How to Calculate Your Monthly Payment With An Income-Driven Repayment Plan

Roughly seven in 10 college graduates have student loan debt, with an average of $30,100 per borrowers, according to the Institute of College Access and Success. For some graduates, however, that could be as much, or more, than what they earn their first year out of school. Here are four plans that can help lower your federal student loan payments. We will also show you how to calculate your monthly payment with an income-driven repayment plan

Percentage of college graduates with student loan debt.

For graduates whose income is insufficient to pay back their federal student loans, the government has created four income-driven repayment plans to help make the process more affordable.

“Generally, if a borrower’s total student loan debt at graduation exceeds their annual income, they will qualify for an income-driven repayment plan,” says Mark Kantrowitz, publisher and vice president of strategy at Cappex.com.

Income-driven repayment plans base your monthly payment on your income rather than on the 10-year Standard Repayment Plan. Depending on your needs, it’s important to review each option to find the one that suits you best.

How your monthly payments are calculated

Each of the four income-driven repayment plans differs in how it calculates your monthly payment. Generally, it’s based on a percentage of your discretionary income, which is defined as the difference between your income and a percentage of the poverty guideline for your family size and state.

According to the Department of Health and Human Services, the 2017 poverty guidelines are as follows per household:

Here’s how each repayment plan breaks down.

1. Revised Pay As You Earn (REPAYE)

Any federal student loan borrower can choose this plan as long as their loans are eligible.

How your REPAYE monthly payment is calculated

REPAYE caps your payment at 10% of your discretionary income, which is defined as the difference between your income and 150% of the poverty guideline.

Generally, if a borrower’s total student loan debt at graduation exceeds their annual income, they will qualify for an income-driven repayment plan,”

For undergraduate debt, your repayment period would be extended to 20 years. If you took out any of the loans during your graduate or professional studies, though, the repayment period would be 25 years. If there’s a balance leftover, it’ll be forgiven.

The following loans are eligible for REPAYE:

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Direct PLUS Loans made to graduate and professional students
  • Direct Consolidation Loans that did not repay any PLUS loans made to parents
  • Subsidized Federal Stafford Loans (if consolidated through the Direct Loan Consolidation program)
  • Unsubsidized Federal Stafford Loans (if consolidated)
  • FFEL PLUS Loans made to graduate or professional students (if consolidated)
  • FFEL Consolidation Loans that did not repay any PLUS loans made to parents (if consolidated)
  • Federal Perkins Loans (if consolidated)

Each year, the government will review any updates to your family and income. Depending on the changes, they may increase or decrease your monthly payment for the upcoming year. There’s no cap on how high your payment can be, which means that it could potentially be higher than your original payment if your income goes high enough.

Pros

  • On undergraduate debt, your loans are eligible for forgiveness after 20 years of payments.
  • In cases where your monthly payment isn’t enough to cover all the interest that’s accruing each month, the government will subsidize some or all of the interest due.
  • You don’t need to demonstrate financial need to qualify for this plan.
Cons

  • If you have graduate debt, you have to make payments for 25 years to qualify for loan forgiveness.
  • There’s also no cap on your monthly payment, which could be an issue down the road as your income grows.

2. Pay As You Earn (PAYE)

Targeted to newer borrowers, the PAYE repayment plan is available only to borrowers who didn’t have student loans before October 1, 2007. What’s more, you have to have received a Direct Loan disbursement on or after October 1, 2011.

Another requirement to qualify is that your monthly payment under PAYE would need to be less than your payment under the 10-year Standard Repayment Plan. You also need to demonstrate financial need.

How your PAYE monthly payment is calculated

PAYE changes your monthly payment to 10% of your discretionary income, which is defined as the difference between your income and 150% of the poverty guideline.

Your repayment period on all loans is 20 years, after which the remaining balance will be forgiven.

The following loans are eligible for REPAYE:

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Direct PLUS Loans made to graduate and professional students
  • Direct Consolidation Loans that did not repay any PLUS loans made to parents
  • Subsidized Federal Stafford Loans (if consolidated through the Direct Loan Consolidation program)
  • Unsubsidized Federal Stafford Loans (if consolidated)
  • FFEL PLUS Loans made to graduate or professional students (if consolidated)
  • FFEL Consolidation Loans that did not repay any PLUS loans made to parents (if consolidated)
  • Federal Perkins Loans (if consolidated)

Each year, the government will reassess your income and family situation. Depending on the changes, they may increase or decrease your monthly payment for the upcoming year, but it will never go above the original Standard Repayment Plan amount.

Pros

  • Unlike with REPAYE, all student loans qualify for a 20-year repayment plan.
  • You don’t need to worry about your monthly payments being more than what you were originally paying via the Standard Repayment Plan.
Cons

  • This repayment plan isn’t available to everyone; you must be a fairly new borrower to qualify.

3. Income-Based Repayment (IBR)

Although you don’t have to be a new borrower to qualify for the IBR plan, it does help keep your monthly payments lower.

How your Income Based-Repayment (IBR) monthly payment is calculated

If you’re a new borrower on or after July 1, 2014, your payment will be 10% of your discretionary income. If you have loans from before July 1, 2014, however, your payment will be 15% of your discretionary income.

In both cases, discretionary income is defined as the difference between your income and 150% of the poverty guideline.

The repayment period is also different, with newer borrowers (as of July 1, 2014) getting a 20-year repayment plan and older borrowers getting a 25-year plan.

To qualify, your monthly payment under IBR would need to be less than your payment under the 10-year Standard Repayment Plan. You also need to demonstrate financial need.

The following loans qualify for IBR:

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Direct PLUS Loans made to graduate and professional students
  • Direct Consolidation Loans that did not repay any PLUS loans made to parents
  • Subsidized Federal Stafford Loans
  • Unsubsidized Federal Stafford Loans
  • FFEL PLUS Loans made to graduate or professional students
  • FFEL Consolidation Loans that did not repay any PLUS loans made to parents
  • Federal Perkins Loans (if consolidated through the Direct Loan Consolidation program)

Each year, the government will reassess your income and family situation. Depending on the changes, they may increase or decrease your monthly payment for the upcoming year, but it will never go above the original Standard Repayment Plan amount.

Pros

  • New borrowers qualify for the lower payment amount and shorter repayment period.
  • Plus, your monthly payment will never go higher than what you were paying under the Standard Repayment Plan.
Cons

  • If you’re not a new borrower as of July 1, 2014, your monthly payment will be higher.
  • You’ll also have to make payments for 25 years to qualify for forgiveness on your remaining balance.

4. Income-Contingent Repayment (ICR)

This repayment plan is the only one that is available for all federal student loans, including ones made to parents. There’s no income eligibility requirement, making it a great option for people who can’t qualify for the other plans.

How your Income-Contingent Repayment (ICR) monthly payment is calculated

Unlike the other plans, ICR is a little more complicated. Your payment will be the lesser of the following:

  • 20% of your discretionary income, which is defined as the difference between your income and 100% of the poverty guideline
  • What you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income

Your repayment period will be 25 years regardless of the type of student loans you have.

The following loans are eligible:

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Direct PLUS Loans made to graduate and professional students
  • Direct PLUS Loans made to parents
  • Direct Consolidation Loans
  • Subsidized Federal Stafford Loans (if consolidated through the Direct Loan Consolidation program)
  • Unsubsidized Federal Stafford Loans (if consolidated)
  • FFEL PLUS Loans made to graduate or professional students (if consolidated)
  • FFEL PLUS Loans made to parents (if consolidated)
  • FFEL Consolidation Loans (if consolidated)
  • Federal Perkins Loans (if consolidated)

Each year, the government will reassess your income and family situation. Depending on the changes, they may increase or decrease your monthly payment for the upcoming year. Your payment may end up higher than what you paid with the Standard Repayment Plan.

Pros

  • Parents who took out student loans for their child can qualify for this plan.
  • You can also qualify for it if you’re having trouble with the other income-driven repayment programs.
Cons

  • This plan has the highest monthly payment of any of the income-driven repayment plans.
  • Your payment may also go above your original Standard Repayment Plan payment.

Should you apply for an income-driven repayment plan?

Income-driven repayment plans can help student loan borrowers get lower monthly payments. If you’re struggling to make payments because of low income, consider the four options and choose one based on your needs.

“It can be difficult getting out of an income-driven repayment plan,” says Kantrowitz, so don’t jump into one if you expect a big increase in your income in the future. He does, however, note that the PAYE plan is the best option for those who want the lowest payment.

Also, keep in mind that applying for an income-driven repayment plan extends your repayment period, which means you’ll end up paying more interest over the long run.

Another option to gain some relief from your student loans is by refinancing them. Lenders like SoFi, CommonBond, Upstart, and LendKey all offer competitive interest rates and repayment periods. Through refinancing, you may be able to lower your monthly payment, interest rate, or both.

Compare refinancing lenders to see which one is best for you. Note that these private lenders don’t offer income-driven repayment plans or forgiveness options, and you can’t switch back to federal loans once you’ve refinanced. Think carefully about your options before making a decision and choose the option that has the best long-term benefits.

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