Paying back student loans is a stressful experience, especially for a recent graduate who is either unemployed or making a low salary. That’s where IDR (Income Driven Repayment) plans come in. These plans were developed to help borrowers (students, not parents) keep loan payments affordable and manageable, lowering the stress that typically comes with repayment.
Different plans for different people
There have been various IDR plans set up that are available based on an individual’s situation and what type of repayment plan might work best for him or her. Although they may be different, they all have one thing in common: they place caps on payments based on income and family size. Some even allow debt to be forgiven if the loan hasn’t been paid in full after 20 or 25 years of payment.
- Income-Based Repayment (IBR): For loans taken out after 7/1/14, payments are equal to 15 percent of discretionary income, with loan forgiveness after 25 years or 10 percent of discretionary income with loan forgiveness after 20 years. This plan never requires more than the 10-year standard repayment plan monthly payment amount.
- Pay As You Earn (PAYE): For first loans taken out after 9/30/2007 and at least one loan after 9/30/2011, payments are equal to 10 percent of your discretionary income with loan forgiveness after 20 years of payments. This plan never requires more than the 10-year standard repayment plan monthly payment amount.
- Revised Pay As You Earn Repayment (REPAYE): This program is open to more borrowers and like PAYE, your monthly payments are 10 percent of your discretionary income. NOTE: if you have graduate school debt, it will take 25 years of payments to qualify for loan forgiveness.
- Income-Contingent Repayment (ICR): Payments are the lesser of either: 20% of discretionary income or the amount of what the payments would be for 12-year repayment times the income percentage factor. You can receive loan forgiveness after 25 years of payments.
IDR Plan PROs and CONs
Most of life’s decisions consist of an upside and a downside. Loan repayment options are no different. Let’s start with the positive side of IDRs…
- Lower monthly payments: With the IBR and PAYE plans, monthly payments must be lower than if you were utilizing the 10-year standard repayment plan. This should help make your payments more affordable so that you’ll have more money to use for other monthly expenses.
- Loan discharge: If you have a loan balance remaining after the 20 or 25 year repayment period (plan-dependent), the balance will be forgiven.
- Public Service Loan Forgiveness program: When you repay your loans through an IDR plan, you may be eligible (depending on your field of career) for your loan balance to be forgiven after 10 years of timely payments through the Public Service Loan Forgiveness (PSLF) program. Additionally, this forgiven balance will be tax-free.
- No fixed payments: IDRs, you are not locked-in to fixed monthly payments because they change as your income changes. This helps to keep your monthly payments manageable for the length of your loan. It should be noted that if your income drops to zero, your payment will be adjusted accordingly and still count as an on-time payment.
So those are the positive aspects of IDR plans. Now onto the “not-so-positive” aspects…
- More interest paid: With IDR plans, your smaller payments over a longer period of time (compared to the 10-year standard repayment plan), means you’ll be paying an overall greater amount of interest.
- Longer loan term: IDR plans extend your loan term to 20 or 25 years. If your income increases by a large amount and your monthly payments are higher, you may pay off your loan before you qualify for loan forgiveness.
- Taxes on forgiven debt: Unlike the forgiven balance on the PSLF mentioned above, the forgiven balance on the IDR plans may be taxable as income.
- Income information requirements: Annual updates about your income and family size are required in order to continue to qualify for IDR loans. If you forget to provide this information or miss the deadline for providing it, you will be let go from your current plan and placed on the 10-year standard repayment plan.
- Loan qualification: IDR plans are available only for federal student loans, and currently not every federal student loan qualifies.
If interested in applying for an IDR, you can do so online. The four things you’ll need are:
- Federal Student Aid ID
- Personal Information (i.e. Name, Address, Phone, etc.)
- Spouse Information (if applicable)
- Income Information
Want more advice for paying off and understanding student loans? Check out the student loan information page at the myFICO Forums.