Differences between ICR, IBR, PAYE and REPAYE Student Loan Repayment
There are currently four main income-driven repayment plans:
- Income-Contingent Repayment (ICR)
- Income-Based Repayment (IBR)
- Pay-As-You-Earn Repayment (PAYE)
- Revised Pay-As-You-Earn Repayment (REPAYE)
There’s also a little-used Income-Sensitive Repayment (ISR) plan in the Federal Family Education Loan Program (FFELP). ICR, IBR, PAYE and REPAYE are all available in the Direct Loan program. IBR is also available in the FFEL program.
Differences in the Calculation of the Monthly Loan Payment
There are several important differences in how the monthly loan payment is defined, as shown in this table.
The percentage of discretionary income for PAYE may depend on when the borrower obtained their loans. The percentage is 10% for borrowers who are new borrowers as of July 1, 2014, and 15% otherwise. However, President Obama made PAYE available to new borrowers as of October 1, 2007 who have at least one loan disbursed on or after October 1, 2011.
There is a different minimum monthly payment for each of the income-driven repayment plans. The minimum payment is $5.00 under ICR, unless the calculated payment is zero, in which case the payment is zero. The minimum payment is $10.00 under IBR, PAYE and REPAYE unless the calculated payment is less than $5.00, in which case the payment is zero.
When Does It All End?
The repayment term and what happens at the end of repayment varies according to the income-driven repayment plan.
The length of the repayment term is 25 years under ICR, IBR and for borrowers of graduate loans under REPAYE.
The length of the repayment term is 20 years under PAYE and for borrowers of just undergraduate loans under REPAYE.
The length of the repayment term for PAYE may depend on when the borrower obtained their loans. The length of the repayment term is 20 years for borrowers who are new borrowers as of July 1, 2014, and 25 years otherwise. As noted above, the 20-year repayment term under PAYE may be available to new borrowers as of October 1, 2007 who received a loan on or after October 1, 2011.
The repayment term is reduced to 10 years for borrowers who are seeking public service loan forgiveness under ICR, IBR, PAYE and REPAYE.
The remaining balance is cancelled at the end of the repayment term. This loan forgiveness is tax-free under the public service loan forgiveness plan and taxable after 20 or 25 years in an income-driven repayment plan otherwise.
If the loan forgiveness is taxable, the cancellation of the student loan debt will substitute a smaller tax debt for the student loan debt. This tax debt can be paid all at once or in installments over up to six years. If you can’t afford the tax payments, you can negotiate an offer in compromise with the IRS. If you are insolvent, with your debts exceeding your assets, you can ask the IRS to exclude all or part of the cancelled debt from income by filing IRS Form 982.
Special Interest Payment Rules
Borrowers can be negatively amortized under ICR, IBR, PAYE and REPAYE, if the monthly payment is less than the new interest that accrues. This which means that your loan balance may actually increase every month despite making payments.
Accrued but unpaid interest is capitalized annually under ICR and PAYE until it reaches 10% or more of the loan’s original principal balance. Any additional interest is not capitalized until the loan status changes, such as when the borrower switches to a different repayment plan. Accrued but unpaid interest is not capitalized under IBR or REPAYE until the loan status changes.
The federal government may pay some of the accrued but unpaid interest on subsidized and unsubsidized loans in an income-driven repayment plan, as shown in this table.
President Donald Trump has proposed replacing the existing income-driven repayment plans with a new income-driven repayment plan. The monthly payment will be 12.5% of discretionary income, which is defined as the amount by which AGI exceeds 150% of the poverty line. The repayment term will be 15 years for borrowers with only undergraduate loans and 30 years for borrowers with any graduate loans. President Trump’s proposal includes a marriage penalty and the payments are not capped at the standard repayment amount.
Vice President Joe Biden has proposed a new income-driven repayment plan with a monthly payment equal to 5% of discretionary income, which is defined as the amount by which AGI exceeds $25,000. Joe Biden’s proposal has a 20-year repayment term with tax-free forgiveness of the remaining debt.