Income-Based Repayment: What it Means For Your Student Loan

If you’ve used federal student loans to finance your education, you’ll be expected to start paying them back six months after you graduate. But if have very high student debt relative to your income, and if you meet certain criteria, you may be able pay your loan back using an income-driven loan repayment plan.

There are three types of these repayment plans: Income-Based Repayment (IBR), Pay As You Earn (PAYE) and Income-Contingent Repayment (ICR). While each of these plans might result in a lower monthly payment, keep in mind that all of them will stretch your repayment over many more years, which means that you may end up paying more—perhaps significantly more—in interest.

You must meet a particular set of requirements in order to qualify for any of these repayment plans, including that you must have at least one Direct Loan or a loan in the Federal Family Education Loan (FFEL) program. You can determine eligibility and calculate what your payment would be under each type of plan at The U.S. Department of Education’s Repayment Estimator, and apply online at StudentLoans.gov.

PAYE Plan

The PAYE plan caps your monthly repayment at 10 percent of your discretionary income, which is the difference between your adjusted gross income and 150 percent of the poverty guideline for your family size and state of residence. (Poverty guidelines are maintained by the U.S. Department of Health and Human Services and can be accessed here.) The repayment period for PAYE plans is 20 years. If any balance remains at the end of the repayment period, that amount is forgiven. As it stands now, you must pay income tax on the forgiven amount, but the U.S. Treasury proposes to change that, making the leftover debt non-taxable for loans forgiven after December 31, 2014.

The PAYE plan is currently available to students who took out their first federal student loan after October 1, 2007, and who received a disbursement on a loan after October 1, 2011. President Obama recently directed the Department of Education to expanded the availability of the plan to federal loan borrowers who took out loans before October 2007 or who applied for no new loans after October 2011. The Department has begun the process and expects to make the plan available to those additional borrowers—an estimated 5 million—by the end of the year. Starting with the 2015-2016 academic year, the PAYE plan will be the only income-based repayment plan available to new borrowers.

IBR Plan

In order to qualify, your monthly payment under a standard 10-year repayment plan must be more than 15 percent of your discretionary income (that amount was reduced to 10 percent for new borrowers after July 2014).

Under an IBR plan, the most you’ll pay per month is 15 percent of your discretionary income. Your payment amount changes as your income changes, so the more you can afford, the more you pay. You must provide updated income and family size numbers to your loan servicer annually.

The repayment period for IBR plans was 25 years, but has been reduced to 20 years for new borrowers as of July 1, 2014. If any balance remains at the end of the repayment period, that amount is discharged.

ICR

There is no standard income eligibility requirement for ICR plans—anyone with federal student loans can make payments under this plan. Your monthly loan payment will be based on your adjusted gross income, family size and the total amount of your federal student loans, and will be recalculated each year. The repayment period is up to 25 years, and as with other income-driven plans, any debt left after 25 years is forgiven.

Public Service Loan Forgiveness

Available to borrowers who have loans made through the William D. Ford Federal Direct Loan Program, the Public Service Loan Forgiveness (PSLF) program was created as a way to encourage recent graduates to take jobs in public service. Those who have been employed full-time by a public service organization and have made 120 qualifying payments on their federal loans after October 1, 2007, can have the remainder of their loan forgiven. Debt forgiven under PSLF is not taxable, but President Obama’s latest budget proposal puts a cap of $57,500 on debt forgiven for new borrowers as of July 1, 2015.

Eligible PSFL employers include any federal, state, or local government organization or agency and most not-for-profit organizations, including the U. S. military, public schools, public child and family service agencies, and governmental jobs with public transportation, public water companies or public housing authorities. Not-for-profit organizations that are tax-exempt under IRS section 501(c)(3)—such as private, not-for-profit schools and charities are also eligible. To see if your employer qualifies, check the IRS listing of 501(c)(3) organizations. Some other employers may also qualify. See the Department of Education’s PSLF FAQ for details.


StartwithChange.com: Income-Based Repayment What it Means For Your Student Loan

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