You may have heard the term "income based repayment" if you have been looking into ways to afford the payments on your federal student loans. But what does that mean to you? Can (or will) it help you? Well, the higher your loan balance and the lower your income, the more likely it is that the answer will be "yes."
Obviously, "income based repayment" is a repayment plan based on your income. But how does it work? Well, the philosophy behind these plans is that your monthly payment should not exceed 15% (in some instances 10%) of your "disposable income."
This prevents your student loan from consuming the money you need to live. There are three types of income based plans depending on the type of loan and when it was taken out.
Income Based Repayment (IBR). This is for loans taken out by the student, not the parent, under the Stafford, Perkins, or Graduate PLUS program. However, Perkins loans can only be a part of this if they are consolidated with Stafford and/or Graduate PLUS loans.
It calculates a payment based on household income (most often determined by your Adjusted Gross Income for the previous tax year), loan balance, and family size. This aims to keep your monthly payment at or below 15% of disposable income, and can extend your repayment period up to 25 years. Any balance remaining at that point is forgiven.
Pay As You Earn (PAYE). This is the new form of IBR, in which the payment cap is 10% instead of 15%, and the maximum payment plan before forgiveness is 20 years, instead of 25. Everything else is the same. However, to qualify for this repayment plan you must not have any federal student loan balances as of October 1, 2008, and new loans were taken out after October of 2011.
Revised Pay As You Earn (REPAYE). The government later revised the PAYE program to expand it beyond new borrowers, and can be an option for you. The good news is that it has the same cap of 10% of disposable income, shortened repayment period of 20 years (only on undergraduate loans).
The bad news is, the payments are based on the borrower’s and spouse’s AGI, even if you file separate tax returns, the term is up to 25 years for graduate or professional school loans, and worst of all, the payment cap is 10% of disposable income even if your 10 year fixed payment is lower! For this reason, I generally recommend that if you are a “new borrower,” you pick IBR for your plan to get the same 10% cap without the REPAYE restrictions.
Income Contingent Repayment (ICR). This is a repayment plan, essentially, for the parents, who took out Parent PLUS loans for their children that are not eligible for IBR. This plan is only available for Direct Loans and not those obtained through the FFEL Program (Federal Family Education Loan).
If you have a FFEL loan or loans, you can consolidate them into a Direct Loan to get ICR. Just do not consolidate them with Stafford, Perkins, or Graduate PLUS loans, or you will make those loans ineligible for IBR. Same 15% cap and 25 year repayment period.
How Can I Find Out More?
If you live in southern New Jersey and are looking for a more affordable repayment plan, please feel free to call my office at 856-432-4113 or contact me through this site to schedule an appointment in my Woodbury office to discuss your case.
If you would like more information about student loans, you can dowload my free book, I Graduated; Now What? A Guide to Dealing with Your Student Loans.
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