What’s Income-Driven Repayment on Federal Student Loans?
- An income-driven repayment program could be a great option if you’re struggling to pay back your current student loans.
- Income-driven repayment plans are more affordable monthly but can accrue more interest over time.
- Not every loan or circumstance is eligible for income-driven repayment.
Ever feel like your financial life is a never-ending game of Jenga, with bills piling up higher and higher? Adding student loan payments into the mix can make it feel like you’re on hard mode.
Luckily, income-driven repayment plans (IDRs) of your federal student loans can be a great solution to making it more manageable. These plans adjust the amount you need to pay based on factors like your income or family size.
An IDR is for borrowers who are struggling to pay their current student loan payments and don’t want to default on them, or for those who have high student loan debt, but a low income. They are meant to make it easier for you to pay back what you owe.
Of course, with everything, there are pros and cons you need to consider before determining what makes sense for you. Before we look at those, let’s talk about the types of income-driven repayment plans.
Types of Federal Student Loan Repayment Plans
There are currently four types of federal student loan repayment plans that have their own eligibility criteria you must meet to qualify. Here’s a quick overview of each plan:
Income-Based Repayment Plan (IBR). Assuming you’re a new borrower (since 2014), this plan gives you monthly payments that are typically equal to 10% of your discretionary income divided by 12. Under this plan, your payment is entirely based on your income and family size, so it may be adjusted accordingly.
However, if your income would raise your payment to more than what it would be under a 10-year standard repayment plan, this plan would stop including your income as a repayment factor. You would simply pay what you would under that 10-year standard repayment plan based on the amount you owed when you first began the IBR plan.
Income-Contingent Repayment Plan (ICR). You’ll pay either 20% of your discretionary income, or what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted to your income, whichever is less.
Under this plan, if your income increases enough, it’s possible that you may need to pay more than what the 10-year standard repayment plan would require because your income could allow for it.
Pay As You Earn (PAYE). This plan gives you monthly payments that are typically equal to 10% of your discretionary income divided by 12. Similar to IBR, PAYE would stop including your income as a repayment factor if your payments were higher than what they would be under a 10-year standard repayment plan. You would pay what you would under that 10-year standard repayment plan based on the amount you owed when you first began the PAYE plan.
Saving on a Valuable Education (SAVE). This plan gives you monthly payments that are typically equal to 10% of your discretionary income divided by 12. Similar to ICR, it will always account for your increase in income as well as your family size. This means in some cases you may pay more than what the 10-year standard repayment plan would require.
Learn more about the eligibility requirements of each plan.
The pros and cons of Income-Driven Repayment Plans
The ability to pay back your student loans in a way that won’t force you to pinch pennies each month just to get by is great. Although, it’s important to know the full picture of these plans. They’re super helpful, but there are some cons that go along with it as well.
- They’re affordable BUT you may pay more in interest over time.
Your monthly payments are likely to be much lower than they otherwise would be, which helps make them more affordable. But, because you’re paying them back over a longer period of time, you may end up paying more interest than you otherwise would have on a standard repayment plan.
- Loans may be eligible for forgiveness, BUT you may need to pay income tax.
Depending on the plan you choose, after 20 – 25 years, any remaining balance you have may be forgiven. However, you may need to pay income tax on that forgiven amount.
- You have to quality.
Having a repayment plan that is based on your income and family size is great for making it more affordable. In some cases, you may not have a monthly payment at all. However, not all loans are eligible for these types of repayment plans. Check with your loan servicer to see what options, if any, are available to you.
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