Income Based Repayment Plan
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.
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.
The federal government offers several different income-driven repayment plans for federal student loans. Here is a breakdown of the plans:
- Income-Based Repayment (IBR): Payments are equal to 15 percent of discretionary income, with loan forgiveness after 25 years (not a new borrower after July 1, 2014), or 10 percent of discretionary income with loan forgiveness after 20 years (new borrower after July 1, 2014); never requires more than the 10-year Standard Repayment Plan monthly payment amount.
- Pay As You Earn (PAYE): Payments equal to 10 percent of your discretionary income with loan forgiveness after 20 years of payments; never more than the 10-year Standard Repayment Plan monthly payment amount.
- Revised Pay As You Earn Repayment (REPAYE): Like PAYE, REPAYE sets your monthly payments at 10 percent of discretionary income. REPAYE is open to more borrowers, but if you have graduate school debt, it will take 25 years of payments to qualify for loan forgiveness.
- Income-Contingent Repayment (ICR): Payments are the lesser of either what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income or 20 percent of your discretionary income. Loan forgiveness after 25 years of payments.
Benefits Of an Income Based Repayment Plan
Under an Income Bare Repayment plan, your payment is based on your living circumstances. How much you earn and how many dependents you claim on your income tax return.
Payments are equal to 15 percent of discretionary income, with loan forgiveness after 25 years (not a new borrower after July 1, 2014), or 10 percent of discretionary income with loan forgiveness after 20 years (new borrower after July 1, 2014).
The discretionary income is the amount of income you earn over 150% of the federal poverty line for your family size. This payment will not be higher than what you were paying under the standard 10 year repayment plan. In many cases, borrowers in the Income Based Repayment Program actually “pay” zero Dollars if their discretionary income isn’t high enough to meet the minimum amount.
The new monthly payment amount will not be higher than 10 percent of your discretionary income if were a new borrower on or after July 1st 2014. If you had loans prior to this date, then 15% of your discretionary income is used to calculate your payment.
Qualifying Loan Types
Eligibility for Income Based Repayment depends on which loans you have taken out for your education, and when they were taken out. The following Federal Student Loans from the Direct Loan and Federal Family Education Loan (FFEL) Programs are the ones that qualify for application:
- Direct PLUS Loans (Graduate and Professional Students)
- Direct Consolidation Loans without PLUS Loans that were made directly to parents and not just as cosigners.
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- FFEL PLUS Loans (Graduate and Professional Students)
- FFEL Consolidation Loans without PLUS Loans that were made directly to parents and not just as cosigners.
If you do not have one of these loan types, you may still be eligible for the IBR by consolidating your federal student loans into the Direct Loan program.
Another benefit of an Income Base Repayment Plan is the Interest Payment Benefit. If your new monthly payment isn’t large enough to pay the accruing interest on the subsidized portion of your direct loan, the Federal government will pay it for you for a period of up to but no more than three consecutive years once you begin your Income Based Repayment program. This is another great benefit that these plans offer.
Forgiveness At End Of Term
On e of the greatest benefits that these programs offer is forgiveness of any outstanding balances once the payment term has been completed.
Twenty year forgiveness for new borrowers that took their loans out after July 1st 2014, or Twenty five years if the loans were taken before that date. The lifetime of an Income Based Repayment Loan is considered to be no more than 25 years. If over the lifetime of this loan, you make 300 qualified payments and the loan is still not completely paid off, any remaining loan amount will be forgiven and legally discharged.
Taxability of Student Loan Forgiveness
Some loan forgiveness programs are taxable and some are not. Under current law, the amount forgiven generally represents taxable income for income tax purposes in the year it is written off. There are, however, a few exceptions. Generally, student loan forgiveness is excluded from income if the forgiveness is contingent upon the student working for a specific number of years in certain professions.
Public service loan forgiveness, teacher loan forgiveness, law school loan repayment assistance programs and the National Health Service Corps Loan Repayment Program are not taxable.
Loan discharges for closed schools, false certification, unpaid refunds, and death and disability are considered taxable income.
The forgiveness of the remaining balance under income-contingent repayment and income-based repayment after 25 years in repayment is considered taxable income.
Public Sector 120 Months Forgiveness
The Public Service Loan Forgiveness (PSLF) Program forgives the remaining balance on your Direct Loans after you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer. Qualifying under this plan could save you 15 years of payments.
Employment with the following types of organizations qualifies for PSLF:
- Government organizations at any level (federal, state, local, or tribal)
- Not-for-profit organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code
- Other types of not-for-profit organizations that provide certain types of qualifying public services
Annual Reassessment of Payment
Under an income base repayment plan, borrowers will be reassessed every year and the payments could be adjusted based on changes on income or family size. Getting married, having a child, claiming more or less dependents or losing your job will affect your monthly payment. The payment for the upcoming year could go up or down depending on how your living circumstances have changed at the time of the yearly re-assessment. The great new is that your payments will always remain affordable and based on your living circumstances
Start today !
Taking advantage of an Income Base Repayment Plan will definitely put you in control of repaying your Federal student loans. You will be making payments that are affordable to you based on your living circumstances and you might also have a large portion of that student loan forgiven.
Ignoring repaying your loans or procrastinating to take action will lead to having your loans fall in to a default status which could prevent you from qualifying for these programs. Nor paying your student loans could cause your wages or income tax return to be garnished and will negatively affect your credit score causing you to pay more for items that you finance.
If you want to find out more or want to see how you can benefit, give us a call today !