Income-driven repayments are a great option for people with a high amount of student loan debt but a low salary. The monthly payments are based on your discretionary income and family size, and vary depending on the four types of plans (for Federal loans):
- Pay As You Earn Repayment Plan (PAYE Plan)
- Revised Pay As You Earn Repayment Plan (REPAYE Plan)
- Income-Based Repayment Plan (IBR Plan)
- Income-Contingent Repayment Plan (ICR Plan)
Here’s a chart from the Department of Education that details how much you can expect to pay, depending on the plan you qualify for (you can also use this repayment estimator):
Remember: income-driven repayment plans may not necessarily give you the lowest monthly cost of all the repayment options, but as I have detailed, you need to be enrolled in an income-driven repayment plan to qualify for the Public Service Loan Forgiveness program or other forgiveness options.
“Under all four plans, any remaining loan balance is forgiven if your federal student loans aren’t fully repaid at the end of the repayment period,” per FinancialAid.gov. Repayment periods vary, but usually last 20 to 25 years. Remember that your forgiven loans are taxed as income if you’re not in PSLF.
Note that given the length of the plans, you may not have any debt left to be forgiven. How your income scales throughout your career will play a big role in that. To that end, your monthly payment will change over the course of your career as your income and family size changes. And you need to recertify this each year. “You must provide your loan servicer with updated income and family size information so that your servicer can recalculate your payment,” per FederalAid.gov, even if there are no changes from last year. Your servicer will send you a notice when you need to do this.
Which of the four plans you’re eligible for depends on a variety of factors, including which type of loan you’ve taken out (you can see loan eligibility in this chart). But here’s how it generally breaks down:
- PAYE and IBR: “The payment you would be required to make under the PAYE or IBR plan (based on your income and family size) must be less than what you would pay under the Standard Repayment Plan with a 10-year repayment period.” Additionally, you need to be a new borrower as of Oct. 1, 2007, and have received a disbursement of a direct loan on or after Oct. 1, 2011. “If you qualify for Pay As You Earn, not the revised one, take it, it’s the best plan,” says student loan expert Mark Kantrowitz.
- REPAYE: Anyone with eligible loans (see the chart here) can qualify for these loans. But beware: “Monthly payments aren’t capped,”says Kantrowitz, so you can end up paying quite a bit each month, particularly if you’re married (both your and your spouse’s incomes will be considered in your monthly payments).
- ICR: Anyone with eligible loans (see the chart here) can qualify for these loans, and this is the only income-driven repayment plan available to parent PLUS loan borrowers.
“The government is aggressively steering people toward 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 go with the government’s suggestion—double check your PAYE eligibility.
How do you know if you should wait for forgiveness or try to pay your loans off sooner? According to Travis Hornsby, founder of Student Loan Planner, it’s all a question of salary. Calculate what your monthly payments would be over the course of 10 years (based on the standard 10-year repayment plan), and determine whether that payment is something you can afford. “If it’s easy to pay more than [the 10-year monthly payment], then pay it off,” says Hornsby. “If you can’t afford that monthly payment, then that’s an indicator that you need to look into the forgiveness rules.”
Hornsby’s rule of thumb: “If you’re going to owe more than double your income over your entire career, then you probably want to look into loan forgiveness options.” Otherwise, you may want to look into refinancing, which we’ll get into tomorrow.
You can apply for an income-driven repayment plan here. There are also other types of repayment plans (though again, you won’t qualify for forgiveness), and a deferment or forbearance can help if you’re having difficulty making your payments on time.
Alicia Adamczyk on Two Cents, shared by Alicia Adamczyk to Lifehacker
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