If your student loan bills are devouring a big chunk of your paycheck, an income-driven repayment plan could bring you relief, lowering your monthly payment to something much more affordable.
But with four different income-driven repayment plans to choose from, how do you know which is the best for your situation?
After all, at first glance, they look remarkably similar.
But while these plans share a lot of similarities, they also have some key differences that could make a major impact on how much you pay each month.
Here are some tips on choosing the best income-driven repayment plan for you, depending on your individual circumstances.
To find out which might be the best fit, click on the link below if …
… you want the lowest monthly payment
… you borrowed loans after Oct. 1, 2011
… you borrowed loans after July 1, 2014
… you expect your income to increase significantly over time
… you’re married and file taxes together with your spouse
… one or more of your loans was used for graduate school
… you have a Parent Plus loan
Income-driven plans adjust your monthly payments based on your income and family size. To calculator your monthly payment, most plans look at your discretionary income, which is defined as the difference between your overall income and 150% of the federal poverty guideline.
For example, the 150% guideline for a single person in 2019 is $18,735. So, if you make $30,000, your discretionary income would be $11,265. On an income-driven plan, your payment would be capped at 10%, 15%, or 20% of that total, or between $1,127 and $2,253.
If you’re looking for the lowest monthly payment, PAYE or REPAYE could be your best options, since they cap your bills at 10% of your income. IBR could also reduce your payment to 10%, but only if you were a new borrower on or after July 1, 2014.
While this consideration still leaves you with several options, it’s a good place to start. What’s more, Federal Student Aid can help you find a plan with the lowest payment when you submit your application.
When you fill out your application, you can choose “I want the income-driven repayment plan with the lowest monthly payment” so the system can choose the right plan for you. But if you want to understand why one plan stands out over another, read on to learn about more important differences among the income-driven repayment plans.
Although the PAYE plan, along with REPAYE and IBR, can reduce your payments to just 10% of your discretionary income, you can only qualify if you borrowed student loans at the right time.
To be eligible for PAYE, you can’t have had an outstanding balance on a Direct or FFEL loan on or after Oct. 1, 2007. And your current Direct loans must have been disbursed on or after Oct. 1, 2011. If you received loans before this date, you can’t qualify for PAYE.
So if you’re a relatively new borrower, PAYE could be the best income-driven repayment plan for you, as it lowers your monthly payment to 10% and caps your repayment term at 20 years. (Some of the other plans go up to 25).
But if your loans are older, you’ll probably gravitate toward one of the other income-driven plans instead.
In addition to October 2011, you should also pay attention to a second date: July 1, 2014. The IBR plan also considers when you borrowed your student loans, and if you borrowed after this date, your payment will be capped at 10%, with a repayment term of 20 years.
But unfortunately, if your student loans predate July 1, 2014, your monthly bill will be 15% of your income. What’s more, your term will span 25 years, leaving you in debt for an additional five years before you see any loan forgiveness.
So not only will you have more the pay each month compared to a post-2014 borrower, but you’ll pay extra interest since you’ll be in debt for five additional years. If your loans are pre-2014, then PAYE or REPAYE would likely save you more money than an IBR.
While you should consider which is the best income-driven plan for saving money today, it’s also important to look into your financial future.
Most plans require you to recertify your eligibility on an annual basis, and they adjust your payments if your income or family size changes.
If your family grows but your income stays the same, for example, your payment might go down. But if the opposite happens and you start making more money, your monthly payment could increase as a result.
On the REPAYE plan, your monthly payment could increase without limit. If your income suddenly doubles, your student loan bill could do the same. In fact, you could even end up paying more on this plan than you would under the standard 10-year plan.
But PAYE and IBR don’t let this happen, because they have a built-in cap to your monthly payment. No matter how much your income grows, your monthly payments will never exceed the amount you would pay on the standard 10-year plan.
These plans can be especially helpful for doctors, who make a relatively low salary while in residency but then see a big jump in income as they move further along in their career path. If you expect to see your income rise in the future and want to keep your student loan payments low, PAYE or IBR would likely be a better option than REPAYE.
When choosing the best income-driven repayment plan, another consideration is your marital status. The REPAYE plan takes both your and your spouse’s income into account when you apply. Combining incomes could mean your student loan bill gets a lot higher.
But PAYE and IBR don’t take spousal income into account, so your payment will remain based on your income, and only your income. If you file taxes with a spouse but don’t want your student loan plan to be based on two incomes, opt for the PAYE or IBR plan rather than REPAYE.
If you’ve still got a balance left over after 20 or 25 years on an income-driven repayment plan, the remainder may be forgiven. You’ll have to pay taxes on the forgiven amount, but otherwise you can kiss that student loan debt goodbye.
However, the amount of time until your loans are forgiven could vary depending on whether they were used for your undergraduate education or for graduate school. If you have even one graduate school loan, your terms on REPAYE increase to 25 years, rather than the 20-year term for undergraduate loans.
So before choosing REPAYE, consider what you used your loans for. If they were graduate school student loans, REPAYE would switch from being one of the most affordable options to one of the more expensive ones. In this case, you might want to look at PAYE or IBR instead.
If you’re looking to put a Parent Plus loan on income-driven repayment, your choice is easy: Pick the ICR plan. That’s because ICR is the only plan that Parent PLUS loans qualify for — and you have to consolidate them first.
To make your Parent Plus loan eligible for ICR, you first must apply for Direct Loan Consolidation. Then you can choose the ICR plan, which adjusts your bill to 20% of your discretionary income and offers loan forgiveness after 25 years of on-time repayment.
Finding the best income-driven repayment plan for you
So, which is the best income-driven repayment plan? For most borrowers, REPAYE, PAYE, or IBR are better options than ICR, since they could give you lower monthly payments.
And PAYE seems to have a slight edge over REPAYE and IBR, since it lowers your payments to 10% and sets your term at 20 years, rather than 25. But to qualify for PAYE, you must be a relatively new borrower. Those with older student loans could do better with another plan.
Whatever you choose, remember that you must recertify your eligibility every year to stay on the plan. At this time, you can also switch to a different income-driven plan if your current one no longer meets your needs.
At the same time, don’t forget that lowering your bills and extending your terms means you pay more interest in the long run. Although an income-driven plan could save your finances today, you might consider other strategies for paying off your debt in the future.
Before restructuring your debt, use our income-based repayment calculator to estimate exactly what your new repayment plan will cost. By crunching the numbers, you’ll have a clear sense of the short- and long-term effects of changing your student loan repayment plan.
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