…you’ll lose those months you could have accumulated for PAYE/IBR benefits such as cancellation of any unpaid balance after 20/25 years. We’re assuming here that right after you graduate, you haven’t found a job, you’re broke, etc., so you qualify for Partial Financial Hardship.
Partial Financial Hardship Issue
PAYE/IBR repayment plans require you to have “Partial Financial Hardship.” Partial Financial Hardship is defined as (https://studentaid.ed.gov/glossary#letter_p):
For IBR, a circumstance in which the annual amount due on your eligible loans, as calculated under a 10-year Standard Repayment Plan, exceeds 15 percent of the difference between your adjusted gross income (AGI) and 150 percent of the poverty line for your family size in the state where you live.
For Pay As You Earn, a circumstance in which the annual amount due on your eligible loans, as calculated under a 10-year Standard Repayment Plan, exceeds 10 percent of the difference between your adjusted gross income (AGI) and 150 percent of the poverty line for your family size in the state where you live.
For both plans, the amount that would be due under a 10-year Standard Repayment Plan is calculated based on the greater of the amount owed on your eligible loans when you originally entered repayment, or the amount owed at the time you selected the IBR or Pay As You Earn plan.
Earning “too much” Money?
Let’s say you didn’t jump on PAYE/IBR after you graduated (year 1), at the earliest point in which you could have entered PAYE/IBR repayment. One year later (year 2), you’re at a high-paying job, which disqualifies you from PAYE/IBR because of the Partial Financial Hardship requirement. Then you lose that high-paying job and now you finally qualify for PAYE/IBR based on Partial Financial Hardship (year 3). That means you lost out on starting the clock at year 1 and year 2 for PAYE/IBR benefits, in particular the cancellation of any unpaid balance after 20/25 years. You are 2 years behind!
Hypotheticals: Effect of Variable Incomes
Source: IBR Q&A from Department of Education
Q15 What happens if my income increases so much that I no longer have a “partial financial hardship” as described in Q&A #4 above? Do I then lose eligibility to repay under IBR?
A15 If your IBR payment amount increases to the point where it is more than the monthly amount you would be required to repay under a 10-year Standard Repayment Plan, you would no longer be considered to have a “partial financial hardship.” In this situation, you may remain on the IBR Plan (to take advantage of some of the other IBR benefits, as described in Q&A #2), but your monthly payment will no longer be based on your income. Instead, you will be required to pay the amount you would have been required to pay under a 10-year Standard Repayment Plan based on the amount of your eligible loans that were outstanding when you began repaying under IBR. Your repayment period based on this recalculated amount may be more than 10 years. [January 5, 2010]
Q16 If I am repaying under IBR and my income increases so that I no longer have a partial financial hardship, but I stay in IBR and make the required, recalculated 10-year standard payment amount, is it still possible for me to receive loan forgiveness after 25 years?
A16 As long as you remain on the IBR Plan (even if you no longer have a partial financial hardship) and you otherwise meet the requirements for loan forgiveness, you will qualify for forgiveness of any remaining loan balance at the end of the 25-year period. [January 5, 2010]
Q17 What happens if, after it is determined that I no longer have a “partial financial hardship” and I am no longer making income-based payments (as explained in Q&A #15), my income goes down?
A17 If your income later decreases so that your calculated IBR payment amount is once again less than what you would be required to repay under a 10-year Standard Repayment Plan, you will return to making income-based payments.
Did You Know?
For any income-driven repayment plan (e.g., IBR/PAYE), the repayment period includes periods of economic hardship deferment and periods of repayment under certain other repayment plans.