Student Loans: Income Based Repayment

To officially kick of our blog series about student loan management options, we are going to discuss income-driven repayment plans. These plans are only available to people with qualifying federal student loans that are in good standing. If your loan is in default you are going to have to rehabilitate your loan before pursuing one of these plans.

There are several types of income-based repayment plans, but there are several important things to consider before pursuing this path. For one, if your income does increase at some point, for many of the repayment plans your monthly payment will increase as well. Most importantly, as you are paying less per month while following these plans, you are paying off your debt slower than you would have otherwise and are therefore accruing more interest than you would have otherwise. This means that, in total, you may end up paying significantly more money than you would have on a standard repayment plan. Knowing some of the potential issues, here are some of the income-driven repayment options.

  1. Pay as you Earn (PAYE): On this plan, your monthly payment is about 10% of your monthly discretionary income. To be eligible for this plan, this calculated monthly payment has to be less than you would otherwise be paying on the standard repayment plan. After a 20 year repayment period, any remaining balance on the debt is forgiven. You also must currently have direct loans taken out on or after October 1, 2011, and not have any other direct or FFEL loans that you still owe money on from before that.
  2. Revised Pay as you Earn Repayment Plan (REPAYE): This plan is a revised version of PAYE. The main differences are that, one, you are eligible for this plan even if your payment would be higher than the standard repayment plan, two, the requirements for when your debt was incurred are waved, and three, your discretionary income is calculated by using both you and your spouse’s incomes even if you file taxes separately.
  3. Income-Based Repayment Plan (IBR): This plan is similar to the PAYE plan, except that both direct loans and FFEL loans are eligible. There are other minor differences in which loans you have to refinance before being eligible, and that the plan offers forgiveness after 25 years, rather than the 20 years offered by the PAYE plan.
  4. Income-Contingent Repayment Plan (ICR): This plan is the most widely accessibly is one of the least powerful when it comes to lowering your monthly payment. This plan is open to people with federal direct loans and FFEL loans like some of the previous plans, but is also open to parents with PLUS loans that have been reconsolidated into a Direct Consolidation loan. The cost of this openness is that your monthly payment will be 20% of monthly discretionary income rather than 10%.

We hope this information was helpful. In the next post in this series on student loans, we will be discussing student loan rehabilitation. As always, if you have any question that weren’t addressed by this article, please feel free to reach out to us at the Massachusetts Debt Relief Foundation for a free consultation.