DIFFERENT INCOME-DRIVEN REPAYMENT PLANS AND WHY YOU SHOULD SIGN UP
If you have heard talk about income-driven repayment plans, you may be wondering what all of the hype is about and whether or not it is a good idea to sign up for one. Income-driven repayment plans have been extremely successful in helping students better afford their student loan payments. The best part about income-driven repayment plans is that they only take a portion of your discretionary income and from that amount, you pay a percentage. Many students receive low monthly payments that are much more affordable than what they were previously paying. Some students will even have their monthly payment set at $0.
Below, we will dig deeper into the different income-driven repayment plans and how each one can benefit you. If you would like to participate in any of the programs below, it is important that you contact your student loan lender and speak to them about applying.
What Is an Income-Driven Repayment Plan?
An income-driven repayment plan is a plan that is used to set your monthly student loan repayment at an amount that is affordable to you based on your family size and the amount of income you bring in per month. There are four main types of income-driven repayment plans, which include:
The REPAYE or Revised Pay As You Earn Repayment plan takes a total of 10 percent of your discretionary income and then generates your monthly payment.
Under this plan, your repayment period is approximately 20 years if you are repaying loans that were all received during your undergraduate period. If the loans were received during your graduate or professional study, the loan term is 25 years.
The PAYE or Pay As You Earn plan often takes 10 percent of your discretionary income and comes up with your monthly payment.
Under this plan, your repayment period is approximately 20 years.
The IBR or Income-Based Repayment plan uses 10 percent of your discretionary income if you borrowed your student loans on or after July 1, 2014 and you were a new borrower.
If you took out your student loans on or after July 1, 2014 and are not a new borrower, your monthly payments will be determined based on 15 percent of your discretionary income.
Under the IBR plan, if you are a new borrower on or after July 1, 2014, you will have 20 years to repay your student loans. If you are not a new borrower and took out a student loan on or after July 1, 2014, you will have 25 years to repay the loan.
The ICR or Income-Contingent Repayment plan is a bit different than the other three options and it has two options within it. Under this option, either 20 percent of your discretionary income will be considered OR your payments will be equal to what you would have paid over the course of a 12-year repayment plan that is adjusted to meet your income.
Typically, the ICR plan allows you to repay the loan over 25 years.
Payment Estimates for Income-Driven Repayment Plans
If you are wondering just what you might pay if you are on an income-driven repayment plan, we will provide you with some figures below.
In this scenario, we will assume that you have student loan debt that total $30,000 and your income is $25,000 per year. Under the standard repayment plan, your monthly payment would be $333. Under the REPAYE plan, your initial monthly payments would be $60 and then gradually move up as your income moves up to reach $296. Both the PAYE and IBR for new borrowers would also have an initial monthly payment of $60 and a final monthly payment of $296. The IBR plan for existing borrowers would be an initial monthly payment of $90 and gradually move up to a final monthly payment of $333. The ICR plan will start with a monthly payment of $195 and gradually move up to a final monthly payment of $253.
You Can Receive Loan Forgiveness Under All of These Plans
Depending on your situation, you may be able to receive student loan forgiveness under these income-driven repayment plans. In fact, if you make on-time, qualifying payments for the length of the loan term, your remaining balance will then be forgiven.
Students will enjoy the benefits that these income-driven repayment plans offer. For instance, if you experience any type of economic hardship, deferment, or forbearance, these payments still count towards your total repayment period.
Students may or may not have a balance left over when they reach the time for forgiveness. Whether or not you have a balance will depend on several different factors. For example, if you are on an income-based repayment plan and your income increases, then your monthly payment will increase, which could result in you paying down your debt quicker than you would have if your monthly payment was set at $0.
Final Thoughts on Income-Driven Repayment Plans
It is important to understand what income-driven repayment plans are and how they will affect you. These plans do have a lot of success and they can help you better afford your student loan payments. Students who do struggle to make their payments may want to consider these programs as they look at your income and family size.
Under these income-driven repayment plans, you still keep all of the benefits you received under your federal student loans, which makes these plans lucrative and extremely helpful to many students.
One thing to keep in mind is that you do have to reapply for this plan on a yearly basis, which means you do have to turn in your tax return for review. You may notice that your monthly payment amount fluctuates based on the amount of money you make each year.
If you are considering an income-driven repayment plan, now is the time to talk to your student loan lender and apply for the appropriate plan that meets your needs.