Are $0 PAYE and IBR Payments Too Good To Be True?

Michael Lux Blog, Strategy, Student Loans 0 Comments

There are a ton of student loan scammers out there.  Many student loan lenders have been known to be ruthless with their borrowers.  Federal loan servicers have a reputation for not always sharing accurate information.

In the confusing and frustrating world of student loans, it should come as no surprise that borrowers are skeptical of $0 “payments” on income-driven repayment plans such as IBR, PAYE, and REPAYE.

Is a $0 IBR or PAYE payment legit?

One of the great advantages to having federal student loans is that there are repayment plans based upon your income rather than how much you owe.

If the Department of Education decides that you cannot afford a monthly payment, you will owe $0 per month.  The department of education will look at your family size and location when determining what you can afford.  Payments are calculated based upon your Adjusted Gross Income (AGI) on your taxes.  To find out how much you can expect to pay on various repayment plans, be sure to check out the Department of Education’s Student Loan Repayment Estimator.

How does a $0 payment work?

Income-driven repayment plans are updated each year.  If you have a $0 payment, it means you will owe $0 per month for the next year.  At that time you will again have to certify your income and, if necessary, your payment will change based upon any changes in your income.

Borrowers with $0 payments do not have to set up bank withdrawals or submit checks each month in the amount of $0.

Is a $0 payment the same as a forbearance or deferment?

No.  Deferments and forbearances are normally limited.  With a a $0 payment, there is no limit to how long it will last.

Does a $0 payment count towards loan forgiveness?

The big advantage of a $0 payment over a deferment or forbearance is that each month you have a $0 payment, you are one month closer to getting your loans forgiven.  With most of the income-driven repayment plans, forgiveness for borrowers comes after 20 to 25 years worth of payments.  Each month you make a $0 payment you are closer to forgiveness.  $0 per month payments also count towards Public Service Loan Forgiveness, provided you are working for an eligible employer and meet the other requirements.

How do I get a $0 per month payment?

Not everyone is able to get a $0 payment because most borrowers have some discretionary income based upon their most recent tax return.  However, any borrower can sign up for an income-driven repayment plan.  The process can take a few months to complete, but it only takes about 10 minutes to fill out the necessary paperwork.  Borrowers can apply at studentloans.gov or request a paper application from their loan servicer.

What is the downside or risk to a $0 payment?

The problem with $0 payments is that your student loan balance will still grow each month.  The interest does not go away, so when you are ready to attack your debt, your balance will larger than what you started.  One way to minimize the damage from the interest while you make $0 payments is to sign up for the Revised Pay As You Earn (REPAYE) Plan.  Unlike the other income-driven repayment plans, REPAYE will only charge you half the interest.