If you find yourself in a difficult financial situation after school, the income-based repayment plan could offer you relief from higher monthly payments. This program is available for several types of Direct and Federal Family Education Loan (FFEL) program loans, including:
- Subsidized and Unsubsidized Direct Loans
- Direct PLUS Loans for graduate or professional students
- Direct Consolidation Loans (except those that include parent loans)
- Subsidized and Unsubsidized Federal Stafford Loans
- FFEL PLUS Loans for graduate or professional students
- FFEL Consolidation Loans (except those that include parent loans)
You must demonstrate partial financial hardship to qualify for this plan, meaning that the payments you would make under the standard plan must be higher than what you would owe using the income-based plan. Your monthly payments will be calculated using the following criteria:
- The amount you owe on your loans
- Your adjusted gross income
- The size of your family
- Your federal income tax filing status
- Your legal residence
The amount of your monthly payments is recalculated each year, and you must submit documentation regarding your income and family size to your lender annually. You can look up your provider’s information and other details about your federal loans using the National Student Loan Data System. If you do not provide your lender with this information, you may lose eligibility for lower payments and will be required to pay the amount you would have if you used the standard repayment plan.
With the income-based repayment plan, your monthly payments may not cover the interest that accrues between payments. In this case, the government will pay your monthly accrued interest on subsidized Direct, Stafford, and FFEL loans for up to three years. Accrued interest that is not paid off will not be capitalized, or added to the balance of your loan. Even if you have to defer payments or enter forbearance, the interest that collects during those periods is not capitalized.
The repayment period will last 25 years. If the loan is still not paid off after that time, you could be able to have the remainder of your loan forgiven. Because the repayment period is longer, your loan may accumulate more interest over its life and could be more expensive than it would have been if you used a different repayment plan. Additionally, if you qualify for loan forgiveness after 25 years, you could owe taxes on the forgiven amount.
The Federal Student Aid site has a calculator which allows you to estimate whether or not you will qualify for income-based repayment. Only your lender can officially determine your eligibility for this program. If you meet the requirements, you can apply for this repayment plan using the Student Loans website.
Remember, you are allowed to change the repayment plan of your federal student loans once per year. If you are having trouble making payments or think you may encounter trouble soon, contact your lender to discuss your repayment options.