Low-income students apply for a student loan to get a higher education, some of them even without considering the repayment conditions waiting for them once they graduate from school. Not surprisingly, upon graduation, the majority of these students face difficulties when it comes to paying the loan back. The high amounts of debt made to pay expensive tuition fees leave no room for the graduates. Fortunately, the government payment plans somehow lessen the burden on the shoulders of the people who are mainly at the beginning of their career trying to adapt to the professional life. One of the payment plans preferred by most of the low-income population is income-based repayment plan. The income-based repayment method is the best if your income is much less than your monthly loan payment.
Monthly payment calculation
There are four different repayment plan under which they calculate your monthly payment. The repayment plans are as follows: REPAYE plan, PAYE plan, IBR plan, and ICR plan.
Within REPAYE plan, you need to pay 10% of your discretionary income like PAYE student loan plan under which they also require you to pay 10% your discretionary income. However, within the second one, your payment should not exceed the amount of 10-year standard payment plan. The amount of your monthly fee depends on the time when you have taken the loan out. If you are not a new borrower taking the credit before July 1, 2014, you will pay 15% of your discretionary income.
In contrast, if you are a new borrower taking the loan after July 1, 2014, they will charge you an amount equal to 10% of your discretionary income. Again, your payment must not be higher than the amount decided by the 10-year standard payment plan. Finally, with the ICR plan, there are two alternatives, either you pay 20% of your discretionary payment or the amount offered by 12 years fixed repayment plan. Your income determines which one is right for you.
Estimated payment amount
If you are eager to calculate your monthly payment, there is an official tool which helps you to identify how much money you should pay every month. The tool is on students’ disposal with all kinds of student loan payment plans. You may need to spend more under a repayment plan than the other one. The good thing is that this tool helps you to find the most suitable one for your need.
Eligibility
Each of the repayment plans has its requirements. While REPAYE plan is available for any students with an eligible student loan, PAYE and IBR plans have more criterion. It means that the number of monthly payments required to pay must not be higher than the 10-year standard payment plan. If it is, you cannot be qualified for these repayment plans.
Default Loan
Another important factor that you need to take into consideration is that if you are in a defaulted loan, you cannot apply for any of these income-based repayment plans. Being in a defaulted loan means that you have not made all your monthly payments on time and there is a deficit in your balance. In this case, you need to get out of the defaulted loan. Otherwise, it will affect your future financial issues and hinder you from being admitted to the income-based repayment plans.
There are some ways of getting out of this situation. The first one is that you pay the default amount. However, it is understandable that this way might be not acceptable for people who struggle with various financial problems at a time. In this case, the other options may work for you. We call them Loan Rehabilitation and Consolidation. Usually, student loan rehabilitation takes a few months to let you get rid of the defaulted loan while the loan consolidation is a quicker way to alleviate the situation.
Amount to be paid per month
Since the income-based repayment plans are built on the person’s monthly discretionary income, as it is seen from its name, the amount of money paid per month will not stay the same over the whole period. If there is a change in your family size or your income, the amount to be paid will change accordingly. That is the reason why you have to recertify the concerned instances annually about your family and financial situation. If there is a change before the scheduled date in which you have to inform them about your case, you have two options: wait until the time set beforehand or providing them with this information.
Student loan types and repayment plans
Unfortunately, not all repayment plans are suitable for all types of student loans. Right below you can find information on the proper repayment plan with its eligible student loan types. The ones require consolidation means that you must consolidate this loan type to Direct Consolidation Loan.
Eligible Loans under PAYE
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct Consolidation Loans
- Unsubsidized Federal Stafford Loans: consolidated
- Direct PLUS Loans: graduates or professionals
- Subsidized Federal Stafford Loans: consolidated
- FEEL PLUS Loans: graduates or professionals
- FEEL Consolidation Loans: excluding PLUS loans parents and consolidated loans
- Federal Perkins Loans: consolidated
Eligible Loans under IBR
- Direct Subsidized Loans
- Direct Consolidation Loans: excluding PLUS loans parents
- Direct PLUS Loans: graduates or professionals
- Unsubsidized Federal Stafford Loans
- Subsidized Federal Stafford Loans
- FEEL PLUS Loans: graduates or professionals
- Direct Unsubsidized Loans
- FEEL Consolidation Loans: excluding PLUS loans parents
- Federal Perkins Loans: consolidated
Eligible Loans under ICR
- Direct Subsidized Loans
- Direct PLUS Loans: graduates or professionals
- Direct PLUS Loans to parents: consolidated
- Direct Consolidation Loans repaid PLUS loans to parents
- Direct Consolidation Loans that repaid PLUS loans made to parents
- Direct Unsubsidized Loans
- Subsidized Federal Stafford Loans: consolidated
- Unsubsidized Federal Stafford Loans: consolidated
- Federal Perkins Loans: consolidated
- FEEL Plus loans made to parents: consolidated
- FEEL Consolidation Loans: excluding PLUS loans parents
- FEEL PLUS Loans: graduates or professionals
Is this repayment plan right for you?
Utilizing an income-based repayment plan can let you pay less in monthly installments. However, as you make the period longer, possibly you pay more interest over the period. In another case, you pay higher taxes according to the Internal Revenue Service rules.
Which repayment plans to choose?
Naturally, you might hesitate about which income-based plan to choose. Even though all the repayment plans give you a chance to pay based on your income and family size, they differ from each other with different loan types, different amounts paid monthly, etc. For example, if you have taken a loan made to parents, you won’t be qualified for PAYE and REPAYE plans. We can see the difference between the two payment installation periods.
If not eligible for income-based repayment plans
If you cannot apply for any of these income-based repayment plans, you can think of the Extended Repayment Plan or the Loan Consolidation. You can also pause your payments within deferment or forbearance.
