If you are looking at the amount you owe toward federal student loans and are wondering how you are ever going to repay it, there is hope. A number of federal student loan reduction programs are available that might be able to lower your payments to an affordable amount and put you on a path to being debt-free.
The programs are known as income-driven repayment (IDR) plans, and adoption by borrowers has been increasing over the past couple of years. According to the U.S. Department of Education’s December 2016 report, enrollment by Direct Loan borrowers has increased by 33% year-over-year and 101% since 2014.
Learn more about these student debt relief programs and how they might help you.
IDR plans
IDR plans have been available since 2009 as part of the William D. Ford Federal Direct Loan Program and the Federal Family Education Loan Program. They aim to reduce student loan delinquency and default rates. Here’s a look at how they work.
Some borrowers don’t know about these repayment plans because they dropped out of college and therefore did not undergo exit counseling. Also, there are four main income-driven repayment plans, which can be confusing for borrowers”
“The income-driven repayment plans will reduce the monthly loan payment if the borrower’s total outstanding student loan debt exceeds their annual income,” says Mark Kantrowitz, Publisher and VP of Strategy at Cappex.com. He adds, “The monthly payment is based on the borrower’s income, not the amount they owe.”
How is the monthly payment calculated? “It is a percentage of discretionary income,” says Kantrowitz.
Discretionary income is the amount of income a person has after deducting taxes, mandatory charges, and expenditures on necessary items (such as food, shelter, and clothing). Each repayment plan has a different payment percentage and it’s possible to even have no monthly payment at all! Each year you will have to recertify your income and family size, and the payment will be adjusted accordingly.
“Some borrowers don’t know about these repayment plans because they dropped out of college and therefore did not undergo exit counseling. Also, there are four main income-driven repayment plans, which can be confusing for borrowers,” says Kantrowitz.
Whether or not one of these plans can help you will depend on several factors. These include the amount you have to pay each month, the length of the repayment period, and if your loans are eligible to be repaid under the plan.
Let’s take a closer look at the four main repayment plans, according to the Federal Student Aid Office of the U.S. Department of Education, so you can see how they work and if one is right for you.
#1 Revised Pay As You Earn Repayment (REPAYE) Plan
Payment amount
The payment amount will be 10% of a student’s discretionary income.
Repayment period
The repayment varies depending on what type of study your loans funded.
If all of your loans were for undergraduate study, you will have a 20-year repayment period. On the other hand, if any of your loans were for graduate or professional study, the repayment period will be 25 years.
Eligibility
Any borrower with eligible federal student loans can make payments under this plan.
Eligible federal student loans include:
- Direct Subsidized and Unsubsidized Loans
- Direct PLUS Loans for graduate and professional students
- Direct Consolidation Loans that weren’t used to repay PLUS loans received by parents
The following loan types are eligible if you consolidate them:
- Federal Perkins Loans
- Unsubsidized and Subsidized Federal Stafford Loans
- FFEL Consolidation Loans that didn’t repay PLUS loans which were received by parents
- FFEL PLUS Loans (Graduate and professional students)
- FFEL PLUS Loans that were received by parents
#2 Pay As You Earn Repayment (PAYE) Plan
Payment amount
The payment amount for this plan is also 10% of discretionary income, but can’t be more than your 10-year Standard Repayment Plan amount.
Repayment period
The repayment period is 20 years.
Eligibility
To qualify for this plan, your payment must be less than what your payment would be under the Standard 10-year Repayment Plan. This requirement is typically met when your federal student loan debt is higher than your annual discretionary income.
Additionally, if you had an FFEL Program loan or Direct Loan on Oct. 1, 2007, you aren’t eligible, and you must have received a disbursement of a Direct Loan on or after Oct. 1, 2011.
Eligible federal student loans for this plan are the same as for the REPAYE plan.
#3 Repayment (IBR) Plan
Payment amount
The payment amount on this plan varies depending on whether or not you are considered a “new borrower.” A new borrower is someone who had no balance on a Direct Loan or FFEL Loan when they received a Direct Loan on or after July 1, 2014.
New borrowers qualify for payments that equal 10% of discretionary income, but can not be more than the payment for the 10-year Standard Repayment Plan.
If you’re not a new borrower, your payment amount would be 15% of discretionary income but, again, can’t exceed the 10-year Standard Repayment Plan amount.
Repayment period
The repayment period for new borrowers is 20 years, while it is 25 years for borrowers who are not new.
Eligibility
Similar to the PAYE plan, your payment on the IBR plan must be less than the payment amount on your Standard 10-year Repayment Plan. You must also be a new borrower and have received a Direct Loan disbursement on or after Oct. 1, 2011.
Eligible loans are the same as the REPAYE and PAYE plans, except that the following loans are eligible without consolidation:
- FFEL PLUS loans ( graduate and professional students)
- FFEL Consolidation Loans that didn’t repay PLUS loans which were received by parents
- Unsubsidized and Subsidized Federal Stafford Loans
#4 Contingent Repayment (ICR) Plan
Payment amount
The ICR payment amount is the lower of either 20% of discretionary income or the amount you would pay on a fixed 12-year repayment plan that is adjusted according to your income.
Repayment period
The repayment period is 25 years.
Eligibility
This plan covers the same federal student loans as the REPAYE plan, plus a few more. Under this plan, Direct Consolidation Loans used to repay PLUS loans received by parents are eligible. Additionally, the following are eligible if they are consolidated:
- FFEL PLUS Loans
- Direct PLUS loans received by parents
- FFEL Consolidation Loans that repaid PLUS loans received by parents are eligible if consolidated
This is the only plan out of the four that includes options for parent PLUS loan borrowers.
Calculate your payments for any of these four plans using the Federal Student Aid’s repayment calculator.
When the repayment periods end
What happens when the repayment period ends? With all four of these plans, any loan balance that remains when your repayment period ends will be forgiven. You may or may not have a remaining balance, depending on how fast your income increases and how much income you have in comparison to your debt.
Note: If you have a period of economic hardship deferment, a period when your payment is zero, or periods of repayment under other qualified repayment plans, those will still count as part of your total repayment period.
Is a student loan reduction plan right for you?
These plans can be helpful for a number of reasons. Here’s a quick overview of the pros and cons.
What other options do you have to reduce student loan payments?
Now that you have an understanding of the four IDR programs available to reduce student loans, you will also want to consider refinancing or consolidating your loans through a private lender. By doing so, you can find out if IDR really is the best solution available to you.
Online student loan companies such as SoFi, Upstart Loans, CommonBond, and LendKey all offer options for consolidation and/or refinancing student loans. You can easily apply online to find out what they can offer you and if it will be a better deal than you can get from the IDR plans.
At the end of the day, the most important thing is finding a manageable solution to settle all of your student loans as quickly and affordably as possible. Understanding your options is the first step. The best solution for you may be an IDR plan, a private lending solution, or some combination of the two.
To review a list of student loan lending companies and their offers, click here and compare them apples to apples.
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.
