What is An Income-Based Repayment Loans for Students?

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What is An Income-Based Repayment Loans for Students?

Finding ways to earn money to pay off your student loan is not easy. Good thing the income-based repayment loan exists to help those from under-privileged situations that require financial aid.  

The government launched the income-based repayment loan as an alternative to the income-sensitive repayment loan or ISR and the income-contingent repayment loan or ICR. The goal is to ease the repaying of education loans for students. 

The income-based repayment loan caps the monthly payments at a percentage of the borrower’s discretionary income which can be hugely beneficial for low incomes families. If you are interested to learn more about income-based repayment loans, keep reading!

Difference between IBR loan plan and Standard Repayment Plan

student loan repayment

If you do not sign up with the income-based repayment plan or any of the other income driven repayment plans such as the Pay As You Earn (PAYE), Repay As You Earn (REPAYE), and the Income Contingent Plan (ICP), you are automatically enrolled to the Standard Repayment Plan. 

The difference that you can note between these two different student plans is very significant. For you to understand it better, let me give you this example: you finished schooling and started on your new job. You can now make $25,000, but you still have an average student loan debt for the class of 2016 which was $37, 172. If you are under the Standard Repayment Plan, you will have to shell out monthly payments of $406. However, if you enrolled in the Income-Based Repayment Plan, you only need to pay $86 per month. Such a huge difference, right?

Advantage of Income-Driven Repayment Plans

The most obvious advantage that you can get if you choose to avail of the income-driven repayment plans is that you will have the opportunity to repay your loans based on your income. You will not become overwhelmed and experience too much pressure of earning more when you get out of college. If you can foresee that your salary will remain low and that your family size will grow over the next twenty years, then the Income-Based Repayment loan plan is your best choice!

Here are some of the pros of why you should choose this certain plan:

  • If your income increases more than what you expected it to be, you will never have to pay more than what you would if you chose the ten-year Standard Repayment Plan back then. 
  • The payments have flexible terms, and they are re-evaluated every year, so if you become unemployed or you got a cut in your salary for some reason, then your monthly payments will also go down. 
  • Your monthly payments are capped at 10% of your discretionary income if you got your loan money beyond July 1, 2014. But, if you received it before the said date, your monthly repayment is 15% of your discretionary salary. 
  • You are also eligible for loan forgiveness for twenty to twenty-five years, depending on when you borrowed the money.
  • You can avail of the plan even if you are an undergraduate or graduate student. 
  • Additionally, you also have the power to change plans if you want to finish paying off your loan faster.

Disadvantages of Income-Based Repayment

Pros and cons

There is no perfect thing in the world, right? This is also true for the Income-Based Repayment plan, as there are also downsides that you should first examine before you get it. 

The most significant disadvantage that we can layout for this plan is that if you experience several years where your income is so low, then your monthly payments may not be enough to suffice the interest due. As a result, you will experience negative amortization. If this happens, then the balance that you owe will appreciate or go up. 

However, you might think about why does it matter if you can have it all forgiven after twenty or twenty-five years? Well, there is a current IRS rule that states that you should pay your taxes on the amount forgiven. 

Keep in mind these following considerations if you would choose the Income-Based Repayment plan: 

  • The interest payments from the Income-Based Repayment plan is higher compared to the interest payments from the Standard Repayment Plan.
  • Interest payments are also adjusted every time your income would increase. 
  • The Income-Based Repayment plan cannot be applied for your other private loans. 

Income-Based Repayment Plan Eligibility

If you are interested in applying for an Income-Based Repayment Plan (IBR), here are the requirements: 

  1. You need to present proof that you are undergoing “partial financial hardship”. 
  2. Capability to pay must be lower than the monthly payment required under the repayment plan. Your capability to pay is calculated by using your Adjusted Gross Income (AGI), family size, and quality of a residence. 
  3. Your loans should be made under Direct Loan (DL) or Federal Family Education Loan (FFEL), other private loans are not eligible.

These loans are also eligible as long as made under DL or FFEL: Stafford, Grad PLUS, and Direct Consolidated Loans.  

Monthly payments may also be adjusted depending on your AGI. For example, if your AGI is below the government’s metrics of the poverty line, your monthly payment would be zero. The government may also subsidize any unpaid accrued interest on Stafford loans. For example, if your monthly IBR payment is not enough to cover the loan’s interest, you can get a subsidy.

Exhaust your options! 

options

When you have numerous student loans, you should always explore other payment options and maximize them.  Fresh graduates often rely on their income from their first jobs to pay off student debts. But, most of the time, incomes from first jobs are not that big, and it could not be enough to pay off loans. IBR is one of the many options that students can maximize to finally be able to live loan-free.

 

Author
C. James

C. James is the managing editor at Wealth Gang. He has a degree in finance and a passion for creating passive income streams and wealth management.

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