One of the most flexible and popular student loan repayment options is the Income-Driven Repayment (IDR) Plan. This is the best choice if you want to make affordable monthly payments. If you want to understand how it works, you’ll need a guide to Income-Driven Repayment plans.
This guide will help you explore each type of IDR plan as a reference to choose the option that best fits your financial situation. Moreover, these repayment plans also open up opportunities for loan forgiveness after 10 to 25 years of repayment, depending on the type of plan and loan you have.
Here is a Guide to Income-Driven Repayment Plans
Although there are several types of IDR plans, they all generally work the same way. Your monthly payment is determined based on your income and family size. As a result, your payment amount can increase or decrease depending on your circumstances each year.
1. Income-Based Repayment (IBR)
The IBR Plan is available for most Direct Loans and FFEL Loans. However, it is not available for Parent PLUS Loans or for a Consolidation Loan if that loan was used to pay off a Parent PLUS Loan.
There are two repayment schemes under this plan:
- 10% of your discretionary income per month if you borrowed on or after July 1, 2014.
- 15% of your discretionary income per month if you borrowed before July 1, 2014.
It’s important to note that your monthly payment under this plan will never exceed what you would have paid under the Standard 10-Year Repayment Plan. The repayment period typically ranges from 20 to 25 years, with the possibility of loan forgiveness once the term ends.
The main advantage of the IBR plan is that it keeps your monthly payments relatively low, especially if you have limited income. In addition, IBR is the only IDR plan available for borrowers with FFEL loans.
Also Read : Finding Student Loans with Bad Credit or No Co-signer
2. Pay as You Earn (PAYE)
Student loans that qualify for the PAYE plan include Direct Subsidized Loans, Direct Unsubsidized Loans, Direct Grad PLUS Loans, and Direct Consolidation Loans, excluding Parent PLUS Loans.
Under this plan, your monthly payment is set at 10% of discretionary income, with the same condition as IBR, which is never higher than what you would pay under the Standard 10-Year Repayment Plan.
In addition, you may be eligible for forgiveness of any remaining loan balance after 20 years of qualifying payments.
Also Read : What is a Parent PLUS Loan and How to Apply
3. Income-Contingent Repayment (ICR)
The next Income-Driven Repayment guide is ICR, which is eligible for all types of Direct Loans, except Parent PLUS Loans. These loans only qualify if you consolidate them into a Direct Consolidation Loan.
ICR limits your monthly payment to either 20% of your discretionary income or a fixed repayment plan over 12 years, adjusted according to your income. Furthermore, the ICR repayment term is 25 years, after which you may qualify for forgiveness of any remaining loan balance.
In general, ICR is not highly recommended unless you are a borrower with Direct PLUS Loans. This is because the monthly payments under ICR tend to be higher compared to other IDR plans.
4. Saving on a Valuable Education (SAVE)
SAVE is the most borrower-friendly repayment plan because it offers lower installments, even $0 if your income is less than 225% of the Federal Poverty Line for your family size.
If your income exceeds that threshold, payments are set at 5% of discretionary income for undergraduate loans and 10% for graduate loans. For borrowers with a mix of both, the percentage is calculated proportionally and falls between 5% and 10%.
Besides having the most affordable monthly installments compared to other IDR plans, another major advantage of SAVE is that the government covers any unpaid monthly interest. This prevents your loan balance from ballooning over time.
Also Read : Guide to Finding the Best Student Loan Repayment Plans
Ready to Choose Your Income-Driven Repayment Plans?
By understanding the guide to Income-Driven Repayment Plans, you can evaluate which option best fits your financial goals and income level. From IBR, PAYE, and ICR to SAVE, each plan comes with its own pros and cons.
Once you have a clearer idea of which plan to choose, remember to update your income and family size every year. This information is essential to determine your monthly payment amount. Failing to do so could result in your monthly payments reverting to the standard repayment amount that can potentially increase your costs significantly.
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