“How to Use Income-Driven Repayment Plans to Manage Your Student Loans”

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What Is an Income-Driven Repayment Plan?

Income-driven repayment (IDR) plans are designed to help you lower your monthly student loan payments by basing them on your income and family size. This can make your payments more manageable and help you avoid late payments or defaulting on your loans. For some borrowers, payments could be as low as $0 per month, and you can still qualify for student loan forgiveness under IDR. Here’s what you need to know.

Types of Income-Driven Repayment Plans

There are four types of income-driven repayment plans:

• Saving on a Valuable Education (SAVE) Plan: Formerly known as the Revised Pay As You Earn (REPAYE) plan, this plan typically requires payments of 10% of your discretionary income. Starting in July 2024, the minimum payments will drop to 5% of discretionary income. Your balance is eligible for forgiveness after 20 years if you have only undergraduate debt, or 25 years if part of the debt paid for graduate school.
• Pay As You Earn Repayment (PAYE): This plan requires payments of 10% of your discretionary income and is always less than what you’d pay under the 10-year Standard Repayment Plan. You may qualify for forgiveness in 20 years.
• Income-Based Repayment (IBR): Payments are capped at 10% of your discretionary income if you became a new borrower on or after July 1, 2014, with a repayment term of 20 years. If your first federal student loan predates that, you’ll pay 15% of your income for a maximum of 25 years. Loans in either case are eligible for forgiveness at the end of the repayment term.
• Income-Contingent Repayment (ICR): Payments will be equal to 20% of your discretionary income or what you would pay on a fixed repayment plan with a 12-year term—whichever is lower. You’re eligible for balance forgiveness in 25 years.

How to Use Income-Driven Repayment to Reduce Your Student Loan Payments

1. Estimate Your Payments

The Federal Student Aid Loan Simulator can help you estimate your payments and compare what you’d pay across plans. This can help you find the best payment plan for you and understand how your payments will affect your balance over time.

2. Consider Balance Forgiveness Taxation

Each income-driven repayment plan is compatible with Public Service Loan Forgiveness (PSLF). If you qualify for PSLF, you’ll only need to make payments for 10 years to be eligible for forgiveness. In contrast, you’ll need to make 20 or 25 years’ worth of payments to qualify for forgiveness through income-driven repayment without PSLF.

3. Factor In Interest

Income-driven repayment plans can put you at risk of negative amortization, which is when your balance grows over time because your monthly payments don’t cover the interest. While this can be concerning, if you’re working toward public service loan forgiveness, negative amortization may not harm you because you won’t be taxed on your forgiven balance.

4. Work With Your Servicer

One easy way to determine which plans you’re eligible for is to ask your loan servicer. You can fill out an application requesting your servicer to put you on whichever of the income-driven repayment plans you qualify for that will set your payments as low as possible.

Additional Ways to Lower Your Student Loan Payments

Consider an Extended Repayment Plan

An extended repayment plan can help you lower your monthly payments by extending your loan term to 25 years. If you don’t qualify for income-based repayment, an extended repayment plan may still be able to help you lower your monthly payments. Keep in mind that you’ll pay more in interest over time by extending your payments.

Consolidate Your Loans

If you have multiple federal student loans with various interest rates, consolidating your loans through the federal government can streamline your repayment. You may also be able to extend your term up to 30 years, which can help lower your monthly payments. Remember that you’ll pay more in interest over time if you extend your term.

Refinance Your Loans

Refinancing student loans through a private lender may be an option for those with good credit and a stable income. Doing so may help you qualify for a lower interest rate, depending on your credit score. However, you’ll forfeit many of the protections federal student loans offer when you refinance with a private lender, so it isn’t a decision to take lightly.

Make a Plan to Pay Back Student Debt

While a calculator can help you figure out your payments, only you can determine if a lower payment now will benefit you in the future. Lowering your payments with an income-driven repayment plan may free up cash now, but make sure you understand how what you pay now will impact the cost of your loan long term.

If you need help understanding your options, contact your student loan servicer or a financial advisor who can lay out the financial implications of loan payment plans. A reputable credit counselor may also be able to help you develop a plan for paying off your student loans. If money’s really tight, consider working with a nonprofit that offers no-cost financial assistance.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We are here to help you with the best mortgage solutions tailored to your needs.

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