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Income driven repayment plans - Are you choosing the right one?

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By: Phil Bradford
on 16th Mar,2017

It gets difficult to get out of a student loan debt. If you’re the one who’s struggling to pay off the debt, you can take help of an income-driven repayment plan.
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Under Trump’s presidency, you need to think afresh about your student loan and how you can repay it. He has proposed some changes, which if enacted into law, will benefit student loan borrowers in the long run.

One of which is - Borrowers have to pay 12.5% of their income continuously for 15 years toward their student loan debt after which the remaining amount will be forgiven.

If you have a federal student loan debt (sorry, private student loan borrowers), you can choose one income driven repayment (IDR) plan from the list below to become debt free:

1 Income-Based Repayment (IBR)

This plan has been available for federal student loan borrowers since 2009.

Your monthly payment is capped at 10% to 15% of your discretionary income.

It is a favorable option for borrowers struggling to keep up with the monthly payments and require something more manageable.

The plan:

As of 1st July 2014 or later, new borrowers have to make payments for 20 years at 10% interest. And the rest have to pay their loan at 15% interest for 25 years.

Loans that are eligible for IBR:

  • Stafford Loans
  • Direct Subsidized Loans
  • Unsubsidized Loans
  • FFEL Consolidation Loans
  • Direct Graduate PLUS Loans
  • Federal Direct Consolidation Loans

Pros and cons:

PROS CONS
1. Monthly payments are lowered. 1. Pay more toward interest rate in the long run.
2. After the repayment period of 20 - 25 years, the remaining loan amount will be forgiven. 2. Loans taken out by parents are not eligible.

2 Pay As You Earn (PAYE)

It is comparatively new to IBR (it was introduced in 2012), but unlike IBR, it has stricter regulations.

The plan:

You have to pay 10% of your discretionary income for 20 years.

To qualify, you should have taken out the loan on or after 1st October 2007, have got the Direct Loan disbursement on or after 1st October 2011, and have to prove your hardship in repaying the loan.

Loans that are eligible for PAYE:

  • Direct subsidized and unsubsidized loans
  • Direct PLUS loans (loans given to parents are ineligible)
  • Direct Consolidation Loans

Pros and cons:

PROS CONS
1. Monthly payments are lower than the ones on a 10-year Standard Repayment Plan. 1. Not all are eligible. You have to be a new borrower as per the dates mentioned above.
2. Remaining loan balance is forgiven after 20 years. 2. Have to provide updated information about income and family size to prove your financial hardship.

3 Revised Pay As You Earn (REPAYE)

REPAYE is the newest income-driven repayment program on the list that was introduced in December 2015.

The plan:

It caps the monthly payments at 10% of your discretionary income for 20 years if you’re repaying undergraduate debt and 25 years if paying back a graduate debt.

Loans that are eligible for REPAYE:

  • Both subsidized and unsubsidized Direct Loans
  • Direct PLUS Loans (loans given to parents are disqualified)
  • Direct Consolidation Loans

Pros and cons:

PROS CONS
1. Everyone can participate in this plan irrespective of when they borrowed. 1. Spouse’s income is considered while calculating the monthly payments if you’re married.
2. Interest subsidy is available if monthly payments don’t cover interest charges. 2. Grad school debt won’t be forgiven before 25 years.

Expected change in PAYE and REPAYE:

The Trump government has proposed to combine PAYE and REPAYE for the convenience of student loan borrowers.

4 Income-Contingent Repayment Plan (ICR)

How much you need to pay each month depends on your income. You don’t have to calculate the amount. Just put all the details in the federal government's repayment estimator and find out how much you’ve to pay.

The Plan:

Your income and family size determines how much you pay each month.

Payments are capped at 20% of your discretionary income for 25 years.

Loans that are eligible for ICR:

  • Direct Loans (both Subsidized and Unsubsidized)
  • Direct PLUS Loans (loans given to parents can qualify only if they’re consolidated)
  • Direct Consolidation Loans

Pros and cons:

PROS CONS
1. Easy to qualify. No income eligibility. 1. Payments can be more than a Standard Repayment Plan as they depend on your income.
2. Loans may be eligible for forgiveness. 2. High interest rate and monthly payments.

Caution: Forgiven student loan debt amount is taxable under the federal law. The more you save, the greater tax you have to pay. So, choose the correct option and try to lower your debt amount as much as you can.

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