Student debt repayment usually takes around 20 or more years. Considering such a long period, you might want to build your repayment strategy on the sound ground- on a suitable repayment method. The repayment plan is more than solely meeting the obligations. It determines how much effort, patience, nerves, time, and financial resources you will need to eliminate the debt. If you are financially struggling with student loans, Income-based student loan repayment can come to the rescue. The monthly payments can be as low as $0 with this incredible plan.
This guide explains the details of an Income-based plan and compares it to alternatives. If you want to find out which repayment method is most suitable, you can contact us now for a FREE consultation.
What is an Income-based Student Loan Repayment Plan?
The income-based repayment plan is one of the categories of Income-Driven repayment plans. These plans are designed to help borrowers in financial difficulties. As the name suggests, the monthly loan payment amount is determined considering the earning level of the borrowers. Hence, if borrowers earn less money monthly, they will pay a little amount for debt obligations.
In general, repayment plans differ based on the monthly payment rate and the length of the payback period. Income-based student loan repayment requires either 10% or 15% of the discretionary income from borrowers. Discretionary income is a part of earnings left after deducting taxes and other necessary spendings.
The exact rate of repayment depends on whether you are a new borrower. New borrowers- those who received loans on or after July 2014 – face a less costly repayment plan. In more detail, they only pay 10% of discretionary income monthly. On the other hand, if you are not a new borrower, you will be required to pay 15% of your discretionary income.
Keep in mind that the monthly repayment amount cannot exceed what is required through a 10-year Standard repayment plan in both cases. For clarification, the Standard plan has a fixed rate that allows borrowers to repay the full debt in 10 years.
If you are not sure about how much your monthly payment will be, you can use the Loan Simulator on the official Student Aid website.
Income-based student loan repayment, similar to all other Income-driven plans, grants forgiveness after the payback period. But how long should you be paying the debt bills till you get forgiveness? Under an Income-based plan, you are obliged to repay the debt for either 20 or 25 years.
Again, the exact period depends on if you are a new borrower. New borrowers have a shorter payback period – 20 years, while others should repay debt for 25 years. Once the payback period ends, the remaining debt balance is forgiven.
As mentioned before, Income-based student loan repayment requires borrowers to be new borrowers. Such a term needs a further explanation. New borrowers should not have any outstanding Direct or FFEL loan balance when they get a new loan on or after July 2014. It is also known that no new FFEL loans were distributed after 2010. Hence, we can conclude that only Direct loan borrowers can qualify for this program.
Keep in mind that if you have loan default status, you will not be eligible for any Income-driven repayment plan, including Income-based student loan repayment.
Another eligibility criterion is indirectly about the borrower’s income level. As mentioned before, your monthly payment amount cannot be higher than what you would pay with a 10-year Standard repayment plan. But, on the other hand, if your payment amount is higher, it means you would not benefit from Income-based repayment, which aims to help people in economic hardship. Therefore, your student loan debt should cover a high portion of the annual discretionary income.
One of the most incredible benefits of an Income-based student loan repayment plan is that you can even get $0 payments.
This repayment option, similar to all other Income-driven plans, depends on your income level. For example, if you lose your employment or your income becomes too small, you might be eligible for $0 payments.
Alternatively, if you face financial hardship, you can request a student loan deferment. During this period, you are not required to make debt payments.
Keep in mind that even if your monthly payment is $0 or you are in a deferment period, those months will still qualify for the repayment period. Hence, your payback period, such as 20 years, will not be delayed.
What are Other Income-Driven Repayment Plans?
As mentioned, Income-based student loan repayment is one category of Income-driven plans. There still exist three more repayment plans which belong to this category. Each of them is designed to help borrowers pay out their debt effectively. Besides, borrowers receive forgiveness for the remaining balance after the payback period under all these repayment options.
Pay as You Earn
The Pay as You Earn program and Revised Pay as You Earn was created with a single aim: to help borrowers access the lowest rates of repayment. Currently, the repayment plan requires only 10% of discretionary income. Therefore, even if you have financial struggles, you will be able to afford debt payments. But, again, your payment amount cannot be higher than payment through the Standard plan.
Your repayment period is always 20 years, regardless if you are a new borrower or not.
Revised Pay As You Earn
Revised Pay as You Earn is another Income-driven plan requiring 10% of discretionary income. Borrowers are required to make payment either for 20 or 25 years, similar to Income-based student loan repayment.
However, for this option, the differentiation criterion is not being a new borrower. Instead, if you get student loans for undergraduate studies, you will repay the debt for 20 years. Meanwhile, student debt generated for graduate and professional studies is repaid in 25 years.
The income-contingent plan gives flexibility to borrowers. For example, it might require a fixed payment for 12 years. Alternatively, borrowers can pay 12% of their discretionary income as a monthly repayment amount. In this case, the repayment period is 25 years. But, again, at the end of this period, the remaining balance is canceled.
Can I Achieve Forgiveness Faster?
Under Income-driven plans, you are granted forgiveness after a payback period. Yet, it is also possible that you will have no balance remaining once the payback period ends. It means no forgiveness will be accessible to you.
Income-based student loan repayment offers one of the shortest payback periods -20 years, considering there exist Income-driven plans with 25-year repayment.
However, you can still qualify for forgiveness sooner. Yet, you cannot do it with only repayment plans. You need to enroll in Public Service Loan Forgiveness.
The PSLF program grants forgiveness in at least ten years when you make 120 payments. However, this program also requires borrowers to repay debt under Income-driven plans. Hence, rather than trying to achieve forgiveness only through an Income-based plan, you can enroll in PSLF. In this way, you will enjoy affordable payments with Income-based student loan repayment and get rid of the student debt in 10 years.
However, it should also be mentioned that not everyone will qualify for Public Service Loan Forgiveness. Only if you work in public service- local, tribal, state, federal or non-profit organization- you might qualify for this opportunity.
Changing Repayment Amounts
Repayment under Income-based, on in general, Income-driven plans, is fixed. You pay a fixed amount per month during a year. However, the repayment amount can be updated each year depending on how your income or family size changes. For example, your monthly payment amount will increase if you get promoted and qualify for a higher salary.
Therefore, the Education Department requires borrowers to submit new data to determine updated payment amounts. Even if your income or family size does not change, you are still required to “recertify” by submitting this information.
How to Recertify Family Size or Income?
To submit updated information, you need to submit a new repayment application to your loan servicer. However, in the application form, you will see a question regarding why you submit it. In such a case, you should choose the option which claims application for annual recertification.
Usually, loan servicers inform borrowers when it is time for recertification. However, if your income or family size changes and you want to apply the changes to your repayment sooner, you can again apply. This time you should choose a recalculation of your repayment as a reason for application.
What If I Do Not Recertify Income?
In general, recertifying is always a good idea. However, sometimes borrowers might forget recertification, or their loan servicers fail to inform the debtors about deadlines. In this case, different consequences can happen based on which plan you are enrolled in.
1. REPAYE Plan
In this case, if you are enrolled in the REPAYE plan, you will be removed from the plan. As a result, your new repayment will be an alternative option where you are required to pay the debt in 10 years or similar to REPAYE. You can also choose to enroll in any other plan that you qualify for. However, as you are removed from this Income-driven plan, your Public Service Loan Forgiveness payments can be in danger.
2. Other Income-driven Plans
Under all other Income-driven plans, including Income-based student loan repayment, you will still be enrolled in a repayment plan even if you do not recertify. However, your monthly repayment amount will change. Instead of paying some percentage of discretionary income, you will start making payments based on a 10-year Standard repayment plan. If you provide updated information, you can return to your desired plan.
Besides these consequences, any interest owed can become capitalized, which means added to the original balance. As a result, your student loan cost will increase.
What If I Do Not Recertify Family Size?
Besides income, family size is an element that determines your monthly payment amount. Sure, if you have a large family, your monthly payment amount will be lower. However, if you do not recertify family size, your loan servicer will assume that you have only one person in the family.
Therefore, even if you are two or more people, your monthly payment rate can increase as you do not recertify the information. Yet, you will not be placed to another plan as it was in the case of not recertifying income.
What Happens if My Income Raises?
Throughout the extended repayment period -20 or 25 years- your income level can change significantly. In this case, the consequences depend on which Income-driven repayment plan you have enrolled in.
1. Pay as You Earn and Income-Based Plans
If your income rises high enough to exceed the monthly payment amount under the 10-year Standard Repayment Plan, you will no longer make payments under these plan’s conditions. In other words, your monthly payment will no longer be 10% or 15% of discretionary income as required by the Income-based student loan repayment plan. Instead, you will pay what is required by the Standard plan.
However, during this period, you will still be enrolled in Income-driven plans. The only difference is that you do not pay the rate compatible with Income-driven options. Yet, you can keep recertifying your information. In this way, if your earnings decrease, you can again return to low payments of Income-based or PAYE plans.
2. Revised Pay as You Earn and Income-Contingent Plans
Under these repayment options, it does not matter whether your income increases or not. Even if monthly payments exceed the Standard plan, you will still pay what these Income-driven plans require. In some cases, the monthly payment can even be higher than the Standard plan payment. However, with Income-based or Pay as You Earn plans, monthly payment is never more than the Standard plan’s rate.
Application to Income-based Repayment Plan
If you decide that an Income-based repayment plan is right for you, you can apply by filing a request and submitting it to the loan servicer.
First, contact your loan servicer to get a request form. It is possible to get a request form as paper from a loan servicer or find it online. While filing the form, you will choose which Income-driven repayment plan you want. Besides, information regarding income level and family size will be required.
Keep in mind that you can also choose your loan servicer to decide which plan is most suitable for you. If you choose this option, your loan servicer will decide and enroll you. If you have multiple loan servicers, you need separate requests for each of them.
You might wonder how income level is determined. Usually, Adjusted Gross Income is necessary for this process. In more detail, if you received an income tax return during the last two years and your income level did not change considerably, the officials will use AGI. Alternatively, they can require a pay stub or no document if you are unemployed.
Once applied, it will take several weeks till your request is processed. Borrowers can also ask the loan servicer to grant loan forbearance – non-repayment period- while the request is reviewed.
Is an Income-driven Plan Suitable for Me?
Income-driven repayment plans are not your only repayment options. Income-driven repayment plans can be affordable if your earning level is low. Specifically, borrowers with financial difficulties can enjoy the benefits of such repayment plans.
However, income-driven plans, including Income-based student loan repayment, might not be suitable in some cases. For instance, low payments and long payback periods can lead to more interest payments in the long run. Hence, the total cost of student loans can increase.
Additionally, your options depend on which loans you have. While Direct loans qualify for a wider variety of repayment options, FFEL loans can only be eligible for Income-based student loan repayment among all Income-driven repayment plans.
What Other Options Do You Have?
If you cannot decide which plan to choose, first get familiar with each of them. Besides Income-driven plans, you can have access to several other federal repayment options, such as Standard, Graduated, or Extended plans.
The standard plan requires borrowers to make payments for ten years to pay out the whole balance. Due to a shorter period than Income-based student loan repayment, its monthly rates can be high. Next, Graduated repayment requires less payment during the first years, and its rate gets higher as time passes. Borrowers with excellent future employment capabilities can enjoy this plan.
Additionally, an Extended plan can be a suitable repayment option with a longer payback period – 25 years. You can choose whether you want a fixed payment or graduated with this plan.
This guide focused on Income-based student loan repayment specifically and compared it to other Income-driven plans. However, keep in mind that you can access other repayment options, such as Extended or Graduated plans. If you want to choose the best possible option, we would advise you to get expert help. Debt specialists, like those in Student Loans Resolved, have extensive knowledge of repayment plans. So whether you want affordable or fast repayment, our debt experts can determine the best method.