Introduction
The new income-driven repayment plan was created to help borrowers manage their student loan payments. The plan is intended to provide more flexible and affordable monthly payments based on a borrower’s income, family size, and debt burden. It offers an alternative to the standard 10-year repayment option, which can be difficult for some borrowers to manage given their financial situation. Borrowers need to understand their repayment options and calculate the best plan for their financial situation.
Income-Driven Plan Basics
The new income-driven plan allows borrowers to make smaller monthly payments based on their discretionary income. If you’re making less money than usual or are facing difficulty managing your current loan, you may qualify for reduced monthly payments under the new plan. The reduced payment amount is calculated based on your current income, family size, and total student loan debt.
Eligibility Requirements
You must meet certain eligibility requirements to qualify for the new income-driven plan. You must have an eligible federal Direct Loan or a Federal Family Education Loan program loan currently in an active repayment status. Your loan must also not be in default or delinquency status. Your monthly payment amount under the standard 10-year repayment plan must exceed 10% of your discretionary income.
Advantages of Income-Driven Plans
One of the main advantages of using an income-driven repayment plan is that it gives borrowers more flexibility when managing their student loan debt. By reducing the monthly payment amount, borrowers can better manage their financial obligations and stay current on their loans. Additionally, some plans may provide interest rate reductions or principal balance forgiveness after a certain period.
Types of Income-Driven Plans
Four income-driven plans are available for federal Direct Loans or FFEL program loans: Income-Based Repayment, Pay As You Earn, Revised Pay As You Earn, and Income Contingent Repayment. Each plan has its eligibility criteria, repayment term lengths, and benefits, so it’s important to research before deciding which is right for you.
Income-Based Repayment
The Income-Based Repayment plan allows borrowers to make reduced monthly payments based on their discretionary income. Borrowers must have a partial financial hardship to qualify, meaning that the standard 10-year repayment plan must exceed 15% of their discretionary income. The repayment term is usually 20 years, and any unpaid balance is forgiven after 25 years.
Pay As You Earn
The Pay As You Earn Plan is similar to IBR but with slightly more stringent eligibility requirements. To qualify, borrowers must have a partial financial hardship and demonstrate that they took out their first loan after October 1, 2007, and received a direct loan disbursement on or after October 1, 2011. The repayment term is ten years, and any unpaid balance is forgiven after 20 years.
Revised Pay As You Earn
It is similar to PAYE but with more flexible eligibility requirements. Borrowers must have a partial financial hardship to qualify. Still, they do not need to demonstrate that they received their first loan after October 1, 2007, or that they had a direct loan disbursement on or after October 1, 2011. This plan has the longest repayment term length – up to 25 years – and any remaining unpaid balance is forgiven after 25 years.
Income Contingent Repayment
This plan is the least restrictive of all four income-driven plans. It has the shortest repayment term length – up to 25 years – and any remaining unpaid balance is forgiven after 25 years. This plan does not require borrowers to have a partial financial hardship to qualify, so it’s a great option for those who may not meet the eligibility requirements for the other three plans.
Using for an Income-Driven Plan
To apply for an income-driven plan, you must complete and apply to your loan servicer. Your loan servicer will review your information and determine if you are eligible for the plan. Your loan servicer will provide details on the payment amount and repayment term length if approved.
Conclusion
Income-driven plans can be a great option for borrowers struggling to make monthly payments due to partial financial hardship. By reducing the monthly payment amount and extending the repayment term length, borrowers can manage their student loan debt more easily while keeping their loans in good standing. It’s important to research all four income-driven repayment plans before deciding which one is right for you. Once you have decided, you should apply directly with your loan servicer to get started.
