Student Loan Series: What are my Income-Driven Repayment Plan Options?
Not all student loan payments are created equal. While standard repayment terms consist of 120 consecutive payments over 10 years, there are a number of different options for people to repay their debt with a much smaller monthly payment.
Federal loan borrowers are able to take advantage of income-driven repayment options, which cap monthly payments as percentages of your income and extend the period of repayment to 20 or even 25 years. There are four options to consider:
Pay As You Earn (PAYE)
Revised Pay As You Earn (REPAYE)
Income-Based Repayment (IBR)
Income-Contingent Repayment (ICR)
Let’s see how each of these work and which might be right for you.
Pay As You Earn
PAYE caps your student loan payment to 10% of your discretionary income but it never exceeds the amount you would have paid in a standard 10-year repayment plan. This makes PAYE a good option for those consistently making a lower salary.
The repayment term is 20 years, after which time the remainder of the loan is forgiven.
With PAYE, the interest added to your monthly payment is limited to 10% of the loan. So if your loan was $50,000 and it accrued $10,000 in interest. Only 10%, or $5,000, would be added to your bill. This repayment plan also allows you to base payments on your tax filing status, which benefits married couples who choose to file their taxes separately.
Revised Pay As You Earn
Similar to PAYE, this payment plan caps payments at 10% of discretionary income. For undergraduate debt, the repayment term is 20 years and extends to 25 for graduate debt.
REPAYE has a generous interest subsidy which allows a portion of your interest to be forgiven. This is a huge benefit, as monthly payments are generally low, extending the amount of interest accrued over the life of the loan. This plan is best for people who are single, as if you are married REPAYE will count your spouse’s income when determining monthly payments, regardless of whether you file your taxes separately or jointly.
Income-Based Repayment
For borrowers after July 1, 2014, your monthly payments are capped at 10% of your income with a 20-year repayment period. But if you borrowed before that date, the cap increases to 15% of your income and the life of repayment extends to 25 years.
Similar to PAYE, your monthly payments are based on your tax filing status. Under the new rules, your monthly payments never exceed what your payments would have been in a standard plan, but if your income increases you may no longer qualify for IBR and face added interest burdens.
Income-Contingent Repayment
ICR has the most expensive monthly payments of all the other income-driven repayment options. Under this plan, your monthly payments are capped at 20% of your income over 25 years. While more costly, this is the only income-driven plan that those with parent PLUS loans qualify for.
Benefits to consider
An income-driven repayment plan is an excellent way to keep your monthly student loan payments at bay while still working toward other financial goals. These plans make it possible to pay the rest of your bills and carry the option for loan forgiveness at the end of the repayment period.
Drawbacks to consider
While helpful in debt management, these income-driven repayment plans have a few key drawbacks including inflated interest payments. With smaller monthly payments, you may end up paying much more in interest over the life of the loan.
While the remainder of your loan can be forgiven after the repayment period ends, you could be on the hook for taxes on the forgiven amount. Be sure to look into this before you receive an unpleasant surprise come tax time. In the next email, we’ll give more information about the various repayment options.
Our team is here to help you analyze your options and create a debt reduction strategy that works for you. Book a call today to learn more or sign up for a one-on-one Student Loan Analysis.
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