Student loan debt has been a topic of discussion by the media and politicians in the past few years. While some claim that student loan debt is crippling, there are repayment options available which can help student loan borrowers ease the burden of repayment. Here we examine the differences between the various student loan repayment options as well as common Q&As about student loan repayment plans.
Income-Based Repayment (IBR)
Income-Based Repayment is generally considered less favorable for borrowers than other options. However, if you are a Federal Family Education Loan Program (FEEL) borrower, this is the only option you have available. Your payment is based on adjusted gross income for IBR. You can stay in IBR even if you stop qualifying due to increases in your income – at which time your payments will be no more than the standard 10-year monthly amount.
Income-Contingent Repayment (ICR)
Under an Income-Contingent Repayment plan, your monthly payment will be the lesser of two options – 20 percent of your discretionary income, or the amount you would pay on a repayment plan with a fixed payment over 12 years, adjusted according to your income. Payments are updated every year based on changes to income, family size, and the total amount of your loans. Any outstanding balance on your loan will be forgiven after 25 years. This is a repayment option available to parents who borrowed PLUS loans as well.
Pay as You Earn (PAYE)
To qualify for Pay as You Earn, you must be a new borrower on or after October 1, 2007. You must have also received a Direct Loan disbursement on or after October 11, 2011. To qualify, you must also have a high debt relative to your income. Under this plan, your monthly payments will be 10 percent of your discretionary income, but never more than you would have paid under the 10-year Standard Repayment Plan. Payments are recalculated every year based on updates to your income and your family size. Any outstanding balance remaining on your loan will be forgiven in full after 20 years (undergraduate) or 25 years (graduate or professional).
Revised Pay as You Earn (REPAYE)
Any Direct Loan borrower may choose this plan. Under a Revised Pay as You Earn plan, your payment will be 10 percent of your discretionary income. Payments are recalculated every year and are based on updates to both your income and your family size. Any outstanding balance remaining on your loan will be forgiven in full after 20 years (undergraduate) or 25 years (graduate or professional).
Student Loan Forgiveness – How to Qualify & Enroll
There are a few ways to have your student loans forgiven, cancel them, or discharge them. In any of these scenarios, you may no longer be required to make payments on your loan. However, these scenarios are very specific.
The common types of student loan forgiveness include:
- Public Service Loan Forgiveness
- Teacher Loan Forgiveness
- Closed School Discharge
- Total and Permanent Disability Discharge or Discharge Due to Death
For Public Service Loan Forgiveness (PSLF), individuals who are employed by a government or not-for-profit organization may be able to receive loan forgiveness. PSLF forgives the remaining balance on your Direct Loans after you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer.
Teacher Loan Forgiveness is offered to teachers who complete five full consecutive years teaching at a low-income elementary school, secondary school, or educational service agency. These teachers may be eligible for forgiveness up to $17,500 on Direct Loans or FEEL Program loans.
A closed school discharge may be available if your school closes while you’re enrolled or soon after you withdraw. Additionally, if you become totally and permanently disabled, or die while making loan payments, you may qualify for a discharge of your federal student loans.
To apply for forgiveness, cancellation, or discharge, you’ll need to contact your loan servicer. Depending on the type of forgiveness you’re applying for, you may have to make payments during the application process and review to qualify.
How is income-based student loan repayment calculated?
Income-based student loan repayment is calculated based on your income and number of dependents. If you are married, your spouse’s income, as well as any student loan debt they may have, is also taken into consideration.
Is income-based repayment a good idea?
If you are currently struggling financially, income-based repayment can ease the current financial hardship that student loans may be imposing. However, in almost every case, the borrower will end up paying more than he or she would have on a Standard Plan, and you likely will have to pay income tax on any forgiven loan amount and thus, it is not the most financially savvy move if you can afford the full payment.
How do you qualify for student loan forgiveness?
Qualifying for student loan forgiveness is not easy, and most people do not qualify. It is only available to those who work in public service, teachers, those who become permanently disabled, or those who die. You may also qualify if your school closes while you’re attending or shortly thereafter, although that is not common.
Some of your loan amount may be forgiven after 20-25 years of paying them back via an income-based repayment plan.
How many years do you have to wait before student loans can be forgiven?
The minimum amount of time that you must wait before student loans can be forgiven is 5 years if you are a teacher. For those in public service, it is 10 years. For those in income-based repayment plans, it is 20 to 25 years, depending on the plan and the types of loans involved.
Should I Apply for Income-Based Repayment on My Student Loans?
Whether or not income-based repayment is right for your financial situation depends on a variety of factors. If you cannot currently afford your monthly loan payments, and your other option is to default on your loans, then applying for an income-based repayment plan makes complete sense.
On the other hand, being involved in an income-based repayment plan means that you will be paying your loans back over a longer term and you will likely pay more due to increased interest amounts. You also will have to pay income tax on any portion of your loans that are forgiven, if you are paying longer than 20 to 25 years. If you can afford to pay back your loans under a standard plan, that is the most advisable option.