When striving to ease the burden of student loan payments, there are many different routes to take, but some of the most popular are known as “income-driven” plans. Simply put, these programs allow college grads to choose options that meld better with their current financial status, taking into consideration a student’s income to outline a payment plan. Some students find this a lot easier than the traditional option, a ten-year plan based on a fixed rate. Before you sign your name on a dotted line, however, it’s best to weigh both sides of the argument. Luckily for you, we’ve put together this little pro-and-con list about income-driven repayment plans:
Pro: Lower monthly payments
This is huge, and the reason many students opt for this plan in the first place. If you’re choosing to go with an income-based plan, it obviously means that your rates will be lower than those of a ten-year plan. Additionally, the first years after graduation are a financially volatile time for young professionals, and it will help your wallet tremendously to pay percentages of your income instead of dipping into your savings account.
Con: Differences between monthly payment/interest
Very few things in life are simple, and while it may seem like income-driven plans are inherently easier to understand than a ten-year fixed plan, there are caveats here and there. This is one of them. Sometimes, graduates find that their monthly payments don’t directly line up with your interest rate, meaning that your debt will grow even if you’re completing every installment on time. This is known as “negative amortization,” and results from interest rates that are set higher than your payment rates. Before you sign up for the plan, it’d be wise to consult with professionals to ensure this process won’t break your piggybank.
Income-driven payment plans are lightyears more adaptable to your personal financial status than a fixed plan. It’s similar to the difference between trying to lift a boulder and trying to lift a feather. If you find yourself hoping to adjust your personal plan to better fit your needs, that can be done. This is vital for some graduates who have to switch jobs, so if you’re temporarily unemployed, you will not owe anything until you secure a new income. There is no penalty for adjusting your payments, and your rates will evolve as needed until you are able to secure a steady income.
For some, this may not be a big deal, but others who hate the tedious process of filling out forms might be turned off by the extra hoops you have to jump through to apply for an income-driven payment plan. Case in point: every year, assuming you take this route, you’re required to update your financial information (income, dependents, family size, etc.) to ensure you’re not “gaming the system,” so to speak. This process is no different than what you’ll already go through during tax season, however, so this point should not deter most who think this is their best option.
Pro: Public service forgiveness
For students who plan to enter the public sector, income-driven repayment plans have the added bonus of loan forgiveness. The Public Service Loan Forgiveness program (PSLF) counts income-driven payments towards the 120 installments required to be eligible for their policies. This is helpful for a few reasons. First of all, speaking very, very generally, public service workers often make less than their private sector counterparts, meaning the PSLF can greatly ease your loan burden. Additionally, after ten years of payments—in the aforementioned 120 installments—your balance is forgiven, tax-free.
Con: Forgiven debt is taxed
This runs counter to the last point and applies to those who don’t benefit from the PSLF. Under income-driven plans, your forgiven debt is taxed, which is understandably frustrating. The amount is counted as personal income, meaning you’ll probably be taxed, depending on your personal financial standing, somewhere in the neighborhood of 20%. While this obviously isn’t ideal for any student who’s thrilled to be finished with loan repayment, it’s a crucial cornerstone of any income-driven option and, needless to say, you’ll have to plan accordingly.
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