The Ultimate Guide to Income-Driven Repayment Plans for Federal Student Loans
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If you took out federal student loans to pay for your higher education, and are struggling to pay them back, you do have options!
Luckily, the government understands that some people may not be able to afford the high monthly payments that are often required of graduates. Whether you do not yet have a job, or have one that does not pay well enough to cover your payment, there are various repayment plans that can ease the month to month burden of student loans.
In this guide we will go over the various repayment plans that are alternatives to the Standard 10-year plan. In this plan, borrowers are expected to repay their debt within 10 years of the time their grace period, or the time when repayment is not yet required, ends. Depending on the amount of federal student loan debt taken on, monthly payments can be extraordinarily high in the Standard 10-year plan, and many borrowers opt to switch plans to that allow for more manageable monthly payments.
The alternatives to the standard repayment plan are all based on income, so they are fittingly called income-driven plans, and they are quite popular according to our statistics. Because there are 4 separate, yet similar, of these plans, we have highlighted the main points of each so you can decide which is best for you.
Income-Based Repayment (IBR) Plan
In 2009, the federal government introduced the Income-Based Repayment Plan, or IBR. Since that time, it has become the most popular alternative to the Standard 10-year plan, especially given the rising cost of college tuition. IBR is a smart choice for borrowers who have low incomes and cannot afford the monthly payments on their student loan debt.
Note that you are only eligible for IBR if you demonstrate financial need and your new payment would be less than that under the Standard 10-year repayment plan.
Repayment Period
- 25 years for loans taken out before July 1, 2014
- 20 years for loans taken out on or after July 1, 2014
Payment Amount
- 15% of discretionary income for loans taken out before July 1, 2014 but never more than what your payment amount would be under the Standard 10-year plan
- 10% of discretionary income for loans taken out on or after July 1, 2014 but never more than what your payment would be under the Standard 10-year plan
Eligible Loans
Direct Loans
- Regular Direct Loans (both subsidized and unsubsidized)
- PLUS Loans (besides Parent PLUS)
- Direct Consolidation Loans (besides those used to consolidate Parent PLUS loans)
FFEL Loans
- PLUS Loans (besides Parent PLUS)
- Stafford Loans (both unsubsidized and subsidized)
- Consolidation Loans (besides those used to consolidate Parent PLUS loans)
Federal Stafford Loans (both subsidized and unsubsidized)
Federal Perkins Loans if Consolidated
Pros
- Reduced monthly payment
- Forgiveness after 20/25 years (depending on repayment length above)
Cons
- More interest accrues over time most likely
- Longer repayment term
- Any remaining debt after 20/25 years will be taxed as income when forgiven
Pay As Your Earn (PAYE) Plan
The government introduced the Pay As You Earn plan, more simply PAYE, in 2012. Because this plan is very similar to IBR, it is another smart option for those who are having a hard time managing their student loan payments.
Like IBR, in order to be eligible, your new payment must not be higher than it would be under the Standard 10-year plan. The main difference between IBR and PAYE is that PAYE has stricter eligibility requirements. In order to qualify for PAYE, you must have taken out a loan on or after October 1, 2007 and you must have received a disbursement of a Direct Loan on or after October 1, 2011.
Repayment Period
- 20 years
Payment Amount
- 10% of discretionary income but never more than what your payment would be under the Standard 10-year plan
Eligible Loans
Direct Loans
- Regular Direct Loans (both subsidized and unsubsidized)
- PLUS Loans (besides Parent PLUS)
- Direct Consolidation Loans (besides those used to consolidate Parent PLUS loans)
FFEL Loans
- PLUS Loans if consolidated (besides Parent PLUS)
- Stafford Loans if consolidated (both unsubsidized and subsidized)
- Consolidation Loans if consolidated (besides those used to consolidate Parent PLUS loans)
Federal Stafford Loans if Consolidated (both subsidized and unsubsidized)
Federal Perkins Loans if Consolidated
Pros
- Reduced monthly payment
- Forgiveness after 20 years
Cons
- More interest accrues over time most likely
- Longer repayment term
- Any remaining debt after 20 years will be taxed as income when forgiven
Revised Pay As Your Earn (REPAYE) Plan
In 2015, the government released the revised version of PAYE. This new plan was (straightforwardly enough) called the Revised Pay As You Earn, or REPAYE program.
The new plan is much like its predecessor, but is open to many more student loan borrowers because it does not require any financial hardship like IBR and PAYE. Furthermore, this plan is based on both current income and family size (throughout the life of the REPAYE Loan).
Repayment Period
- 20 years for undergraduate student loans
- 25 years for graduate and professional student loans
Payment Amount
- 10% of discretionary income
Eligible Loans
Direct Loans
- Regular Direct Loans (both subsidized and unsubsidized)
- PLUS Loans (besides Parent PLUS)
- Direct Consolidation Loans (besides those used to consolidate Parent PLUS loans)
FFEL Loans
- PLUS Loans if consolidated (besides Parent PLUS)
- Stafford Loans if consolidated (both unsubsidized and subsidized)
- Consolidation Loans if consolidated (besides those used to consolidate Parent PLUS loans)
Federal Stafford Loans if Consolidated (both subsidized and unsubsidized)
Federal Perkins Loans if Consolidated
Pros
- Reduced monthly payment
- Forgiveness after 20 years for undergrad loans and 25 for graduate/professional loans
- Only have to pay 50% of accrued interest on subsidized loans after three years
- Only have to pay 50% of accrued interest for full REPAYE repayment period
Cons
- Spouse's income is included in monthly payment determination
- Any remaining debt after 20/25 years will be taxed as income when forgiven
Income-Contingent Repayment (ICR) Plan
The Income-Contingent Repayment plan, or ICR, is much like the other income-driven repayment plans, but only Federal Direct Loans are eligible. This does, however, include Parent PLUS loans - whereas the others do not.
There is no income requirement to be eligible for ICR and borrowers who make higher salaries are still eligible. This may be a good option for those who want to free up some money to use elsewhere, even if they can afford their current monthly payments. Like REPAYE, this program is always based on current income and family size for the life of the loan.
Repayment Period
- 25 years
Payment Amount
- Whichever is less:
- 20% of your discretionary income
- The amount you would pay on a repayment plan with a fixed payment over 12 years, adjusted according to your income
Eligible Loans
Direct Loans
- Regular Direct Loans (both subsidized and unsubsidized)
- PLUS Loans (including Parent PLUS)
- Direct Consolidation Loans (including those used to consolidate Parent PLUS loans)
FFEL Loans
- PLUS Loans if consolidated (besides Parent PLUS)
- Stafford Loans if consolidated (both unsubsidized and subsidized)
- Consolidation Loans if consolidated (besides those used to consolidate Parent PLUS loans)
Federal Stafford Loans if Consolidated (both subsidized and unsubsidized)
Federal Perkins Loans if Consolidated
Pros
- No income eligibility requirement
- Forgiveness after 25 years
- Possibility of reduced monthly payment
Cons
- Payments may be higher than they would on Standard repayment plan
- Any remaining debt after 20/25 years will be taxed as income when forgiven
When to Switch to an Income-Driven Repayment Plan
It is smart to switch to an income-driven repayment plan when you cannot afford your monthly payment, or when it is so much that it makes the rest of your life difficult. Because these plans (usually) reduce your monthly payment, you will have to pay less each month, freeing up money to spend elsewhere.
Another benefit of switching to an income-driven repayment plan is your potential eligibility for forgiveness. If you have very high debt and low income, then you may be able to have a substantial amount of debt forgiven after either 20 or 25 years, depending on the plan.
Make sure to look into each program's specific details to see what you qualify for and what your new payment plan would look like - both month to month and in the long run. If you qualify for multiple plans, calculate out what your monthly payment would be in each and decide which makes more sense for you personally.
If you are still unsure if you should switch to an income-driven repayment plan, speak to your student loan servicer for more advice on your personal situation.
When to Avoid Switching
If you have no trouble with your current monthly payment, it most likely does not make sense for you to switch to an income-driven plan. Because the repayment length is longer than it would be under the Standard 10-year plan, more interest will accrue over time. More accrued interest equals paying more over the life of your loan(s). Sure, it might be nice to pay less each month, but you could ending up paying thousands more over the life of your loan.
If you came to this page thinking income-driven repayment plans could save you money on your student loan debt, you should consider refinancing your debt with a private lender. When refinancing, a new lender pays off your old loan(s) and gives you a new one with new terms. Typically, borrowers receive lower interest rates and can save thousands over the life of their loans!
Here at LendEDU, we allow borrowers to compare personalized student loan refinancing quotes with one, free application. Alternatively, check out our Student Loan Refinancing & Consolidation guide for full reviews of the top lenders in the industry.
How to Apply for an Income-Driven Repayment Plan
If you have decided that switching to an income-driven repayment guide is for you, you can submit the Income-Driven Repayment Plan Request on the the government's website or fill out the paper version, which you can obtain from your loan servicer.
In order to apply, you will need to verify your income in some way. Typically, they will look at your Adjusted Gross Income (AGI) or an alternative form of documentation.
The government will look at your AGI if you have filed a federal tax return in the past two years and your current income is similar to that in which you put on the tax return at the time. You can submit your AGI with your federal tax return or through the IRS Data Retrieval Tool.
If you have not filed a federal tax return in the past two years, or if your income now is substantially different than what it was when you filed, you will have to provide alternative documentation. This may include something like a pay stub that shows your current income. If you currently have no income, you may not have to provide any paperwork proving income.
Final Thoughts
If you are struggling with your current monthly student loan payment, switching to an income-driven repayment plan may really help ease the burden. Not only does it cap the amount that you pay each month based on your income, it may allow you to qualify for student loan forgiveness (though not for a long, long time).
Don't see the lower monthly payment and immediately jump right in; be sure to consider the long term implications of switching your repayment plan. In most cases, you will end up paying much more over the life of your loan due to the increased amounts of accrued interest.
If you are still unsure as to what to do regarding repaying your federal student loans, speak to your servicer about your options. Furthermore, if you are looking to pay less on your student loans, and have a good credit score, consider refinancing them to a lower interest rate! Sometimes, when refinancing, you can even extend your repayment period while saving money.
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