition:Income is the money you earn, essential for budgeting and financial planning.-Driven Repayment (IDR) plans available. PAYE, IBR, REPAYE, and the newly introduced SAVE plan💡 Definition:The newest and most generous federal student loan repayment plan, offering 5-10% payments and interest subsidies for eligible borrowers. all offer unique features that cater to different borrower needs. Understanding the nuances of each plan can help you make more informed decisions regarding your federal student loans💡 Definition:A financial obligation incurred for education, impacting future finances and opportunities..

Main Differences Among PAYE, IBR, REPAYE, and SAVE

PAYE (Pay As You Earn💡 Definition:An income-driven repayment plan with 10% discretionary income payments, capped at the Standard amount, with forgiveness after 20 years for recent borrowers.)

• Eligibility: Limited to "new borrowers" with loans disbursed after October 1, 2011.
• Monthly Payments: 10% of discretionary income💡 Definition:Discretionary income is the money left after essential expenses, crucial for saving and investing..
• Forgiveness: After 20 years of qualifying payments.
• Payment Cap: Payments are capped at the amount of the standard 10-year repayment plan.
• Calculation of Income: Excludes spouse's income if married filing separately.

IBR (Income-Based Repayment)

• Eligibility: More inclusive than PAYE, available to many borrowers.
• Monthly Payments: 10% of discretionary income for loans taken out after July 1, 2014, and 15% for loans before that date.
• Forgiveness: After 20 or 25 years, depending on the loan's disbursement date.
• Payment Cap: Payments cannot exceed the standard 10-year plan amount.
• Calculation of Income: Excludes spouse's income if married filing separately.

REPAYE (Revised Pay As You Earn)

• Eligibility: Open to all Direct Loan borrowers.
• Monthly Payments: 10% of discretionary income with no cap.
• Forgiveness: After 20 years for undergraduate loans, 25 years for graduate loans.
• Interest Subsidy: Government pays all unpaid interest on subsidized loans for the first three years, then 50% thereafter.
• Calculation of Income: Includes spouse's income regardless of tax filing status.

SAVE (Saving on a Valuable Education)

• Eligibility: Replaces REPAYE; available to all borrowers without restriction.
• Monthly Payments: 5% of discretionary income for undergraduate loans, 10% for graduate loans.
• Forgiveness: After 20 years for undergraduate loans, 25 years for graduate loans.
• Interest Subsidy: No accumulation of unpaid interest if payments are made.
• Calculation of Income: Includes spouse's income regardless of tax filing status.
• Income Protection: Discretionary income is calculated with a higher threshold (225% of the poverty guideline).

Real-World Examples

• Undergraduate Borrower: Consider a borrower with an AGI💡 Definition:Your total gross income minus specific deductions, used to determine tax liability and eligibility for credits. of $50,000, a family size of two, and undergraduate loans. Under SAVE, with 225% of the poverty line as their discretionary income threshold, they might pay $187.50 monthly (5%). Under PAYE, they would pay $375 monthly (10%).

• Graduate Borrower with High Income: Suppose this borrower has an AGI of $100,000 and low debt. Under SAVE, they may pay $833.33 (10%) with no cap, potentially more than they would under PAYE or IBR where payments are capped at the standard 10-year amount.

Common Mistakes and Considerations

• Eligibility Constraints: PAYE is only available to newer borrowers, so older loans may need IBR or SAVE.
• Payment Caps: PAYE and IBR cap payments, potentially offering lower payments for high-income, low-debt borrowers compared to SAVE.
• Spouse's Income: REPAYE and SAVE include a spouse's income, potentially increasing payment amounts for married borrowers filing separately.
• Switching Plans: Shifting from one plan to another can affect forgiveness timing and might carry tax implications. Thoroughly evaluate the benefits and drawbacks before making changes.

Bottom Line

Choosing the right IDR plan💡 Definition:Federal student loan repayment plans that cap monthly payments at a percentage of your discretionary income, with potential loan forgiveness after 20-25 years. involves analyzing your financial situation, future income expectations, and loan type. SAVE stands out as the most generous option for many borrowers, offering lower payments and robust interest subsidies. However, it might not be ideal for those with high incomes and low debt. Always consider your current and future financial landscape when selecting a repayment plan, and consult with a 💡 Definition:A fiduciary is a trusted advisor required to act in your best financial interest.financial advisor💡 Definition:A financial advisor helps you manage investments and plan for financial goals, enhancing your financial well-being. if necessary to ensure the best fit for your needs.