The government offers Income-Driven Repayment plans for individuals struggling to pay their monthly student loan bills. These repayment plans require you to pay a fixed percentage of your monthly income and extend your loan for 20 or 25 years.
What is Income-Driven Repayment?
The federal government offers four income-driven repayment options, all of which are tied to your income.
REPAYE – Under the revised pay as you earn plan, you will pay 10% of your monthly discretionary income for 20 years if you were an undergraduate student, and 25 years if you were a graduate student. You will always pay 10% of your monthly discretionary income, regardless of changes to your income or family size.
PAYE – You will pay 10% of your monthly discretionary income for 20 years. If your income increases, you will never be asked to pay more than you would have under a standard repayment plan.
Income-Based Repayment – Similar to the PAYE plan, you will pay 10% of your monthly discretionary income for 20 years, and you will never be asked to pay more than you would have under a standard repayment plan.
Income Contingent Repayment – You will pay the lesser of 20% of your discretionary income or what you would pay on a fixed payment for 12-years on a standard repayment plan.
Am I eligible for income-driven repayment?
Any student with federal loans is eligible for the REPAYE and ICR repayment options. You are eligible for the PAYE and IBR options if your monthly payment will be lower than what you are currently paying on your standard or consolidated loan plan.
Those with Parent PLUS loans are only eligible for the ICR program.
If you are in default of your federal loans, you will not be eligible for Income-Driven Repayment.
Private loans are not eligible for the government’s income-driven repayment program. If you are struggling to make your monthly private loan payment, contact your lender to see what options may be available to you. It’s possible your lender will offer you a similar payment schedule.
Advantages of Income-Driven Repayment
Lower monthly payments
The primary benefit of income-driven repayment options is that they lower your monthly payments, at least in the beginning. If you’re struggling to meet your fixed payment, these plans will give you a more realistic monthly payment. This makes income-driven repayment plans a great option for those entering into low-paying occupations, or who are suffering financial difficulties.
Payments are tied to your income
Income-driven repayment plans allow you to petition your servicer for a change in monthly payment if you’ve recently experienced a change in financial situation. On a fixed repayment plan, you risk delinquency and default if you suffer financial hardship, such as a loss of job or salary reduction. With income-driven repayment plans, your monthly payment will reflect your most current financial reality.
Your monthly payments won’t be altered if your income increases
If your income increases while you are doing a repayment plan, your principal will stay the same. The principal is the money that you originally agreed to pay back. Your monthly payments might change if your lender reviews your account and determines that payments should increase. Your lender will notify you if your payments will be affected by the change in your income.
Possibility for loan forgiveness
All four income-driven repayment plans offer the potential for partial loan forgiveness. Any loan debt that remains upon the end of your 20 or 25-year loan term is forgiven.
Disadvantages of Income-Driven Repayment
Length of the loan
The first disadvantage to Income-Driven Repayment plans is the length of the loan. Under standard repayment options, you’re debt-free in 10 years. With Income-driven repayment plans, you’re still making monthly payments 20 years later.
It may not seem like a big deal when you’re fresh out of college, but it can turn burdensome if you’re still repaying your loans when the time comes to file your son or daughter’s FAFSA®.
Accrue more interest
While income-driven plans allow you to pay less money today, you will likely end up paying more money in the long run. Due to the extended loan terms, you will end up accruing more interest over the life of the loan, which means you end up paying more money than you would under a standard repayment plan.
Change in income will not affect your payments
Your monthly payments not being affected by a change in your income can be a curse and a blessing. If your income has increased, your monthly payments not changing will be a blessing. However, if your income decreases your monthly payments not changing might cause some problems, especially if you can’t afford the amount you agreed to pay monthly. If this is the case, contact your lender to let them know about your income changes. The lender will review your account and determine whether you qualify for a monthly payment arrangement or not.
Who Should Sign Up For An Income-Driven Repayment Plan?
Anyone struggling to make their monthly loan repayments should consider income-driven repayment options. Since the repayment plans are so lengthy, income-driven repayment plans are best-suited towards individuals who are regularly struggling to repay their federal student loans. They are an extremely attractive option for those who anticipate careers in low-salaried fields.
If you are experiencing a temporary financial setback, such as a loss of job, or temporarily reduced salary, then you may want to consider alternate routes before taking on a 20-25-year commitment.