Once an individual’s student loans are out of deferment and their grace periods are complete, they’re forced to begin making payments under a formal repayment plan. Repayment plans fall into two broad categories: (i) those that are indifferent to whether you can afford the payments, and (ii) “income-driven” plans that consider your earnings to try and keep the payments affordable. Today we are going to discuss the second category: “income-driven” plans that consider your earnings to try and keep the payments affordable.
- First: Income-Based (IBR) repayments are a derivative of how the government defines your “discretionary income,” using a formula that involves the difference between your adjusted gross income (AGI) and a multiple of the federal poverty level in a given year. If your loans were originated before July 2014, 15% of that discretionary income must be applied to your loans over a twenty-five-year period (300 payments). If your loans were originated after July 2014, those figures change to 10% over twenty years (240 payments) and are sometimes referred to as New IBR payments.
- Next you have Pay-As-You-Earn (PAYE) repayments are fairly similar to New IBR payments, using 10% of your discretionary income to pay down your loans each year for twenty years (240 payments). Your calculated payments can never be larger than what you’d otherwise pay under the Standard repayment plan. Revised PAYE (REPAYE) repayments also use 10% of your discretionary income, but they are not capped in the event they exceed your Standard repayments. Also, a spouse’s earnings are always factored into the discretionary income calculation, even if separate tax returns are filed. Finally, the repayment window is extended to twenty-five years (300 payments) for loans that were used for graduate-level studies.
- Lastly, Income-Contingent (ICR) repayments use 20% of your discretionary income over twenty-five years (300 payments). Payments are capped at what you would otherwise pay over a twelve-year period, with an additional multiplier based on your earnings.
Every situation is unique. If you choose to apply for an income-driven repayment plan, go can to www.studentloans.gov, click on “Repayment & Consolidation,” and then select “Apply for an Income-Driven Repayment Plan.” On the next page, select “start application” and follow the instructions. You will need an FSA ID to complete this process, so if you do not have one already, you will need to create an FSA ID before starting the application.