Pay As You Earn Improvement
Federal student loans offer the best repayment options unlike the private student loans. With the income based methods you can avoid default and deferment in most cases. Understanding the differences and when they can be used to your advantage is important.
Under each of these methods, you are required to submit annual financial information normally on your review date. I would confirm this date with your loan servicer. This is another reason for you to consolidate your loans. You can also change methodology depending on your financial situation or if it should change, such as being laid off or getting married.
Since this method does not always cover the entire monthly interest due. In this case, some of this could be still paid by the Federal Government and some could be added back to your loan balance. This interest added onto your loan principal is called negative amortization. You want to avoid this if possible.
Depending on your income tax situation and tax filing status, you may need to compare the different methods but keep in mind the impact on your tax exposure. This is especially true for married couples with significant differences in income and student loan debt.
There are three different income based methods of repayment.
Income Based Repayment (IBR)
This method can be used for both Direct and FFEL student loans. Your payment is based on your current income, the poverty level and a government factor. IBR is a viable option for married couples where one spouse has significant student loan debt and the other does not. Within this method your can file married but separate.
You can also use this method if you have a significant change in income. You can submit a form to reflect an adjustment based on the change in income. Do not stop making payments until the new amount is confirmed from your loan servicer.
Income Contingent Repayment
This method can be used for only Direct Student Loans. Your payment is based on your Adjusted Gross Income, poverty level and a government factor. IBR use your income tax information rather than your current income. Within this method, the household income is used in the calculation and this maybe the best option if you are married.
Since this is based on your income tax information comparing this payment to the IBR method could work to your advantage.
Income Sensitive Repayment
This method can be used for only FFEL student loans. Your payment is based on your Adjusted Gross Income, poverty level and a government factor. IBR use your income tax information rather than your current income. Within this method, the household income is used in the calculation and this maybe the best option if you are married.
Since this is based on your income tax information comparing this payment to the IBR method could work to your advantage.
In your decision process you need to look at this over the long term and understand the flexibility each plan offers.
