Understand 4 Income-Driven Student Loan Repayment Plans
Congress is preparing to review existing legislation governing federal higher education programs, including federal student loans. One proposed change has been to streamline federal student loan repayment options down to one or two plans.
Borrowers can choose from nearly 10 different payment arrangements, some of which seem awfully similar, especially those that use income to determine payment amounts.
The government offers the following plans: income-based repayment, income-contingent repayment, income-sensitive repayment and Pay As You Earn. These names may sound like synonyms, but they don't mean the same thing to your loans.
To help you tell them apart, here's a quick overview of these plans.
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1. Income-based repayment: If you qualify for income-based repayment, it's arguably the best income-driven plan. Income-based repayment actually comes in two versions: a new plan for borrowers who received their first loan disbursement as of July 1, 2014, and the old plan, for everyone else.
Some significant changes make the latest income-based plan new and improved. With the old plan, any amount left on a loan after 25 years of repayment -- or 10 years if you work in the public or nonprofit sector -- and 300 eligible payments, is forgiven.
That requirement drops to 20 years and 240 payments with the new plan. In addition, the old plan limits payments to no more than 15 percent of your discretionary income. That limit is 10 percent for the new plan.
In order to qualify, you have to have a partial financial hardship. This means that your income-based payment would need to be lower than your regular monthly payment.
2. Pay As You Earn: Pay As You Earn works similarly to the new IBR plan. In fact, the government put it into place in 2012 to provide recent borrowers with the benefits of the new IBR plan before it went into effect in 2014.
Both plans offer forgiveness after 20 years or 240 payments, as well as payment caps at 10 percent of your discretionary income. However, Pay As You Earn comes with stricter eligibility requirements, which may make it more difficult for you to qualify.
To qualify, you must be a new borrower as of Oct. 1, 2007. That means you either have no federal loans made before that date or you paid off all prior federal loans before borrowing again on or after that date.
In addition, you must have at least one Stafford loan or Grad PLUS loan disbursed on or after Oct. 1, 2011. You can also have a consolidation loan as long as the consolidation did not repay any loans disbursed prior to Oct. 1, 2007.
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President Barack Obama has proposed expanding eligibility to all federal loan borrowers but that option will probably not be available until late 2015. To initially qualify for Pay As You Earn, you must have a partial financial hardship.
3. Income-contingent repayment: This plan is similar to the old version of income-based repayment, but its eligibility requirements are much simpler. You just have to have loans from the direct loan program to qualify.
Like the old IBR, your remaining loan balance is forgiven after 25 years of payments -- 300 total. Income-contingent repayment caps your potential payments at 20 percent of your discretionary income. Income-contingent repayment also does not count loans outside of the direct loan program when calculating your total debt. This could make your potential payments under income-contingent repayment even more expensive than they would be under the income-based plan.
This is the only income-related payment plan that Parent PLUS loans are eligible for, and even then they must be consolidated under the direct loan program before applying for income-based repayment.
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4. Income-sensitive repayment: Income-sensitive repayment is only available to borrowers with Federal Family Education Loan Program loans. This program has not issued new loans since July 1, 2010. It is also the only payment plan where the borrower gets to choose his or her monthly payment amount.
You do not have to qualify for this plan; rather, you select a monthly payment amount between 4 percent and 25 percent of your monthly income. Payments must be greater than or equal to the interest accruing on your loan, and you can only use this plan for up to five years. Income-sensitive repayment does not come with the chance for loan forgiveness.
If you have FFELP loans, you can see if this plan makes sense for you, however, you may be better off consolidating your loans into the direct loan program and applying for the new income-based repayment, Pay As You Earn or income-contingent repayment plans. FFELP loans are eligible for the older form of income-based repayment.
Each of these plans has many more details and eligibility requirements than covered here. Be sure to do your research to figure out the best one for you.
In addition, remember that extending your repayment period, which each of these plans may do, means you could pay more over the life of your loan, even with the chance for loan forgiveness. So, ultimately, the standard repayment plan may still be your best bet if you can afford it.
Ryan Lane is the senior editor for American Student Assistance, where he oversees the financial website saltmoney.org and serves as the editor of the SALT Blog. He graduated from Syracuse University with a B.S. in journalism.
