Are Federal Student Loan Repayment Programs for You?
Student loan debt and federal student loan repayment programs have become VERY hot topics these days.
According to StudentLoanHero, there is “$1.56 trillion in total U.S. student loan debt, 44.7 million Americans with student loan debt, and 11.5% of student loans are 90 days or more delinquent or are in default.”
So, it’s fair to say that any advice and information that would facilitate loan repayment is helpful.
Not every college student has a high-income job awaiting them upon graduation.
For most student loan borrowers, the 10-year repayment plan is the standard, but it’s not always affordable.
Income-driven repayment plans, only for federal student loan types are designed to make your monthly loan payment affordable based on your income, family size, and the state you live in.
In order to do this, these plans extend payments beyond the standard 10-year term to 20 or even 25 years.
Your monthly payment, then, is reduced, potentially enabling you to retain some funds and live within your budget.
As a bonus, it’s possible for the remaining balance to be forgiven after 10 years of on-time payments if you work for a Public Service Loan Forgiveness Employer.
Here’s what you really need to know about these plans before your student borrows one cent:
How Do Federal Income-Based Repayment Plans Work?
The student submits an income verification form each year that essentially helps their federal student loan servicer(s) understand what the student can afford as a payment.
You can use the federal student loan Repayment Estimator calculator to estimate what the payment could be.
The amount of the payment is based on ten percent of the student’s discretionary income.
The U.S. Department of Education considers your discretionary income to be your gross — after tax — income minus the poverty guidelines for your family size.
It doesn’t matter whether the student has $300,000 in debt or $40,000 in debt, the payment is based solely on income.
For instance, let’s say there are three separate students in different occupational fields with an adjusted gross income of $50,000, the first year after graduation.
One student has $20,000 in debt.
The next student has $50,000 in total debt and the other student went to medical school and has $200,000 in debt with a four percent interest rate.
The income-driven payment the federal government says each student can afford is a $265 to $397 payment.
The standard payments on these amounts are $202, $506, and $1,667.
As long as the payment doesn’t go above this amount, they’ll all pay about the same amount on their loan.
The maximum loan term is 20 years.
Note: The amount of the loan does matter if the student’s income goes up drastically and no longer qualifies for the program.
Thus, if your student is a doctor who eventually will make $200,000 per year, pay attention to the standard payment amount.
That could be the amount they pay later.
When it doubt, guesstimate by inputting other income amounts into the Repayment Estimator calculator to see how much the payment would rise.
Caution: As your student progresses in the repayment process, they should always submit the income verification form a few weeks before annual anniversaries of beginning repayment.
Doing so prevents a payment jump due to lack of income verification.
Benefits of the Income Driven Repayment (IDR) Plans
There is an interest benefit on income-driven repayment plans, but they are a bit different than when you’re on an economic deferment, which is excused breaks from payments.
When you’re in deferment you don’t have to pay interest for up to three years on subsidized loans, the loans where the government pays the interest while you’re in school.
The interest benefit for income-driven repayments is that on subsidized loans, the government will pay the interest difference if the payment doesn’t pay for the total the loan accrued in interest that month.
For instance, let’s say a graduate qualifies for an income-driven repayment of $20.
The interest that would have accrued on their subsidized loans that month would have been $50.
The government would pay the remaining $30.
Four Types of Income-Driven Payment Plans
Revised Pay As You Earn (REPAYE)
This plan caps federal student loan payments at 10% of your discretionary income and forgives your remaining balance after 20 or 25 years of repayment.
Pay As You Earn (PAYE)
In this plan, your payment is 10% of your income.
And that payment will never go above what your student’s payment would be on standard 10-year plan and could be as low as $0 when the student’s income is low enough.
Your repayment term is 20 years.
Income-Based Repayment (IBR)
If you’re a borrower after July 1, 2014, your payment is capped at 10% of your income, and you will make payments for 20 years. If you borrowed before that date, your term will be 25 years.
Income-Contingent Repayment (ICR)
This is the only plan for which Parent PLUS Loans are eligible — though you will have to consolidate these loans first.
Monthly payments are set as the lesser of either 20% of your discretionary income, or what you would pay for a fixed plan over twelve years.
ICR also offers student loan forgiveness after 25 years.
Students are allowed to change repayment plans annually.
Thus, if his or her income goes up in the future, a student may decide to switch to a plan that has guaranteed low payments, long-term.
For instance, they can always pay off loans early.
However, if graduates qualify for Public Service Loan Forgiveness, they want to stick with income-driven options so part of their loan can be forgiven after ten years of on-time payments.
Quick tips for understanding income-driven options:
- Income-driven repayment plans can have payments as low as $0.
- Choosing an income-driven plan is important if your student is in a public service career.
- Graduates can change plans annually. Thus, if the income-driven plan is no longer the best option, they can change it.
- Extended plans can be a better option for long-term affordable payments.
- Use the Repayment Estimator calculator from the federal government to estimate post-graduation payments. You can even estimate for the amount you expect to borrow over a four-year span.
Income-Driven Payment Plans can be a lifesaver if your post-college career is not yet providing you with the funds you may have anticipated.
Like anything, research and sensible thinking will determine whether you qualify and any of the plans will work for you.
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