Many people attending college take out student loans to help defray the cost. While they understand they’ll have to pay the money back, it’s easy to see the repayment as an abstract concept, to be dealt with after graduation, once they have their high-paying dream job.
Too many students are finding out those dream jobs don’t usually exist right after graduation; in fact, college graduates are having a hard time finding jobs at all after graduation, even in the face of a rising economy. The loans, however, still need to be paid back on time, putting graduates in a very precarious position if they are not making enough to cover standard payments. That’s where the income-driven repayment program can help.
What is the Income-Driven Repayment Program?
The income-driven repayment (IDR) program is just what it says – a federal repayment program based upon your income. Depending on how much money you’re earning and what your family size is, your payment would most likely be lower than the standard repayment option. That means more money for living expenses and other bills while you’re looking for that higher-paying job.
IDR doesn’t necessarily forgive your loans or make them go away (except for an exception we’ll talk about later); you’ll still have to pay them back. It does, however, allow you to get some temporary breathing room.
Who Can Apply for IDR?
Most federal student loans qualify for repayment under IDR guidelines. That includes Direct Subsidized and Unsubsidized Loans, Direct PLUS loans, and some Direct Consolidation Loans. FFEL-type loans are only eligible if they are consolidated as are federal Perkins Loans. A few federal loans aren’t eligible at all, including certain types of loans made to parents of students. It’s important that you research the type of loan you have and find out if it’s an eligible type. You can do that on the federal student aid website.
In order to be put on an IDR plan, you need to apply, and you can’t already be in default on any of your loans. This is another reason why it’s so important to communicate with your loan servicing company or the Department of Education as soon as you think there may be a problem with your repayment schedule. Don’t wait until you’re already struggling to talk to your servicer about a new plan.
How Does IDR Work?
The basics of the IDR program are as follows:
- Four different income-based plans exist, each with different terms and criteria.
- Payments are calculated based on a percentage of your discretionary income.
- The term of that program lasts 20-25 years; whatever balance is left over at the end of that time is forgiven.
It sounds straightforward, but let’s take a closer look at some of the individual plans.
The Revised Pay As You Earn Plan takes 10 percent of your discretionary income, defined as the difference between your income and 150 percent of the poverty guideline for your family size. That guideline is based on your state of residence and determined by the U.S. Department of Health and Human Services. If you were pursuing a bachelor’s degree, the REPAYE plan forgives any outstanding balance after 20 years on the plan; if you were a graduate student, that increases to 25 years.
The Pay As You Earn Plan also takes 10 percent of your discretionary income per month, but where the REPAYE plan can sometimes go over the Standard Repayment Plan amount, the PAYE plan does not. This means your payment amount is capped, regardless of how much you earn later. That helps some graduates who enter the PAYE plan and then land a high-paying job. As with the REPAYE plan, the PAYE program lasts 20 years, after which your outstanding balance is forgiven.
The standard Income-Based Repayment plan goes off of the date you became a borrower. If it was on or after July 1, 2014, the plan takes 10 percent of your discretionary income up to the Standard Repayment Plan amount – which effectively caps it much like the PAYE plan. If your loan originated before July 1, 2014, then you’re looking at paying 15 percent of your discretionary income per month. Either way, it’s still capped by the Standard Repayment Plan amounts.
The Income-Contingent Repayment Plan has the simplest eligibility requirements of all – you just need to have direct federal loans to qualify. It also forgives your outstanding balance after 25 years and is the only income-related plan that allows Parent PLUS loans to be included – but those must be consolidated under the direct loan program. The plan pegs payments at 20 percent of your discretionary income, and payments are capped at a standard repayment plan over 12 years.
What Happens to My Interest?
Even if you end up with really low monthly payment, your interest continues to accrue – meaning your balance continues to grow while you’re making those smaller payments (or no payments at all). The government will cover unpaid interest that accrues for three years on some loans, so pay attention to the fine print and make sure you understand what kind of loan you have.
How Do I Know if IDR is Right for Me?
While you might want to go straight to the application page, you’re better off doing a bit of research first. Because some of the plans won’t allow you to count certain types of loans when figuring your total debt, your payments could actually be higher under IDR than if you simply went with a standard repayment. Thankfully, there is a tool that allows you to see what your payments could be under the various income-based programs.
When Should I Apply?
If you’ve already looked into the various programs and decided that one of them is a good option for you, the best time to apply is right away – before you are unable to make your monthly payment. You can find out all you need to know about the various programs by visiting the federal Student Aid website.