What Is an Income-Driven Repayment Plan?
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- If you have a high debt-to-income ratio, an income-driven repayment plan may help.
- Federal loans, including Direct Loans, are eligible for income-based repayment.
- REPAYE, PAYE, IBR, and the ICR for Parent PLUS loan borrowers are income-driven options.
- Income-driven repayment is required for the Public Service Loan Forgiveness program.
Federal student loan payments were paused through Aug. 31. After that date, payments are scheduled to resume. So, for borrowers, it's time to prepare.
If you can't afford your current student loan payments, you have options, including an income-driven repayment (IDR) plan.
An IDR can make student loan payments more affordable because lenders base the payment amount on the borrower's discretionary income. The calculation includes the difference between your annual earnings and the poverty guideline in your state for your family size.
How Do Income-Driven Repayment Plans Work?
Payments 30 days, or more, late can result in bad credit reports, wage garnishments, and significant additional fees. If you have a high debt-to-income ratio, an income-driven student loan repayment plan may make repayment more manageable.
Depending on your income and the plan, an IDR could even bring payments down to $0 per month. Most federal student loans are eligible.
However, an IDR isn't a one-size-fits-all solution. Here's a breakdown of the different income-driven repayment plans and what you need to know beforehand.
What Are the Different Types of Income-Driven Repayment Plans?
There are four income-driven repayment plans. Each option has a different repayment period and varying eligibility requirements.
Anyone with Direct Loans — except PLUS loans, consolidation loans for Parent PLUS loans, and Federal Family Education Loans (FFEL) — can apply for the Revised Pay As You Earn (REPAYE) plan. The borrower's adjusted gross income, family size, and the eligible loan balance determine the new amount. The revised loan payment is typically equal to 10% of the borrower's discretionary income divided by 12. With the REPAYE plan, discretionary income is the difference between your annual income and 150% of the poverty guideline for your family size and state of residence.
The Pay As You Earn (PAYE) plan calculates monthly payments equal to 10% of your discretionary income divided by 12. However, this option is only applicable for Direct Loans.
To qualify, you must have been a new borrower effective Oct. 1, 2007, and received a loan disbursement on Oct. 1, 2011, or after.
Income-Based Repayment Plan
The Income-Based Repayment (IBR) plan offers monthly payments typically equaling 15% of your discretionary income, or 10% for new borrowers, divided by 12. IBR is for FFEL Program and Direct Loans. Parent PLUS Loans and consolidation loans with at least one Parent PLUS Loan are not eligible.
Income-Contingent Repayment Plan
The one option for Parent PLUS Loan borrowers is the Income-Contingent Repayment (ICR) plan. Parent borrowers may consolidate Direct PLUS or Federal PLUS loans into a Direct Consolidation Loan, then choose the ICR plan. The repayment plan offers a fixed monthly payment over 12 years or 20% of discretionary income divided by 12. With the ICR plan, discretionary income is the difference between your annual income and 100% of the poverty guideline for your family size and state of residence.
How to Apply for Income-Driven Student Loan Repayment
You can apply for income-driven repayment at studentaid.gov. First, log into your account, then go to the IDR request page to complete an application.
1 Gather the Information You Need to Apply
It's a good idea to gather your information before applying. The student aid site offers an IRS data retrieval tool, but keep your tax documents on hand for reference. The application includes questions about your employment, marital status, family size, and proof of income.
2 Get an Idea of Your Monthly Payments
You can use the Loan Simulator ahead of time to explore your options and calculate student loan payments. It can help you determine which income-driven repayment plan best fits your budget. The simulator identifies qualifying student loans, matches them with the IDR, and determines the price difference between available alternatives.
3 Decide Which Income-Driven Repayment Plan to Apply For
The Loan Simulator calculates repayments and may recommend a loan consolidation. You must provide complete and precise information to receive the most accurate recommendation. Then you can use the comparisons and recommendations to determine which income-driven repayment plan will meet your needs.
4 Submit an Income-Driven Repayment Plan Request
Go to the student aid website and click on the "Manage Loans" tab to submit your application. Then select "Apply for Income-Driven Repayment," log in, and fill in the application. If you don't consolidate your loans, you'll need to apply with each loan provider, and you must recertify yearly.
Is an Income-Driven Repayment Plan Right for You?
An income-driven student loan repayment extends the term from 10 years to 20 or 25 years. Can you afford to pay 10-20% of your discretionary income? If you've met the requirements and make your payments on time, any leftover balance can qualify for loan forgiveness.
Additionally, an income-driven repayment plan is mandatory to apply for a Public Service Loan Forgiveness (PSLF) program. However, you'll pay more interest in the long run, even if you qualify for loan forgiveness. Not only that, but the forgiven amount is taxable by the IRS as earned income during the prior tax year.
Frequently Asked Questions About Income-Driven Repayment Plans
What are the different types of income-driven repayment plans?
There are four types of income-driven repayment plans. REPAYE calculates monthly payments based on your discretionary income. PAYE never exceeds the standard repayment amount even when you earn more money. FFEL Program and Direct Loans can qualify for the IBR plan.
Finally, the ICR plan helps parent borrowers with a fixed monthly payment over 12 years.
What is the difference between IDR and IBR?
An income-based repayment (IBR) is one type of income-driven repayment (IDR) plan available to students with federal loans. Income-based student loan repayment is only available for loans such as the Stafford, Grad PLUS, Perkins, and consolidation loans. Private student loans and Parent PLUS loans don't qualify for IBR.
If your payments are high compared to your income, one of four IDR options could help reduce payments.
Is PAYE or IBR better?
The IBR is easy to qualify for, for students who have a high debt-to-income ratio. It's harder to qualify for PAYE. However, PAYE may offer lower monthly payments because it caps at 10% of your discretionary income. Additionally, PAYE borrowers may qualify for loan forgiveness after 20 years of payments.
IBR also offers loan forgiveness. However, loans taken out before July 2014 don't qualify for 25 years. Either way, extending your repayment plan usually means paying more interest.
Is ICR or IBR better?
IBR could be a better option for many borrowers. For one, an income-based student loan repayment lowers monthly payments more than an ICR. An IBR caps at either 10% or 15% of your discretionary income, depending on the original loan. ICR limits payments to 20% of your discretionary income.
An IBR covers Direct Loans and FFELs. ICR requires loan consolidation for FFELs. However, federal loans for parents (PLUS loans) aren't eligible for IBR.
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