Income Based Payments
If your outstanding federal student loan debt is higher than your annual income or if it represents a significant portion of your annual income, you may want to repay your federal student loans under an income-driven repayment plan.The first step in getting into a income repayment plan is to consolidate your loans. Consolidating your Federal Student Loans gives you a few different Student Loan Repayment options. For some basic information on those options, go to our FAQ Page
Each repayment plan has its unique benefits and qualifying criteria.At the Student Debt Center we look into each persons unique circumstances and clearly present the different options so our clients can make an educated decision on the program that is most beneficial for them.
The four repayment plans are the Standard Repayment, Graduated Repayment, Income Contingent Repayment, and the Income Based Repayment Plan.
Income Based Repayment
Income-Based Repayment (IBR) is a repayment plan that caps your required monthly payments on the major types of federal student loans at an amount intended to be affordable based on income and family size. All Stafford, Grad PLUS, and Consolidation Loans made under either the Direct Loan or Federal Family Education Loan programs are eligible to be included in the program. Non-federal loans, loans currently in default, and Parent PLUS Loans are not eligible for the income-based repayment plan.
This plan is by far the most unique in the Student Loan Forgiveness program, and often times the most beneficial. There are many benefits to the program, one of which is forgiveness on the first three years of unpaid interest from when you enroll into the Income Based Repayment plan for the subsidized portion of your loan. This works out for many to be a form of instant forgiveness on their loans, because otherwise this interest would be due.
Under this plan, the amount of your payment can never exceed 15% of your adjusted gross income over the poverty line for your family size. If you are married and file jointly, your spouses student loan indebtedness can be taken into account which can further lower your payment. You may want to take advantage of an Income Based Repayment if:
- You are having a financial hardship and would like some relief on the repayment of your federal student loans
- You qualify for a payment that is less than the monthly interest payment on the loan or a payment zero. Under this criteria, any interest will be forgiven on the first three years
- You do not anticipate any large increases in your earnings , and you believe that you will always qualify for payments of zero dollars. Under this circumstances, your federal student loans will be entirely forgiven at the end of the program term.
If you would like to see what your income based repayment could be, click here. Click here for additional information regarding the Income Based Repayment Plan
Standard plans last for up to 10 years and come with the following features:
- Fixed monthly payment amounts with a minimum amount of $50 per month
- Monthly payment amounts are based on your total loan amount—the more you owe, the higher your monthly payment will be
- You’ll pay less interest for your loan over time under this plan than under other plans
- You will pay the loan and interest in its entirety. There is no balance or interest forgiveness
Under this plan, the term is always based on the size of the loan. See the chart below to see some standard and extended repayment periods under the standard and graduated repayment plans. The standard repayment plan might be a good alternative to paying your federal student loans if:
- You want to pay off the loan as soon as possible, can afford the higher monthly payment and have only a few years left on paying the loans
- You do not qualify for an income based repayment plan because your income is too high
- Your loan balance is small where the payments are affordable and the repayment period is short.
The standard repayment plan allows you to pay your loans in a shorter term but with the highest monthly payments. Often times clients that do not qualify for any of the Income Based Repayment plans do not see a benefit of consolidating their loans into a Standard Repayment Plan since their current payments are often the same as they would be if they were to consolidate and enroll under a standard plan.
If you can qualify for one of the income base repayment plans, it is almost always best to enroll under one of these plans. The greatest benefit is that contrary to the standard repayment plan, an income based plan gives you the flexibility of the payments being calculated based on your living circumstances with the added bonus of forgiveness of any outstanding balance at the end of the term. This is the largest benefit that is most times overlooked by borrowers after it is explained to them.
Graduated Repayment Plan
The Graduated Repayment Plan starts with lower payments that increase every two years.
Payments are made for up to 10 years (between 10 and 30 years for consolidation loans).
If your income is low now, but you expect it to increase steadily over time, this plan may be right for you.
On this plan, for the first few years you are only paying interest on the loan.You start off only paying interest on the loan and after every two years your payment increases
The biggest drawback of the Graduated Repayment Plan is that the total amount you will pay on the loan will be more than a standard repayment. This is because you are only paying off the interest for the first two years, and even into years 3-4 you may not be paying off the principal as fast as you would be in a normal amortization schedule as in the Standard Repayment Plan.
You make lower payments at the beginning which gradually increase every two years. This plan and the standard repayment plans do not offer any payment flexibility should you run into a financial hardship and are unable to make the monthly payments. Another drawback of these repayment plans is that they do not offer any type of forgiveness.
These drawbacks are the main reasons why most borrowers would be much better of by enrolling into on of the income based repayment plans.
Income Contingent Repayment
If your federal student loan payments are high compared to your income, you may want to repay your loans under an income-driven repayment plan such as the ICR plan.
Most federal student loans are eligible for at least one income-driven repayment plan. If your income is low enough, your payment could be as low as $0 per month.
Following are the main features of the Income Contingent Repayment plan.
- You make payments for 25 years, then any remaining balance is forgiven.
- No “partial financial hardship” requirement.
- Payments are usually 20% of your discretionary income.
- There is some reduction in the amount of interest you will pay, but it is less generous than under the other plans
This plan is the only available income-driven repayment option for parent PLUS loan borrowers. Although PLUS loans made to parents can’t be repaid under any of the income-driven repayment plans (including the ICR Plan), parent borrowers may consolidate their Direct PLUS Loans or Federal PLUS Loans into a Direct Consolidation Loan and then repay the new consolidation loan under the ICR Plan (though not under any other income-driven plan).