Study the Income-Driven Student Loan Repayment Options
Learn about which payment plan is best for you.
If you recently graduated from college, you might believe your studying days are over, but one thing you are sure to learn quickly is that there are always new things to learn. Take your federal student loans for example. You have borrowed money during your college years with the idea bumping around in your head that eventually this money will have to be repaid. You’ve heard there are repayment options but haven’t paid attention because it didn’t apply to you at the time.
Well, that is changing now and, if you don’t want to be surprised in six months, it’s time to buckle down once again and study your student loan repayment options. There are two kinds of payment approaches: time-based and income-based. Time-based spreads out your payments over a fixed period of time. There is a standard ten-year repayment plan where payment amounts are the same every month, a ten year graduated repayment plan where the amount increases over time, and an extended repayment plan which can take the term of the loan to 25 years.
The problem with time-based repayment plans is that the amount due doesn’t necessarily coincide with the amount you are earning at a particular point. It might be wise for you to consider one of the income-based repayment plans where payment terms are usually extended, which allows the amount due to fall more within your potential income range. In some cases, you might not be required to make any payments until your income reaches a certain amount.
Although you will usually pay more over the long run with this type of plan, one appealing characteristic is that most offer loan forgiveness after a set number of years, usually somewhere between 20 and 25. If any part of your loan is forgiven in the future, though, be aware that there may be some type of tax implication.
There are four types of plans that fall under income-driven student loan repayment options:
- Pay As You Earn (PAYE): To qualify for this option, you must be a new borrower on or after October 1, 2007, and must have received a disbursement of a Direct Loan on or after October 1, 2011, and must have a high debt relative to your income. Your maximum monthly payments will be 10 percent of your discretionary income, but will never be more than the 10-year Standard Plan amount. Payments will be recalculated each year and can be revised based on your income and family size. Your spouse's income or loan debt will be considered if you file a joint tax return.
- Revised Pay As You Earn (REPAYE): Any Direct Loan borrower with an eligible loan type may choose this plan. Although monthly payments will still be 10 percent of your discretionary income, this is slightly different from the PAYE plan because that amount can be higher than the 10-year Standard Plan amount. Another difference is that income or loan debt can be considered for both spouses, whether taxes are filed jointly or separately.
- Income-Based Repayment (IBR): Once again, you must have a high debt relative to your income for this program. With an IBR plan, monthly payments will be 10 or 15 percent of your discretionary income but are never more than the 10-year Standard Plan amount. Your spouse's income or loan debt will be considered only if you file a joint tax return.
- Income-Contingent Repayment (ICR): In this case, your monthly payment will be the lesser of 20 percent of your discretionary income or the amount you would pay on a repayment plan with a fixed payment over 12 years, adjusted according to your income. Your monthly payment can be more than the 10-year Standard Plan amount. Your spouse's income or loan debt will be considered only if you file a joint tax return.
Take into consideration the amount of debt you have, the types of loans you have, your income potential, and your marital status before making a final choice, or ask your loan servicer to choose a plan that is best for you.