Pay It Forward vs. Pay As You Earn

Under Pay It Forward, graduates contribute a small percentage of income (about 4-5%) for a set number of years after graduation (about 20). Under Pay As You Earn, a federal income-based repayment (IBR) plan, graduates make payments of no more than 10% of their discretionary income* for 20 years. The current interest rate is 4.66%.

The following example shows the lifetime cost for graduates financing $21,000 – the average debt for a Washington State University graduate – both under Pay As You Earn and under Pay It Forward. For this amount of financing, the Pay It Forward contribution would be 2.08% of income for 20 years. Based on a graduate’s income and household size, lifetime cost can vary quite a bit between programs.

pay it forward vs pay as you earn graphic 1

In this example, Pay It Forward contributions have a lower lifetime cost than Pay As You Earn loan payments for graduates at the median income level. In fact, the lifetime cost of Pay It Forward contributions is less than the lifetime cost of Pay As You Earn loan payments for graduates earning between 60% and 120% of median income. Any single graduate earning less than about $70,000 on average over the 20 years following graduation would pay less under Pay It Forward than under even the most generous federal loan repayment programs. At income levels below 40% of median (or about $21,000 a year), larger households benefit more under federal loan programs than Pay It Forward.

For more program details and illustrations, take a look at Policymaker’s Guide to Pay It Forward and the accompanying Technical Notes.

*Any income above 150% of the federal poverty level for their household size

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