Income-driven repayment plans are available to federal education loan borrowers who are struggling to afford the standard repayment schedule. These plans make use of your income, family size and state of residence to determine what your monthly payment ought to be.
Based on your circumstances, you might be able to choose from as much as four different income-driven repayment plans, each using its own payment per month calculation and repayment period. This is what you should know about how these plans work, their advantages and disadvantages and how to apply.
How Income-Driven Repayment Plans Work
An income-driven repayment schedule enables you to set your monthly education loan payment for an amount that you can afford depending on how much you earn. Based on which plan you choose, your payment per month is going to be 10%, 15% or 20% of the discretionary income, that is calculated based on your household income, family size assuring of residence.
These plans also extend your repayment term from 10 years with the standard repayment schedule to twenty or Twenty five years. Should you have a balance after your payment term, the remaining will be forgiven.
How to Qualify for an Income-Driven Repayment Plan
Eligibility for income-driven repayment plans can vary depending on the plan and also the types of loans you've. For starters, these plans are only available to borrowers with federal student loans―private lenders generally don't offer them.
That said, not every federal student loans immediately qualify. With a few federal home loan programs, you may need to consolidate your loans to make them eligible.
Additionally, two plans have an income requirement. For example, if your payment per month around the Pay As You Earn (PAYE) or income-based repayment plan is lower than it would be around the standard repayment schedule, you may be eligible. You may also qualify for efforts in case your student loan balance exceeds your annual income or represents a substantial portion of your earnings.
If you're unsure whether you qualify for income-driven repayment, evaluate the Federal Student Aid website or contact your loan servicer.
Types of Income-Driven Repayment Plans
There are four income-driven repayment plans readily available for eligible federal loan borrowers. Here's how each one of these works:
- Income-based repayment (IBR): This plan caps payments at 10% of the discretionary income if you received the loan before July 1, 2023, with forgiveness after 20 years. For individuals who receive your finance on or after that date, the payment is 15% of the discretionary income with forgiveness after Twenty five years.
- Pay While you Earn (PAYE): This plan cuts your monthly obligations to 10% of your discretionary income while offering forgiveness after 20 years of repayment. Even if your income grows, your payment will never exceed the 10-year standard repayment schedule amount. To qualify, you'll want received the loan on or after October 1, 2007. You must also provide removed an immediate loan or a direct loan consolidation after October 1, 2011.
- Revised Pay While you Earn (REPAYE): This plan sets your monthly payments at 10% of the discretionary income. Your repayment term is going to be 20 years if all of your loans are undergraduate loans, but if any of your loans were for graduate study, the term will be 25 years.
- Income-contingent repayment (ICR): Your monthly payment about this plan will be the lesser of 20% of your discretionary income or even the amount you'd pay on a fixed 12-year repayment schedule, adjusted based on your earnings. Your repayment plan will be extended to Twenty five years. Note that this is actually the only income-driven repayment schedule available to parents who took out parent PLUS loans.
As you attempt to determine which intend to choose, it's important to note how discretionary earnings are calculated. For the IBR, PAYE and REPAYE plans, it's the difference between your annual income and 150% from the poverty guideline for your family size assuring of residence.
For the ICR plan, your discretionary income is the main difference between your annual income and 100% from the poverty guideline figure.
Pros and Cons of Income-Driven Repayment Plans
Getting on an income-driven repayment plan can offer relief for struggling federal student loan borrowers, but it is not necessarily the best option over time. Here are a few pros and cons to think about before you apply.
Pros
- It provides immediate relief. If you're experiencing financial hardship now, an income-driven repayment plan can offer an immediate reduction of your monthly payment as well as reducing a few of the pressure in your budget.
- It will help you avoid default. Student loan default may have a significant negative effect on your credit report and financial wellness. By decreasing your monthly payments, you are able to avoid missed payments and default.
- It can eventually result in forgiveness. Depending on your future income, you may be effective in keeping a minimal payment and obtain forgiveness once you've reached no more your repayment term.
Cons
- You have to recertify each year. Each year, you're required to recertify your earnings and family size. In case your income grows or else you forget to recertify, your payment per month may increase, based on which plan you're on.
- You'll pay more interest. With lower monthly obligations, less of that which you pay goes toward reducing the principal balance of your loans, which means more interest over time. In some instances, an income-driven payment plan might not even be enough to cover the accrued interest, which could cause your education loan good balance to grow over time instead of shrink.
- You might not qualify for the plan you want. Depending which kind of loans you've and your finances, you may not be capable of getting around the income-driven plan you want.
How to Apply for Income-Driven Repayment
Whether you are planning to apply for an income-driven repayment schedule or you're just considering it, here's how you can go through the process:
- Before you apply, the Department of Education recommends that you contact your loan servicer and explain your situation to obtain top tips on whether income-driven repayment is right for you and which intend to choose.
- Visit the government Student Aid website to apply online or download the paper application form.
- Provide your company name, Ssn, address and phone information.
- Choose an agenda or request that the loan servicer put you of the routine that gives you the lowest payment per month.
- Share details about your loved ones size, marital status and, if applicable, information about your spouse.
- Provide income information and can include documentation, which may include a pay stub, a tax return or perhaps a tax transcript.
- Finish answering the rest of the questions and sign the applying, then send it in directly to the loan servicer.
Note that for those who have multiple federal loan servicers, you will need to submit a separate application to them. And don't forget, you'll need to resubmit this application every year—your loan servicer will send a reminder when it's time—to avoid potential issues.
Continue Making On-Time Payments to Build Your Credit Score
Whether or not you choose to get on an income-driven repayment plan, you need to make your student loan payments promptly every month. If you are late by 30 days or more, the late payment could get reported towards the credit rating agencies, which could damage your credit score.
While you make payments in your student loans and take other steps to construct your credit, use Experian's free credit monitoring plan to track how well you're progressing and address potential issues as they arise.