4 Income-Driven Repayment Plans That Lower Your Student Loan Payments

As we all know, student loan debt has become one of the fastest growing types of debt in America today. At this point, there are many people who simply want to get rid of their student loans or, at the very least, get some relief. If you fall within either of those categories, you’ve come to the right place. An income-drive repayment plan can lower student loan payments.

Income-driven repayment plans can help you help you lower your federal student loan payment by adjusting your payments (usually downward) based on your income.

Please note that, unless you apply for an Income-driven repayment plan, your federal student loan will automatically default to the Standard Repayment Plan. This means you will pay at least $50 per month for up to 10 years. Your monthly payment could be higher, but your loan would be paid off in 10 years.

According to student loan expert and bankruptcy attorney, Jay Fleischman, of the Student Loan Show, “The government provides you with so many options for your federal student loans, that you’d be silly not to take advantage of them in order to avoid default-related financial hardship.”

Currently, there are four types of income-driven repayment plans from which you can choose. In order to enroll, you’ll have to submit an application to see if you qualify (some loan servicers accept the online version of the application).

Important facts about income-driven repayment plans

  • In order to qualify for these loans, your federal student loans can’t be in default.
  • Under all four plans, any remaining loan balance is forgiven if your federal student loans aren’t fully repaid at the end of the repayment period.
  • Borrowers must recertify your income annually to keep your income-driven repayment plan in place.
  • It’s possible to switch from one plan to another if you qualify for the new plan for which you are applying.
  • You could end up paying more interest over the life of your loan because your monthly payment amounts are lower and the life of the loan is extended.
  • You should still apply for an income-driven repayment plan even if you plan to apply for the Public Service Loan Forgiveness Program.
  • These payments apply to federal student loans only (not private loans.)
  • Any forgiven loan amounts may be taxable unless you can prove insolvency.

Before we go into the income-driven loan options, one of the most important things to understand is what the federal government considers discretionary income. This number is used to help calculate your loan amounts under income-driven repayment plans.

The government provides you with so many options for your federal student loans, that you’d be silly not to take advantage of them in order to avoid default-related financial hardship.”

In a nutshell, it’s your adjusted gross income (AGI,) as reported on your most recent tax return, minus 150% of the U.S. Federal Poverty Guidelines. The poverty guideline is based on your state, AGI, and family size. Using the income matrix on the U.S. Federal Poverty Guidelines website, you can find out what would be considered your discretionary income.

Let’s say you’re a family of five living in the state of Indiana. If you make $54,000 per year, your discretionary income would be $54,000 minus $43,170 ($28,780 times 1.5) or $10,830.

If you are on an income-driven plan, your payment would be a percentage of $10,830.

With that in mind, here are some income-driven plans that could help lower your monthly student loan payments.

Source: Rukuku.com

Pay as You Earn Repayment Plan (PAYE)

PAYE (aka the “Obama Student Loan Plan”) allows you to pay 10% of your discretionary income, but never more than the 10-year Standard Repayment Plan amount.

What you should know:

  • You’ll typically only qualify for PAYE  if your student debt is higher than your discretionary income or represents a significant portion of your annual income.
  • After 20 years of qualified payments, your remaining balance is forgiven.
  • Applies to students who received William D. Ford Direct Loans after October 1, 2007, and had funds disbursed on or after October 1, 2011.

Downside:

  • If you file taxes with your spouse, their income is also considered.
  • You could pay more over time than the 10-year Standard Repayment Plan.

Revised Pay as You Earn Repayment Plan (REPAYE)

This is a revision of the PAYE plan that covers more borrowers. There are fewer limitations on the types of loans and when they were disbursed. No matter when you first received your loan, you are eligible to apply for REPAYE.

What you should know:

  • You can qualify for REPAYE, regardless of when you took out your loans.
  • No matter how much your income grows, your payment will never exceed 10% of your income based on family size.
  • Loans are forgiven after 20 years of qualified payments, but the term is 25 years for Graduate Plus Loans.

Downside:

  • If you file taxes with your spouse, their income is also considered.
  • As your income grows, your payment could also grow.
  • You could pay more over time than the 10-year Standard Repayment Plan.

Income-Based Repayment Plan (IBR Plan)

This plan is ideal for borrowers with high debt in relation to their income. In order to qualify, you’ll have to demonstrate financial hardship based on your adjusted gross income.

What you should know:

  • Your payments will never exceed 10% of your discretionary income if you got your loan after July 1, 2014, or 15% if your loan was taken out before then.
  • Your payment will never exceed what you would have paid under the Standard Repayment Plan.

Downside:

  • If your income is very low starting out, your payments won’t touch the interest, causing your balance to increase (also known as negative amortization.)
  • If your loan balance increases on this program, your forgiveness amount increases along with the taxes you’ll owe for that forgiveness.

Bonus tip:

If you apply for an IBR plan immediately after graduating, your previous year’s income will be considered (which was probably $0 or very low.) You’ll have 12 months to recertify (instead of the standard six-month grace period), which could potentially mean 12 months of payments at $0 that still qualifies towards your “forgiveness clock.”

Income-Contingent Repayment Plan (ICR Plan)

Your monthly payment will either be 20% of your discretionary income or the amount you would pay on a repayment plan with a fixed payment over 12 years, according to your adjusted gross income, whichever is less.

What you should know:

  • This is the only loan available to Parent PLUS borrowers.
  • Parent borrowers can consolidate their loans and repay them under this plan.

Downside:

  • Based on income and family size, an increase in income could increase your payments.

Bottom line

If you’re looking for some relief from your federal student loan payments, you’ve got many options before you default or run into financial troubles. Don’t forget that you also have the option to consolidate and/or refinance your student loans. Lenders like SoFi, UpStart, LendKey, and CommonBond can help you with that.

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