The Income-driven repayment option is the perfect repayment path for borrowers of federal student loans who are earning less than their outstanding loan balance. These loan options are based on: a) income b) family size c) the state you are residing in d) and the type of your federal student loan.
In this article, we will discuss the four main plans under the Income-Driven Repayment option. There’s no standard plan that fits all. You have to figure out the best plan for you, based on your current payback capacity and financial situation.
Revised Pay As You Earn (REPAYE)
Available since December 17, 2015, this plan allows all Direct Loan borrowers to apply regardless of their date of loan acquisition. No document is required to demonstrate your financial hardship, unlike the other plan options.
Your payment is capped at 10 percent of the discretionary income. This is the adjusted gross income above 150 percent of the relevant poverty income level, divided by 12. There is no placed limit on monthly payments. Your eligibility must be renewed annually.
If you are married, your spouse’s income will be included in calculating the monthly payment, although you could opt out of it if you are able to sufficiently demonstrate that you are unable to access the spouse’s income information or if you are separated.
Loan forgiveness is available after:
a) 20 years for borrowers with loans for undergraduate studies
b) 25 years for borrowers with loans for graduate studies
After the loan has been forgiven, the canceled amount will now be considered taxable income but there are instances that you may not have to pay for them. If you are having trouble with managing taxes for forgiven loans, consult a professional.
Pay As You Earn (PAYE)
The Pay As You Earn plan has been around since December 21, 2012. Eligible individuals are only those who are Direct Loan borrowers who took out their loans on July 1, 2014 or at a later date.
The payment amount is determined using the adjusted gross income. Similar to the REPAYE, it is capped at 10 percent of the discretionary income and you must renew your eligibility on a yearly basis.
The income that will be included in the calculation will be determined on whether you filed singly or with your spouse as a married couple.
After 20 years of repayment, you can be eligible for a loan forgiveness. After the loan has been forgiven, the canceled amount will now be considered taxable income but there are instances that you may not have to pay for them. If you are having trouble with managing taxes for a forgiven loan, consult a professional.
Income Based Repayment (IBR)
All Direct Loan borrowers and borrowers under the Federal Family Education Loan (FFEL) Program are eligible for the Income Based Repayment plan. In fact, it is the only repayment option under the Income-Driven Repayment umbrella that is available for FFEL borrowers. If you refuse to be constrained by this limit, you can get around it by consolidating your loans into the Direct Loan program and choosing between the range of Direct Loan IDR plans afterward.
The payment amount is determined based on adjusted gross income. If your income has increased since you qualified for the repayment plan, you can still stay with the plan but your payments will be no more than the 10-year standard monthly payment amount which is based on the balance that you owed when you first entered this repayment option. It is possible for your repayment period to be longer than 10 years but any interest that has accrued will be added to your outstanding loan balance.
If you are filing jointly with your spouse and both of you carry federal student loans, the IBR formula will utilize both your debts and incomes jointly in determining the repayment amount. Otherwise, only the income and debt of the filing individual will be considered. If you file separately, however, you might lose some advantages in tax benefits.
Loan forgiveness is viable after 25 years of repayment. After the loan has been forgiven, the canceled amount will then be considered taxable income but there are instances that you may not have to pay for them. If you are having trouble with managing taxes for a forgiven loan, consult a professional.
Direct Loan Income Contingent Repayment (ICRP)
Only Direct Loan borrowers and those who have accessed the Direct Loan Consolidation Program are eligible for this Income-Driven repayment plan. If you qualify, you will be required to pay no more than 20 percent of any earnings above the poverty level. If you want to know how much repayment you are going to make, you can use the department’s repayment estimator.
If you are married and file taxes jointly with your partner, both of your and your spouse’s income information will be used by the plan to determine your repayment amount.
If you are a Parent PLUS borrower, you cannot choose ICRP as your repayment option but you can consolidate the Plus loans and choose ICRP for the new Direct Consolidation loan afterward.
Forgiveness is possible after 25 years of payment. After the loan has been forgiven, the canceled amount will now be considered taxable income. However, there are instances that you may not have to pay for them. If you are having trouble with managing taxes for a forgiven loan, consult a professional to clear up the matter.