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Student Debt Basics: Income-Driven Repayment Plans

03/07/2016 04:12 pm ET | Updated Mar 07, 2016

Income-driven repayment plans can be a safety net for student loan borrowers looking for debt relief. If your debt is high compared to your income, one of the four income-driven repayment plans could be the solution to making sure your monthly payments are not overwhelming your budget.

Monthly payments under income-driven repayment plans are generally calculated as a percentage of your discretionary income. (Your discretionary income is defined as your adjusted gross income, as filed on your taxes, minus 150% of the federal poverty level for your family size.)

There is no required type of employment necessary to enroll in one of the four income-driven repayment plans, and all come with forgiveness after 20 or 25 years. However, it's good to be aware that this forgiveness is taxable--meaning the amount forgiven after 20 or 25 years counts as taxable income in the year it is written off.

In addition, since your monthly payments will be reduced, your interest will continue to accrue over time and the balance on your loans will get bigger and bigger. In fact, the overall balance on your loan may be bigger than the initial balance after 20 or 25 years!

With all this in mind, one of the four income-driven repayment plans may still be the best option to stay on top of your student loan debt. Here's the rundown of your options:

The PAYE (Pay As You Earn) Plan

The PAYE plan will cap your monthly payments at 10% of your discretionary income, and you won't ever have to worry about paying more than you would under a standard 10-year repayment plan. You must have a partial financial hardship to enroll in this plan, and all enrollees will receive taxable forgiveness after 20 years. In addition, you must be considered a "new borrower," meaning you had no federal loans before October 1, 2007 (or managed to pay off any loans you took out before that date before taking out new loans) and you must have received a federal loan, a disbursement on a federal loan or consolidated your loans on or after October 1, 2011.

The REPAYE (Revised Pay As You Earn) Plan

On the surface, this new plan looks a lot like the PAYE plan since it also caps your monthly payments at 10% of your income. However, there are lots of key differences. The good: anyone can enroll in this plan, regardless of whether they are a new borrower or not. You don't have to have a partial financial hardship to apply. Undergrad borrowers receive taxable forgiveness after 20 years, and graduate loan borrowers receive forgiveness after 25 years. And if your monthly payments don't fully cover the accrued interest for that month, you will only be charged 50 percent of the unpaid interest.

The bad: there's no cap on your monthly payment amount, so if you suddenly start to bring in more income, watch out! Your monthly payments could easily become more than they would be under a standard 10-year repayment plan. In addition, your spouse's income counts towards calculating your monthly payment even if you filed your taxes separately. Read our article all about the REPAYE plan for more information.

The Income-Based Repayment (IBR) Plan

This older plan caps monthly payments at 15% for older borrowers who took out loans before July 1, 2014, and 10% for everyone else. Older borrowers will receive forgiveness after 25 years, and newer borrowers who took out loans after July 1, 2014 receive forgiveness in 20 years. All IBR enrollees must have a partial financial hardship.

The Income-Contingent Repayment (ICR) Plan

Under the ICR plan, borrowers will pay whichever is less: 20% of their discretionary income, or whatever you would pay on a 12-year fixed repayment plan adjusted to your income. This plan comes with taxable forgiveness in 25 years, and there is no partial financial hardship required to enroll.

You can use the Department of Education's Federal Student Aid Repayment Estimator to calculate what your monthly payments would look like under each one of these plans. Each of these plans could be a great option for anyone looking for debt relief without going into default, deferring, or forbearing their student loans. You'll need to re-apply every year, so go to StudentLoans.gov to complete your Income-Driven Repayment Plan Request.

If you still have additional questions about income-driven repayment plans, Equal Justice Works hosts free monthly debt webinars that walk attendees through all of the debt relief options. We also offer a free student debt e-book, Take Control of Your Future, that provides in-depth and detailed information on each plan.

Ashley Matthews is a Program Manager for Law School Engagement & Advocacy, managing the Student Debt and Student Engagement programs. Prior to joining Equal Justice Works, she worked as Communications Manager for Legal Services Corporation where she helped design strategies to increase congressional awareness of federally funded civil legal aid. She also led the digital content and communications team for PSJD.org, a public service initiative of the National Association for Law Placement (NALP). Ashley received her J.D. from the University of Miami School of Law.

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