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

When striving to ease the burden of student loan payments, there are many different routes to take. But, one of the most popular is known as an “income-driven” repayment plan. Simply put, these programs allow college grads to choose options that meld better with their current financial status. It takes 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:

A blue checkbook with a fountain pen underneath it.

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. 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. 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. That means your debt will grow even if you’re completing every installment on time. This is known as “negative amortization,” and results from interest rates 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 piggy bank.

 Pro: Flexibility

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. If you’re temporarily unemployed, you will not owe anything until you secure a new income. There is no penalty for adjusting your payments. Your rates also evolve as needed until you are able to secure a steady income.

Con: Paperwork

For some, this is not a big deal. But to those who hate tedious paperwork, you might not like the extra hoops you need to jump through to apply for an income-driven payment plan. Case in point: every year, assuming you take this route, you need 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 Student 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, taxes apply to your forgiven debt. It is understandably frustrating. The amount counts as personal income, which means it is taxed, depending on your personal financial standing, somewhere around 20%. While not ideal for thrilled students who finished with loan repayments, it’s a crucial cornerstone. Needless to say, plan accordingly.

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