Income-Driven Repayment Plans
One of the most popular programs is the “income-driven repayment plan.” This is an umbrella term for a few different repayment options, including:
- ICR – Income Contingent Repayment
- IBR – Income Based Repayment
- PAYE – Pay As You Earn
- REPAYE – Revised Pay As You Earn
Each of these repayment plans calculates your payment per month as a percentage of your discretionary income. Still not clear. Let’s understand through an example. The income-contingent repayment plan may cap your federal student loan payments at 20% of your discretionary income.
These plans generally extend the repayment period to 20 or 25 years. If you still have a remaining balance after that, the federal government may forgive the rest.
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How Discretionary Income Works
Discretionary income is the amount you have left after covering basic expenses of living. It’s usually measured against the federal poverty line. So, the less you earn, the lower your payments will be. This setup is best for those who want a lower monthly payment but still want to repay student loans.
Federal Student Loans vs. Private Loans
Remember that these income-based plans primarily apply to federal student loans. If you have private student loans, your lender may not offer any income-based plans. Private lenders are not required by federal law to provide the same protections.
But, there is good news: some private lenders offer temporary payment relief. But these are not the same as federal programs like economic hardship deferment or income-based repayment.
What About Loan Forgiveness?
If you’re on an income-driven repayment plan, you may qualify for loan forgiveness. But this is after a certain number of years. In some cases, such as with public service jobs, forgiveness can come even sooner.
But keep in mind that the amount forgiven might be treated as taxable income. It’s wise to review this with a tax expert if you expect a large loan balance to be forgiven.
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Accrued Interest & Long-Term Costs
While these plans lower your monthly payment, they often extend the term of the loan. That means more accrued interest. It’s a trade-off: lower payments now, but more paid in the long run. Still, for many borrowers, especially those who are on tight budgets, that trade-off is worth it.
Consolidation Loans and How They Help
If you have multiple federal student loans, you can consider a “consolidation loan.” This lets you combine them into one. This simplifies your student loan payments.
When you consolidate, you may also become eligible for income-driven plans. It’s a way to reset and start fresh under a more manageable payment plan.
