Income Based Repayment: How to Pay Student Loans

Income based repayment plan may be what you need if you are struggling to pay back your student loans as a result of your insufficient or low income. Government is aware of the plights that students and parents go through when it comes to the repayment of their student loans. That is why government comes up with different programs to help students in ensuring that the burdens of their debts do not denying them the opportunity of attending to other basic important things of life. Among such programs is the income based repayment program which allows students to pay back their student loans based on their income and family size. It is believed that basing the student loan monthly payment on income and family size will make the loan repayment affordable for many. But you need to understand that income based repayment plan is available for federal student loans. If you want to enrol into this program, you will need to fill the income based repayment form. You can get this form from your loan servicer without paying any fee. Essentially, there are four income based repayment plans. I hope you will be able to find one that will suit your situation among the four income based repayment plans listed below:

  1. Revised Pay As You Earn Repayment Plan (REPAYE Plan)
  2. Pay As You Earn Repayment Plan (PAYE Plan)
  3. Income-Based Repayment Plan (IBR Plan)
  4. Income-Contingent Repayment Plan (ICR Plan)

If you enrol into any of these income-based repayment programs, you might be on your way to enjoy Public Service Loan Forgiveness. The starting point is for you to find out how your monthly payment is calculated under each income based repayment plan so that you can choose the one that is proper for you. Alternatively, your student loan servicer may assign a particular plan to you. Nevertheless, you can change your repayment plan any time as you deem fit or as your situation changes. No loan servicer will ask you to pay any fee for changing repayment plan.

How income based monthly repayments are calculated

Revised Pay as You Earn Repayment Plan (REPAYE Plan): Under this plan, your payment amount is 10 per cent of your discretionary income. However, the amount can be more than the 10-year Standard Repayment Plan amount. How is your discretionary income determined under income-based repayment income? Your discretion income is simply the difference between your income and 150 per cent of the poverty guideline for your family size and state of residence as stipulated by the U.S Department of Health and Family Services. For married people, both your income and your spouse’s income or loan debt will be considered. It does not matter whether you file your taxes jointly or separately taxes, though with certain exceptions. Payments will be recalculated each year to reflect your updated income and family size.

If you have eligible loans under Direct Loan Program, you are qualified to enrol for Revised Pay as You Earn Repayment Plan. Below are the eligible loans:

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Direct PLUS Loans made to students
  • Direct Consolidation Loans that do not include PLUS loans (Direct or FFEL) made to parents.

If you have any outstanding balance on your loan that you haven’t repaid in full after 20 or 25 years, you will enjoy loan forgiveness on this amount. Nevertheless, you may be asked to pay income tax on any amount that is forgiven.

Read Also: Student Loan Consolidation Facts You Need to Know

Pay As You Earn Repayment Plan (PAYE Plan): This income based repayment is for Direct Loan Program borrowers who borrowed their student loans on or after Oct. 1, 2007. That is, you must have received a disbursement of a Direct Loan on or after Oct. 1, 2011. For you to be eligible for this income based repayment plan, your required payment amount must be less than what you would pay under the 10-year Standard Repayment Plan. That is, your monthly payment is 10 per cent of your discretionary income. However this should not be more than the 10-year Standard Repayment Plan amount. Just like Revised Pay as You Earn Repayment Plan (REPAYE Plan), your discretion income is simply the difference between your income and 150 per cent of your poverty guideline for your family size and state of residence as stipulated by the U.S Department of Health and Family Services. For married people, your spouse’s income or loan debt will be considered only on the condition that you file your taxes jointly. Also, your debt to income ratio should be considerably high signifying the level of your financial hardship. Payments will be recalculated each year to reflect your updated income and family size. If you have any outstanding balance on your loan that you haven’t repaid in full after 20 or 25 years, you will enjoy loan forgiveness on this amount.. Nevertheless, you may be asked to pay income tax on any amount that is forgiven.  The main disadvantage of this income based repayment plan is that, you will end up paying more for your loan over time than you would under the 10-year Standard Repayment Plan.

The eligible loans under Pay as You Earn Repayment Plan (PAYE Plan) are:

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Direct PLUS Loans made to students
  • Direct Consolidation Loans that do not include PLUS loans (Direct or FFEL) made to parents.

Income-Based Repayment Plan (IBR Plan): This plan is for you if you are Direct Loan Program and FFEL Program borrower and your payment amount under this plan is less than what you would pay under the 10-year Standard Repayment Plan. Under Income-Based Repayment Plan (IBR Plan), your monthly payment is 10 or 15 per cent of your discretionary income if you’re a new borrower on or after July 1, 2014, but never more than the 10-year Standard Repayment Plan amount. Your discretionary income under Income-Based Repayment Plan is the difference between your total income and 150 per cent of the poverty guideline for your family size and state of residence. Just like Pay As You Earn Repayment Plan, for married people, your spouse’s income or loan debt will be considered only on the condition that you file your taxes jointly. Also, your debt to income ratio should be considerably high. Payments will be recalculated each year to reflect your updated income and family size. If you have any outstanding balance on your loan that you haven’t repaid in full after 20 or 25 years, you will enjoy loan forgiveness on this amount. Nevertheless, you may be asked to pay income tax on any amount that is forgiven.  The main disadvantage of this income based repayment plan is that, you will end up paying more for your loan over time than you would under the 10-year Standard Repayment Plan.

The eligible loans under Income-Based Repayment Plan are:

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Subsidized Federal Stafford Loans
  • Unsubsidized Federal Stafford Loans
  • Direct or FFEL PLUS Loans made to students
  • Direct or FFEL Consolidation Loans that do not include PLUS loans made to parents

Income-Contingent Repayment Plan (ICR Plan): Under Income-Contingent Repayment Plan your monthly payment will be the lower of 20 per cent of your discretionary income or what you would pay on a repayment plan with a fixed payment over the period of 12 years, adjusted according to your income. Please, I want you to note that your discretionary income is quite different under Income-Contingent Repayment Plan .Your discretionary income is the difference between your total income and the poverty guideline for your family size and state of residence. Under certain circumstances, your discretionary income may include your spouse’s income.  This applies to married people. If you have any outstanding balance on your loan that you haven’t repaid in full after 25 years, you will enjoy loan forgiveness on this amount. Nevertheless, you will have to pay income tax on any amount that is forgiven. Your monthly payments are usually recalculated every year to reflect your updated income, family size, and the total amount of your Direct Loans. It is important to note that your monthly payment can be more than the 10-year Standard Repayment Plan amount.

The eligible loans under Income-Based Repayment Plan are:

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Direct PLUS Loans made to students
  • Direct Consolidation Loans (including Direct Consolidation Loans made after July 1, 2006 that repaid PLUS loans made to parents)

Please note that your family size within the context of income based repayment include you, your children including unborn children who will be born within the year. The children must receive more than half of their supports from you. Also included in your family size are other people living with you provided they receive more than half of their supports from you and they will continue to receive support from you for the year. Under Pay As You Earn Repayment Plan, Income-Based Repayment Plan and Income-Contingent Repayment Plan, your family size always include your spouse. But for Revised Pay As You Earn Repayment Plan, your wife will not be included in your family size if your spouse’s income is not included in the calculation of your payment amount. Your family size in the context of income based repayment plan may not necessarily be the same with the number of exemption you file for tax purposes.

Read Also: Understanding Student Loans Deferment and Forbearance

How to Apply for Income Based Repayment Plan

If you want to apply for Income Based Repayment Plan, you have two options:

  1. Paper Application: You can approach your loan servicer and ask for Income-Driven Repayment Request form.
  2. Online Application: If you want to apply online, you will need to visit StudentLoans.gov and complete the Income-Driven Repayment Request. This form is free. If you have all your information readily available, you can complete the form within ten minutes.

Required information

To complete Income-Driven Repayment Request, you will need the following

  • Verified FSA ID. However, if you recently made to the identifiers associated with your FSA ID, you may not be able to complete the form until the changes you made has been verified by the Social Security Administration.
  • Personal Information: You will need to provide information about your permanent address, e-mail address, home telephone number, mobile telephone number and the best time to reach you.
  • Financial information: You can document your income electronically by using a data retrieval tool that is established with the Internal Revenue Service. You don’t need to be afraid about the of your tax information. It will not be displayed on the application. You will only be informed whether the retrieval was successful or not. Your adjusted gross income will be used if you have filed a federal income tax return in the past two years. It is possible that you do not want your adjusted gross income to be used as a result of any change in your income since you filed your last tax return. You have the option of submitting the application electronically. Thereafter you can submit documentation of your current income to your loan servicer. You will be guided on how to go about this. For people without any income, you can indicate this on the online application. For married people, your spouse will need to co-sign your application. Unlike other loans, the fact that your spouse co-signs the Income-Driven Repayment Request application does not make him or her responsible for the repayment of your student loan.

You can actually use Repayment Estimator to determine the repayment plan that is best for and and to estimate what your monthly payment will be under each income based repayment plan. You will need to supply your loans information/average loan balance and tax filing status. You will need to indicate whether you are single or married. If married, you will identify whether you and your spouse file taxes jointly or separately. It may take a while for your Driven Repayment Request Application to be processed. Allow your loan servicer to guide you on the next step to follow.

Advantages of Income Based Repayment

With all the explanations given above, you may still want to know why Income Based Repayment plan may be good for you. Below are the advantages it offers:

Affordability: If you are struggling to meet up with your monthly payments, income based repayment plan can help you reduce the amount you pay per month to a manageable level. This will make the payment become easier and more affordable for you. You will be able to spend your money on other important things that matter to you.

Flexibility: The fact that you are paying certain monthly amount now does not mean that you will continue to pay the same amount. Your monthly payment will be revised every year to reflect your updated income and family size. If your income changes significantly before the end of the year, you may not need to wait till the end of the year before you file your updated income so that your monthly payment can be revised to a manageable amount.

Low risk of default: Loan servicers don’t like defaults at all. That is why they can go as far as offering discount to students who sign up for automatic monthly payments. On the other hand, the fact that you are able to reduce your monthly payment to the amount you can easily pay, it will help you build good credit history which will ultimately improve your credit score. Default can last for seven years in your credit report. Remember that if a student defaults in his student loans, such person will be disqualified from future student loans. I think it will worth the efforts if you can do anything that can help you to avoid default. With good credit score, you can enjoy low interest rates on loans. You may be to refinance your student loans under better terms and conditions. However, before you refinance your federal student loans, you should way both the pros and cons. For example, if you refinance your federal student loans, you may no longer have access to some benefits that federal student loans offer such as loan forgiveness, deferment, forbearance and income based repayment plan.

Read Also: How to refinance student loans for better interest rates

Early Repayment: Income based repayment plan does not stop you from making early repayment of your loan. You don’t get penalised if you repay your earlier than scheduled.

Loan forgiveness: You will enjoy loan forgiveness if you have any outstanding balance on your loan that you haven’t repaid in full after 20 or 25 years. You will be asked to pay tax on any amount you are forgiven. If you qualify for Public Service Loan Forgiveness, you may not wait till the time you have paid your student loans for up to 20 or 25 years. Under Public Service Loan Forgiveness, your unpaid student loan balance can be forgiven after 10 years if you enrol for income based repayment plan. You might qualify for student loans forgiveness if you you work full time in government organization, a not-for-profit or tax-exempt organization or private, not-for-profit organization providing any of the listed organizations:

  • Public safety
  • Public education
  • Military service
  • Public health (including nurses, nurse practitioners, nurses in a clinical setting, and full-time professionals engaged in health care practitioner occupations and health care support occupations
  • Law enforcement
  • Public library services
  • School library or other school-based services
  • Public interest law services
  • Early childhood
  • Public service for individuals with disabilities and the elderly
  • Emergency management

Disadvantages of Income Based Repayment

More interest: By making less monthly payments, you are simply extending your student loans term as it will take you longer period to repay the loan. Hence, you will end up paying more interest. Chunk of your monthly payment may be going towards interest payment instead of paying down the interest. Failing to pay up your student loans on time might prevent you from qualify for other loans such as auto loan. Lenders may not be willing to extend fresh loans to you if your debt to income ratio is high. On the other hand, interest on your student loans may be tax deductible.

Eligibility: Not all student loans are eligible for income based repayment plan. Only specific federal student loans are eligible for this special repayment plan. Even with federal student loans, if your income is high, you may not be eligible for income based repayment plan. In most cases, the income of your spouse will be combined in order to determine your family income.

Re-certification: If you enrol in income based repayment plan, you will be required to complete fresh income based repayment form. It is mandatory. This is to allow your loan servicer to recalculate your monthly payment based on your current income and family size. If you refuse to file your application at the end of the year, you may be forced to start paying the amount you would pay under the 10-year Standard Repayment Plan. If you don’t want to be penalized, it means you must file your application before the deadline. If you don’t want to forget the filing, you may ask your loan servicer to always send you reminders.

Taxation: If you qualify loan forgiveness on your unpaid student loan balance, you will be required to pay tax on the amount. This automatically increase your tax payable without corresponding cash inflow. This may affect your budget negatively.

Conclusion

If you are still having problem repaying your student loans after you have signed up for income based repayment, you will need to quickly contact your loan servicer. Don’t allow your loans to enter into default. Defaulting in payment of your student loans will not help you in any way. If you are in default, your loan servicer will definitely report this to the three major consumer reporting agencies namely Experian, TransUnion and Equifax. This will definitely ding your credit score and the impact is going to be negative on your finances. For examples, you may no longer have access to affordable rates on credit cards, insurance and auto loans. You may be denied the opportunity of getting mobile phone contracts. Some employers carry out credit checks on applicants, so also homeowners before they rent out their apartments. Therefore, you may find it difficult securing a new job or an apartment to rent.

Read Also: Student Loans: Useful Guide to Students and Parents

So, it is better you allow your loan servicer understand your financial predicament on time. Perhaps he may have a better arrangement for you. He may help you arrange for student loans deferment or forbearance. It may even mean changing your repayment plan entirely. But each of these options may likely extend your loan period. If you are granted deferment or forbearance, you may be shocked that your loan will continue to accrue interest. The interest will be capitalised (except you continue paying the interest as it accrues), thereby increasing your outstanding loan amount. The best way is to ensure that you do everything you can do to quickly pay off your loan.

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