Be careful out there, kids! While many repayment plans are available to college graduates today, it is worth considering the implications of postponing interest payments. If you are going to maintain a Partial Financial Hardship (PFH) for the next 20-25 years, then Income Based Repayment (IBR) or Pay As You Earn (PAYE) may be good options for you, but what if you don’t?
“President Obama’s new PAYE repayment option is yummy. Thank you, Mr. President!” -Heather Jarvis (Student Loan Expert)
If you can’t maintain a PFH for the entire term of the loan, then the accrued interest that becomes capitalized might not be so “yummy”. That accrued interest is capped at 10% of the balance for the PAYE plan, but there is no cap for the IBR plan. PAYE is only applicable to subsidized federal student loans anyway, so a majority of the student’s debt will most likely be accumulating interest.
Educate yourself before making a decision regarding your student loan repayment plan, or at least do some research before declaring these alternatives a panacea. Compound interest adds up quickly, and although lower payments may seem helpful right now, it could be painful for borrowers who haven’t read the fine print.