Income-Driven Repayment Plans
For years student loans have been an ever growing concern. As the cost
of tuition consistently grows and the job market continues to become overcrowded.
Student debts become harder and harder to pay off. It is with this in
mind that the United States’ government has spent years attempting
to solve the enigma of making student loans affordable. One of the bigger
successes in the ongoing embattlement on student loan debts has been the
creation of Income-Driven Repayment Plans for qualified federal loans.
Income-driven student loan repayment plans simply put are repayment plans
directly linked to your annual income. As of now there are 3 primary income-driven
repayment plans offered:
- “Income-Based Repayment (IBR)”;
- “Pay-As-You-Earn (PAYE)”; and
- “Income Contingent Repayment (ICR)”
These plans are designed in a manner to help keep you on top of your loan
repayment by capping your repayment rate at a lower amount based off your
annual income. While this can be great, bare in mind that paying less
monthly will also mean that you will being paying back your debt for a
longer time and as such you will garner more interest on your loan. So
while these plans are great if you have a lower income, they are not necessarily
right for everyone. All of these plans also set out a debt discharge date
that declares after a certain amount of time any payments you still owe
will be forgiven.
Income-Based Repayment (IBR)
Income-Based Repayment plan is currently the most accessible of the available Income-driven Repayment
plans. The plan is available to any student who has taken out a Direct
or FFEL loan as well most feral loans. in order to qualify for an IBR
must meet a standards of a “Partial Financial Hardship” (PFH)..
This Means if the standard loan repayment rate would cost more than 15%
of your annual Income you qualify.
There are two different versions of this plan: “2014” and “classic”.
Both are very similar but have some slight differences. The IBR “2014”
is available for borrowers who have taken out their first loan after July
1, 2014. Anyone who has taken out federal loans before then qualify for
IBR Classic. Both plans determine your loan payment through a sliding
scale ratio based on total household income by how many people in a household.
The big difference between the two plans is the payment percent Capping
and the debt discharge time. Under the Classic plan the monthly payment
cap is set at 15% and your debt will be discharged after 25 years and
300 payments. With the 2014 pan the the payment cap gets dropped to 10%
and the discharge will occur after 20 years and 240 payments. For the
most part may be a good fit for you have low income or if you are facing
temporary financial hardship.
The PAYE plan was put into place in 2012. It was designed as companion
to the not yet passed 2014 IBR plan to provide recent borrowers the same
rates and debt forgiveness protections. To qualify for the plan you must
have had no student loans taken out before October 1, 2007 and you must
have at least 1 federal loan taken out after September 30, 2011. Additionally,
you must meet a stricter standard of PFH then required by IBR. The PFH
requirements for PAYE dictate that you qualify if the standard 10 year
loan repayment rate costs more than 10% of your annual income.
If you happen to meet these strict requirements then you are given a repayment
plan that is based on a ratio of your Family income to Number of people
in your household. The maximum payment cap is at 10% and any debts owed
after 20 years are discharged. While the PAYE plan has the same Cap and
Discharge time as the 2014 IBR the monthly payment percent is generally
a third of rate.
President Obama recently proposed loosening up the requirements for the
PAYE repayment plan to open it up to anyone who has a Federal loan and
meets the standards for PFH. The proposal is likely to be passed by congress
by the end of the year.
Income Contingent Repayment (ICR)
Income Contingent Repayment is the oldest of the available Income-Driven
Repayment plans. It is also the most readily available. The rate you pay
monthly is determined by one of two algorithms. 20% of discretionary income
divided by 12 or the amount you would pay in 12 years multiplied by a
varying percentage factor of your annual income. Whichever resulting rate
from these algorithms is lower will become your payment rate under the
ICR plan. Under this plan your repayment will be capped at 20% of your
income and any remaining balance will be forgiven after 25 years.
ICR plans have the most lax qualifications of the available Income-driven
repayment plans. The only qualification is that you have taken out Direct
loans. Unlike the other plans ICR plans will not disqualify you if your
original loan was a Parent PLUS loan. However, if your loan was a Parent
PLUS loan you need to have the loan consolidated and brought into the
Direct loan program.
How can I apply for an Income-Driven Repayment Plan?
When applying for an Income-Driven Repayment the first thing you will want
to do is call your loan servicer. They will be able to give you more information
on each of the plans discussed above. If you have decided that Income-Driven
Repayment is right for you then will have to fill out and submit an Income-Driven
Repayment plan Request. You can either fill out a physical paper form
with your servicer or you can fill out a digital form online at Studentloans.gov.
With this form you can either select the repayment plan of your choice
or you can select to have your servicer determine which plan will grant
you the lowest monthly payment.
In addition to filling out an Income-driven Repayment Plan request you
must also provide documentation of your adjusted gross income. This can
be done in one of two ways. The quickest option is if you are submitting
your request online you can access the “IRS Data Retrieval Tool”
which will directly input your most recent income tax return information
directly into the digital form. Alternatively, If you are placing a paper
request you must obtain a paper copy of your most recent IRS tax return
(Note: If you currently have do not earn income, or receive untaxed income,
you can notate that on your application and you will not need to provide
additional income documentation.)
*Disclaimer: While many of these Income Driven Repayment plans may result
in lower monthly rates they may ultimately cost more in the long term
even with their built in loan forgiveness. If you can afford the standard
10 year plan it is most often the most cost efficient in the long term.
Before you decide to refinance your loan be sure to contact your loan
servicer to make sure you are entering the best plan for you.
All the information on this page is subject to change. The information
on this page may become outdated and may be irrelevant to your particular
loan situation. For advice on your accounts, seek a review with an attorney.