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  • Writer's pictureLisa Gosweiler

What the heck are Income Driven Repayment Plans?

Income-driven repayment plans are a type of repayment plan available for federal student loans. These plans adjust the borrower's monthly loan payment based on their income and family size, making it more affordable for borrowers who have lower income levels. There are four income-driven repayment plans currently available for federal student loans:

  1. Income-Based Repayment (IBR): This plan caps the borrower's monthly payment at 10-15% of their discretionary income, depending on when the loan was taken out. The borrower must have a partial financial hardship to qualify. The remaining borrower's loan balance will be forgiven after 20-25 years of payments.

  2. Pay As You Earn (PAYE): This plan caps the borrower's monthly payment at 10% of their discretionary income and forgives any remaining loan balance after 20 years of qualifying payments. The borrower must have a partial financial hardship to qualify.

  3. Revised Pay As You Earn (REPAYE): This plan caps the borrower's monthly payment at 10% of their discretionary income, but does not require a partial financial hardship to qualify. Under this plan, the borrower's spouse's income is also taken into account, even if they file their taxes separately.

  4. Income-Contingent Repayment (ICR): This plan caps the borrower's monthly payment at 20% of their discretionary income or the amount the borrower would pay on a fixed 12-year repayment plan, whichever is less. The borrower's payment amount is recalculated annually based on their income and family size. The borrower's loan balance can be forgiven after 25 years of payments.

Under all IDR plans, any remaining loan balance is forgiven after a certain number of qualifying payments, typically 20-25 years, depending on the plan. However, any forgiven amount may be subject to income tax.

IDR plans can be helpful for borrowers who have a high amount of federal student loan debt relative to their income, as they can lower monthly payments and provide a path to loan forgiveness. It's important for borrowers to carefully consider the terms and conditions of any IDR plan before enrolling.

To enroll in an income-driven repayment plan, borrowers must submit an application and provide documentation of their income and family size. The plan must be renewed annually, and borrowers must continue to provide documentation of their income and family size to remain enrolled in the plan.

It's important to note that while income-driven repayment plans can make monthly payments more affordable, they may also increase the total amount of interest paid over the life of the loan. Borrowers should carefully consider their options and consult with their loan servicer before enrolling in an income-driven repayment plan.

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