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Missing IBR or PAYE Certification is REALLY Expensive

Capitalization of interest on IBR, PAYE, and REPAYE makes failing to re-certify on time a costly error.

Written By: Michael P. Lux, Esq.

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Unexpected costs are everywhere with student loans. Interest grows every day, and one mistake can mean getting hit with late fees.

One mistake that can cost thousands of dollars comes with Income-Driven Repayment (IDR) plans like Income-Based Repayment (IBR) and Pay As You Earn (PAYE) re-certifications. That statement is worth repeating: screwing up IBR or PAYE re-certification can cost thousands of dollars.

Why is Missing an IBR, PAYE or REPAYE Deadline Expensive?

When you are on income-driven plans IBR, PAYE, and REPAYE it is possible that the monthly interest on your student loans is greater than your actual payment. If this is happening, it means your balance is growing rather than shrinking with each payment. While this situation is clearly far from ideal, it is a way that many borrowers tread water until they get a better-paying job, or ultimately qualify for student loan forgiveness.

For borrowers in this situation, re-certifying in a timely manner each year is critical. The reason is the capitalization of interest. When your interest is capitalized, it means that the extra interest that had accumulated is added to your principal balance. In other words, you start paying interest on the interest.

Typically, on PAYE or IBR, interest is not capitalized as long as you remain enrolled. However, failing to re-certify your income on time gets you kicked off your IDR plan and placed on the standard 10-year plan. The instant you are kicked out, your interest is capitalized. Even if you do eventually re-certify, that interest is added to your principal balance, and there is nothing that can be done about it… that means paying interest on a larger student loan balance.

Sherpa Tip: If you fall into the category of borrowers who have monthly payments smaller than the interest the loan generates, consider signing up for the Revised Pay As You Earn (REPAYE) plan. Borrowers on REPAYE get an interest subsidy that is not offered on the other repayment plans.

An Example: The Cost of a Missed Certification

Suppose you have a $100,000 federal student loan balance. After finishing school, it takes you just over a year to find your first job. During this time, you are on an IDR plan, and your monthly payments are $0. If your interest rate is 5%, it means that you now owe your original $100,000 plus the $5,000 of interest.

If you stay on the IDR plan, that $5,000 floats in limbo so long as you are enrolled in income-driven repayment. During this time, no interest accrues on that $5,000. The second you go off IDR, it is added to your balance.

If you fail to re-certify on time, that $5,000 is immediately added to your $100,000 balance, and you start paying interest on that interest. If you fail to re-certify after that first year and then stay on IBR or PAYE for 10 years, the mistake will cost you approximately $2,500! If you have higher interest rates, loan balances, or take longer to pay off your loans; the cost of a failure to re-certify is even more expensive.

Servicers Can Make the Problem Worse

Federal loan servicers have done a lousy job when it comes to re-certification reminders.

While completing the application to recertify is fairly simple, applying at the right time isn’t simple. Lenders may get backed up and prolong the time it takes to certify your income. It is possible that a borrower could submit their re-certification right at the deadline but still end up having their interest capitalized.

Most servicers will only send a letter or an email reminding students. These limited reminders do not explain the consequences of failing to re-certify on time.

The Department of Education previously revealed that over 57% of the people on IBR failed to re-certify on time.  With the failure to re-certify being such an expensive mistake, people should not be missing this deadline.

Avoiding capitalization

If you are on IBR or PAYE, re-certifying on time each year is essential.

Set up a reminder on every calendar you have. Better yet, email your lender to find out the deadline for your next re-certification application. When you do get the reminders, don’t ignore them. It is a really expensive mistake.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

2 thoughts on “Missing IBR or PAYE Certification is REALLY Expensive”

  1. lets say i already made this mistake and 60k loan has 186k balance — half way through PSLF 120-and-done process

    any recourse?

    i feel like an idiot

    • At this point I don’t think there is anything you can do about past interest capitalization.

      That said, if you are already half way to the 120 payments for PSLF it probably doesn’t matter. Once you hit 120, your entire balance is forgiven and there isn’t any tax on the forgiveness.


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