Is the Income-Driven Student Loan Repayment Plan Right for You?
Income-based payments are a great option for people with high student loan debt but low salaries. Monthly payments are based on your discretionary income and family size and depend on four types of plans (for federal loans):
- Pay-as-you-go plan (PAYE plan)
- Revised pay-as-you-go plan (REPAYE plan)
- Income Based Repayment Plan (IBR Plan)
- Contingent income repayment plan (ICR plan)
Here is a Department of Education chart detailing how much you can expect to pay depending on the plan you are applying for (you can also use this repayment estimator ):
Remember, income-driven repayment plans may not necessarily give you the lowest monthly value of all repayment options, but as I detailed , you must be enrolled in an income-driven repayment plan to be eligible for the forgiveness program. government loans or other forgiveness options.
“Under all four plans, any outstanding loan balance is forgiven if your federal student loans are not paid in full at the end of the repayment period,” FinancialAid.gov said in a statement. Maturities vary, but usually last from 20 to 25 years. Remember, your forgiven loans are taxed as income if you are not a PSLF member.
Note that due to the length of the plans, you may not have debt forgiveness. How your income grows throughout your career will play a big role in this. To this end, your monthly payment will change over the course of your career as your income and family size change. And it needs to be re-tested every year. “You must provide your loan service provider with updated income and household size information so that he can recalculate your payment,” according to FederalAid.gov , even if there is no change from last year. Your service center will send you a notification when you need it.
Eligibility
Which of the four plans you are eligible for depends on many factors, including what type of loan you have taken (you can see the eligibility for a loan in this chart ). But here’s how it usually fails:
- PAYE and IBR: “The payment that you will need to make under the PAYE or IBR plan (depending on your income and family size) must be less than what you would pay under a standard 10-year repayment plan ”, for StudentAid.gov. In addition, you must be a new borrower on or after October 1, 2007 and receive repayment of the direct loan on or after October 1, 2011. “If you are eligible for a pay-as-you-go rather than a revised one, then this is the best plan,” says student loan expert Mark Kantrowitz.
- PAY OUT: anyone with eligible loans (see chart here ) can qualify for these loans. But be careful: “There is no monthly payout,” Kantrowitz says, so you may end up paying a hefty amount each month, especially if you’re married (your income and your spouse’s income will count towards your monthly payments).
- ICR: Anyone with eligible loans (see chart here ) can qualify for these loans and this is the only income oriented repayment plan available to PLUS parent loan borrowers.
“The government aggressively directs people towards REPAYE because it’s cheaper for them,” says Kantrowitz, “and if it’s cheaper for them, it’s more expensive for you.” So don’t just settle for a government proposal – double check your eligibility for PAYE.
How do you know if you need to wait for forgiveness or try to pay off the loan earlier? According to Travis Hornsby, founder of the Student Loan Planner , it’s all about the paycheck. Calculate what your monthly payments will be over 10 years (based on a standard 10 year repayment plan) and determine if you can afford that payment. “If it’s easy to pay more than the [10-year monthly payment], then pay it off,” Hornsby says. “If you cannot afford this monthly payment, then this is an indicator that you need to learn the rules of forgiveness.”
Hornsby’s rule of thumb is: “If you are going to be in debt more than double your entire career, then you probably want to explore options for loan forgiveness.” Otherwise, you can consider refinancing, which we’ll talk about tomorrow.
You can apply for an Income Based Repayment Plan here . There are other types of repayment plans as well (although, again, you are not eligible for forgiveness), and a deferral or abstinence can help if you are having difficulty paying off on time.