Pros and Cons of Income-Driven Repayment Plans for Student Loans

Income-driven repayment plans provide multiple payment options that help lower the monthly payments on federal student loans. This is a great solution for borrowers who can’t afford their loan repayments. However, this may not be the best solution for all borrowers. Understanding what an income driven repayment is and how it works can help you determine if it is the best option for you.

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What Is Income Driven Repayment?

The income driven repayment program is only applicable to federal student loans. It includes four different repayment plans that base the monthly payments on the borrower’s income. This is regardless of the amount of debt owed or the current repayment plan. In addition to income, the borrower’s family size and a few other factors are also considered when calculating monthly repayments.

The main aim of income driven repayment is to make loan repayments more affordable for borrowers struggling to repay their loans. It is especially beneficial for borrowers with low or no income who have exhausted their eligibility for other solutions.

All income driven repayment plans are designed in such a way that the monthly payments are always lower than the standard repayment plan. For unemployed borrowers and those with low income, the payments may even be zero.

Features Of Income Driven Repayment Plans

There are four income driven repayment plans. Each one has its own eligibility requirements and each one calculates monthly payment amounts differently.

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1. Income-Contingent Repayment (ICR)

  • Monthly payment calculation: Based on 20% discretionary income, adjusted gross income, and family size
  • Eligible Loans: Only Direct Loans but not including parent PLUS loans
  • Repayment term for undergrad student loans – 300 payments over 25 years

2. Income-Based Repayment (IBR)

  • Monthly payment calculation: Based on adjusted gross income, family size, and 10% or 15% of discretionary income, based on loan disbursement dates
  • Eligible loans: FFELP and Direct Loans excluding parent PLUS loans and consolidation loans
  • Repayment term for undergrad student loans – 300 payments over 25 years

3. Pay-As-You-Earn Repayment (PAYE)

  • Monthly payment calculation: Based on 10% of discretionary income adjusted gross income, family size, and total federal student loan balance
  • Eligible loans: Only Direct Loans
  • Repayment term for undergrad student loans – 240 payments over 20 years

4. Revised Pay-As-You-Earn Repayment (REPAYE)

  • Monthly payment calculation: Based on 10% of discretionary income adjusted gross income, family size, and total eligible federal student loan balance
  • Eligible loans: Only certain Direct Loans not including FFELP, Parent PLUS, and Consolidation loans
  • Repayment term for undergrad student loans – 240 payments over 20 years

How Does Income Driven Repayment Plan Work

Enrollment in income driven repayment plans is valid for one year only. Once you enroll in any income-based repayment plan, you must recertify the plan every year. Recertification involves re-submitting your income and other financial documents by the annual deadline. Your next year’s monthly payments recalculate based on your updated financial circumstances. This includes your current monthly income, total loan balance, and family size.

Failing to recertify your income-based repayment plan could result in your payments being increased. In addition, the unpaid interest could be capitalized or added to the loan principal.

After you’ve completed 20 or 25 years of payments (depending on your plan), the outstanding student loan balance is forgiven. Borrowers who qualify for Public Service Loan Forgiveness (PSLF) get the added benefit of tax-free student loan forgiveness. The loan must meet certain requirements to get the tax-free benefit.

Is Student Loan Income Driven Repayment Right For You?

Income driven repayments are a great solution for you if you can’t afford your current loan repayments on your income. Because these plans are based on your income, payments are more manageable and help you pay off your debt faster.

Consider enrolling in a student loan income driven repayment plan, if any of these apply to you:

You’re earning zero or low income

Monthly repayments are calculated as a percentage of your monthly income so they’re always affordable. If you’re unemployed, your monthly loan repayments will be zero.

You’re struggling to make your monthly repayments and are at risk of defaulting on your loan

If you have other large expenses, you may find the loan repayments unaffordable even if you earn a relatively high income. Missing payments can have major consequences. Not only will you have to pay late payment fees and interest but your credit score will also take a hit. Enrolling in an income driven repayment plan reduces your monthly repayments, lowering the risk of student loan default.

You have high student loan debt and need to free up cash

The higher your debt, the higher your monthly payments. Income driven repayment lowers the monthly repayment amount, freeing up the cash you need.

You’re near the beginning of your current student loan repayment plan

Enrolling in any of these plans restarts the clock on repayment. Your new repayment plan will typically be about 20 to 25 years. If you only have a few years more on your loan term, it’s better to try and clear the debt instead of extending it.

You qualify for Public Service Loan Forgiveness (PSLF)

Income drive repayment plans are a mandatory requirement for forgiveness. PSLF forgives your outstanding student loan balances after 10 years of working in public service. If your job qualifies you for PSLF, you must enroll in one of the student loan income-driven plans.

As we said earlier, each of the income driven repayment plans calculates your monthly payment amounts differently. The best plan for you will depend on the type of loans you have as well as your financial and personal circumstances. Using a repayment calculator can help you determine which repayment plan is best for you.

Give some thought to your financial circumstances and long-term goals before enrolling in any new student loan repayment plan.

Pros And Cons Of Income-Driven Repayment Plans

While these plans offer some notable benefits, they do have a few downsides too. Understanding the pros and cons can help you determine whether this program is right for you.

Advantages include:

  • Lower monthly payments
  • No risk of defaulting even if you’re unemployed
  • Freeing up cash for other expenses
  •  No impact on credit scores

Downsides include:

  • Higher interest accrual over the longer loan term
  • Longer time to get out of student loan debt

How to Apply For An Income-Driven Repayment Plan

Once you’ve decided that income driven repayment is right for you, you have to choose a plan and submit an application.

Follow these steps to apply for your chosen plan:

  1. Sign in to your FSA account.
  2. In your account, navigate to repayment plans.
  3. Enter your personal information. If you’re married, you’ll need to also enter your spouse’s information.
  4. Enter your family size.
  5. Enter your income information. The easy way to do this is by transferring your up-to-date IRS data using the IRS Data Retrieval Tool provided. This tool gathers your information directly from the IRS website.
  6. Select the plan you want to enroll in. If your loan doesn’t qualify for that plan, it won’t let you submit the request. Choose another plan and submit your application.

Remember, you’ll need to recertify your plan every year using this same process.

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