Income-driven repayment: A loan-forgiveness requirement

As a nonprofit employee, you may qualify to receive Public Service Loan Forgiveness (PSLF), but first you must be enrolled in an income-driven repayment plan.

If your standard federal student loan payments are high compared to your income, you may want to repay your loans under an income-driven repayment plan. Most federal student loans are eligible for at least one of the four income-driven repayment plans detailed below. An income-driven repayment plan adjusts your monthly student loan payment for affordability, based on your income and family size. In some cases, your payment could be as low as $0 per month.

An income-driven repayment plan adjusts your monthly student loan payment for affordability… in some cases, as low as $0 per month.

There are four income-driven repayment plans. Be sure to review them all before pursuing any one in particular:

1. Income-Based Repayment
2. Pay As You Earn (PAYE)
3. Revised Pay As You Earn (REPAYE)
4. Income-Contingent Repayment

Income-Based Repayment

Income-Based Repayment (IBR) is a federal student loan repayment program that adjusts the amount you owe each month based on your income and family size. With IBR, monthly payments will be capped at a certain percentage of your discretionary income, or the amount you would pay under the 10-year Standard Repayment Plan. The percentage rate depends on when you took out the loan and whether you had existing federal student loans.

If you borrowed your first loan before July 1, 2014, your payment is 15% of your discretionary income. If you borrowed on or after July 1, 2014 and you are a new borrower, or had no outstanding federal student loan balances when you received the new loan, you pay 10% of your discretionary income.

Your IBR payment will be lower if your federal student loan debt is high relative to your income and family size. In addition, if you have a subsidized loan, and your monthly IBR payment is less than the interest that accrues each month, the government will pay the difference for the first three years and your overall balance won’t increase.

While your loan servicer will perform the official calculation, you can use the Repayment Estimator provided by the Department of Education (DOE) to estimate whether you are likely benefit from an IBR plan. To apply, first contact your servicer to see if you qualify. Many borrowers with federal student loans can enroll online. Because your monthly payment is based on your current income and family size, you must submit documentation to your servicer each year to remain in the IBR program.

Any remaining balances are forgiven after you make payments for 20 or 25 years. However, the IRS considers the loan balances forgiven to be taxable income. If you expect that you cannot manage the tax implications, contact the IRS to discuss your options.

Pay As You Earn

Created by the Obama administration, Pay As You Earn (PAYE) is a federal student loan repayment plan that caps your monthly federal student loan payment at 10% of your discretionary income. PAYE is now available to some borrowers with newer federal loans. (Note that Income-Based Repayment is currently available for all student loan borrowers, and caps your monthly payment at no more than 15% of your discretionary income.)

For borrowers who qualify for PAYE, monthly loan payments will be two-thirds of what they would typically be under IBR. Additionally, after 20 years of monthly payments, any remaining student loan balance is forgiven. PAYE is also an eligible repayment plan for borrowers seeking to qualify for Public Service Loan Forgiveness.

To determine whether or not you qualify for PAYE, check the Pay-As-You-Earn calculator created by the DOE. In order to qualify for PAYE, you need to have borrowed your first federal student loan after October 1, 2007, and you need to have borrowed a Direct Loan or a Direct Consolidation Loan after October 1, 2011. You also need to demonstrate partial financial hardship.

Revised Pay As You Earn

The Revised Pay As You Earn program (REPAYE) eliminates the “demonstrated financial distress” and date-of-borrowing requirements. Under REPAYE, no matter your salary, your payments will never be more than 10% of your discretionary income; in addition, you can qualify for REPAYE regardless of when you took out your Direct Loan. Like PAYE, you still receive loan forgiveness after 20 years of qualified payments (or 25 years of payments on a Grad PLUS loan). Also like PAYE, participation in REPAYE makes you eligible for the Public Service Loan Forgiveness program, which could forgive your loans after just 10 years.

Under Revised Pay As You Earn, no matter your salary, your payments will never be more than 10% of your discretionary income.

The primary benefit of the REPAYE plan is that it is open to anyone who borrowed from the Direct Loan program (with the exception of parents who used PLUS loans), no matter when or how much you borrowed. The list of qualified William D. Ford Federal Direct Loan programs includes Direct Subsidized and Unsubsidized Loans; Direct PLUS loans not made to parents; and Direct Consolidation Loans that do not include PLUS loans made to parents.

As with other plans, payments on the REPAYE program are recalculated every year based on your income and family size. If you are married, both you and your spouse’s income and loan debt are figured in the calculations.

Income-Contingent Repayment.

Any borrower with eligible federal student loans can make payments under the Income-Contingent Repayment (ICR) plan. This is the only income-driven repayment option available for parent PLUS loan borrowers. Before they can take advantage of ICR, however, parent borrowers must consolidate their Direct PLUS Loans or Federal PLUS Loans into a Direct Consolidation Loan, and then repay the new consolidation loan under the ICR Plan. (Note that a consolidated loan including a PLUS loan is not eligible for any other income-driven plan.)

Another option: Loan deferment and forbearance

If your inability to repay your loans is caused by a temporary setback, a deferment or forbearance may make more sense than an income-based repayment plan. If your circumstances qualify for a deferment or forbearance, it will allow you to “pause” your federal student loan payments or to temporarily reduce the amount of your payments. The main difference between deferment and forbearance regards interest: Depending on the type of loan involved, a deferment may relieve you from paying the interest that would otherwise accrue during that time; under forbearance, principal payments are postponed but interest continues to build, adding to your total debt.

Adapted from this article by the Consumer Financial Protection Bureau

FOR MORE INSIGHT

On student loan repayment
Learn about how, when, and to whom you make your federal loan payments (Office of Federal Student Aid)
Repay student debt (Consumer Financial Protection Bureau)
Income-driven repayment plans (Office of Federal Student Aid)
Choose the loan repayment plan that’s best for you (Office of Federal Student Aid)

On student loan deferment or forbearance
Find out if you qualify for a deferment or forbearance (Office of Federal Student Aid)
Know when it’s OK to postpone your student loan payment (U.S. News & World Report)

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