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Whether you have one student loan or many, you may be able to take advantage of an income-driven student loan repayment plan for loan management. Income-based repayment plans offer some of the best options for borrowers with relatively low incomes, but these plans aren’t for everyone. Find out which borrowers and which loans are eligible for income-based repayment plans and learn how these plans compare with income-driven repayment plans for student loans.
An income-based repayment plan, or IBR for student loans, is one of the many options that the U.S. Department of Education offers. This federal student loan repayment program is designed to make your loans easier for you to pay off. Since the amount that you’ll owe each month is based on how much you earn, this equates to essentially 10 or 15 percent of your discretionary income. This type of plan helps you live within your means, even if you have extensive student loan debt.
The manageable monthly payments aren’t the only benefit you’ll enjoy when you enroll in an income-based repayment plan, though. With this type of plan, you could be eligible for student loan forgiveness at the end of the term of your plan. If any balance remains at the end of your loan term, the Department of Education will waive it. Since IBR plans last for 20 or 25 years, depending on whether you first borrowed before or after July 1, 2014, you’ll have to make consistent payments for at least two decades before you can look forward to loan forgiveness.
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In some cases, you’ll also be eligible for the Public Service Loan Forgiveness program. To participate in this program, you’ll have to work full-time for a qualifying employer, which includes government agencies and many nonprofit organizations. While you’re employed full-time, you’ll have to make 120 qualifying payments, which typically means you’ll have to pay the amount due for each bill within two weeks of the due date. After fulfilling both of these obligations, the Department of Education will forgive the remaining balance due on your student loans.
Although the benefits of these plans are attractive, income-based repayment plans also have some downsides. The terms last for 20 or 25 years, which could be twice as long as the term of your current student loan. Since the term of an IBR plan is longer, you’ll pay more interest throughout the term of the loan. If the Department of Education forgives any of your loan balance, you may owe income taxes on that amount, too.
While most people can take out student loans while they’re enrolled in college full time, not everyone is eligible to enroll in an income-based repayment plan. Instead, many borrowers have to stick to a standard repayment plan, which includes fixed monthly payments and terms of about 10 years.
To take advantage of an income-based repayment plan, you have to be able to demonstrate at least a minimum level of financial hardship. Essentially, the amount that you would pay when enrolled in an IBR plan has to be less than what you’d pay with a standard student loan repayment plan.
You can confirm what you pay on a standard 10-year plan by checking your latest student loan bill and calculating your annual repayment amount. To confirm what you’d pay with an IBR plan, you’ll need to do a simple calculation:
Afterward, compare the standard and IBR amounts. If the IBR figure is lower, you may be eligible for an income-based repayment plan.
In addition to income requirements, your loans must meet other criteria to be eligible for an income-based repayment plan. If you took out a private student loan with a bank, credit union, or other financial institution, it won’t qualify for IBR. Instead, only federal student loans are eligible for income-based repayment plans:
It’s also important to note that not all federal student loans qualify for IBR. The following types of federal loans aren’t eligible:
Income-based repayment plans make up one of four total income-driven repayment options that the federal government oversees. Depending on your income level, the types of loans you have, and other extenuating circumstances, another income-driven repayment plan may be a better option for you.
With a Pay-As-You-Earn (PAYE) plan, you’ll pay about 10 percent of your discretionary income, following the calculation above. No matter what you earn, with this plan, you won’t have to pay more than you would with a standard repayment plan. All PAYE plans have a term of 20 years, which is twice as long as the standard repayment plan. When the term ends, the Department of Education will forgive any remaining balance. If you qualify for the Public Service Loan Forgiveness program, however, your loan balance could be forgiven in as little as 10 years.
To be eligible for a PAYE plan, you’ll need to pass the same income test you’d take for an IBR plan. For a PAYE plan, your first loan has to be dated October 1, 2007, or later, and you must have gotten a Stafford Loan disbursement on October 1, 2011, or later.
The amount you pay under a PAYE plan depends on how much you make and the size of your family when you first move to this type of repayment plan. If you later earn a high enough income that you’d pay more than you would have under a 10-year standard repayment plan, your monthly bill will be recalculated according to the standard repayment plan.
With a Revised Pay-As-You-Earn (REPAYE) plan, you’ll pay around 10 percent of your discretionary income. If all of the federal loans you took out were for undergraduate coursework, your plan term will be 20 years. If one or more of your loans were for graduate or professional education, your plan term will be 25 years. Like PAYE and IBR plans, REPAYE plans also forgive any remainder that you still owe at the end of the term. These plans also qualify for the Public Service Loan Forgiveness program, so you could look forward to loan forgiveness in just 10 years.
REPAYE plans are some of the easiest to qualify for. As long as you have eligible student loans, you can take advantage of this repayment plan.
One thing to keep in mind is that the amount you owe each month can change over time. With a REPAYE plan, your monthly payment depends on how much you make and the size of your family.
With an Income-Contingent Repayment (ICR) plan, you’ll pay either 20 percent of your discretionary income or what you’d pay on a standard 12-year repayment schedule, whichever is less. All ICR plans have a term of 25 years, and they’re eligible for both standard and public service loan forgiveness.
Most federal student loans are eligible for ICR plans, including PLUS loans that parent borrowers have transitioned to Direct Consolidation loans. Similar to REPAYE plans, ICR plans determine monthly payments based on the income you earn and the size of your family.
Keep in mind that you won’t be eligible for income-driven repayment plans if your student loans are in default, which means you’ve neglected to make payments each month. To get out of default, you may need to consolidate or rehabilitate your student loans. Once you’re out of default, you may qualify for your choice of income-driven repayment if your loans meet the requirements above.
If you’re eligible for just one repayment plan, your choice is easy. However, if you qualify for multiple repayment options, you’ll need to weigh your choices carefully. Ballpark your monthly payment using a sample chart or use one of the many available online calculators to determine what your monthly payment would be under each different plan.
Keep in mind, however, that even the most advanced online calculators require some guesswork. For instance, you can anticipate that the federal poverty line will increase at some point in the future, but it’s impossible to pinpoint a date or an amount. In addition, the interest rates for your student loans may increase over time, but you can’t project the rate increase or the date. Your income level and family size is also likely to change over time, but you can’t always predict those factors, either.
As you’re calculating your estimated payments, remember that the amount may not be exact. As you compare your options, choose the repayment plan that results in the lowest total payment.
If an IBR plan sounds like the right choice, you’ll want to enroll as soon as possible. The enrollment and verification process can be time-consuming, and your application may not be approved as quickly as you’d like. That means you’ll want to leave plenty of time to complete each step.
Since most borrowers enroll in IBR plans through student loan servicers, you’ll want to start the process by contacting your loan company. The end result is the same no matter which loan servicer you have. However, each company requires a slightly different enrollment and verification process. Always contact your servicer with questions about your status, and keep careful notes of what you submitted and when.
It’s also important to note that enrolling in an income-based repayment plan is an ongoing process. Your payment amount may go up or down depending on your income and family size. You must reapply for an IBR plan every year. This process is known as re-certification. You’ll need to resubmit income and family data by the annual deadline, even if nothing has changed from one year to the next. Make sure you stay eligible for both income-based repayment and loan forgiveness, complete the re-certification process on-time every year.