Income Based Repayment
Every year, hundreds of thousands of students in the U.S. graduate with a high school degree. Notably, a majority of them would not be able to pursue a college or university degree without some sort of financial assistance from the government or other private organization. However, with the cost of education rising, student debt is becoming a real issue for both the students (debtors) and the government (lender). According to one major estimate, the total student debt is in excess of $1 trillion. While student loans must be repaid, in some cases, a debtor may have a hard time paying his/her monthly student loan payments. Therefore, the Income-Based Repayment Plan is designed for students looking to better manage their monthly finances.
Who is Eligible to Apply for IBR?
This plan is for those who need to make lower monthly student loan payments. Those with partial financial hardship are considered eligible for the plan. Furthermore, debtors with the following list of loans may be eligible to apply for the plan:
- Subsidized and unsubsidized Federal Stafford loans
- Direct subsidized and unsubsidized loans
- FFEL consolidation loans without underlying PLUS loans made to parents
- FFEL PLUS loans made to graduate or professional students
- Direct Consolidation loans without underlying PLUS loans made to parents
- Direct PLUS loans made to graduate or professional students
The following loans are not eligible:
- Private education loans
- Consolidations loans that include underlying PLUS loans made to parents
- PLUS loans made to parents
Advantages and Disadvantages of IBR
Some of the many benefits of the plan are:
- Monthly payments based on debtor’s discretionary income
- Interest payment benefits
- 10-year public service loan forgiveness
- 25-year forgiveness
- Limitation on the capitalization of interest
Some of the disadvantages are:
- Taxes need to be paid on any loan amount that is forgiven after 25 years
- Submission of annual documentation
- Paying more interest due to increased number of payments
While IBR does not cover private loans, our website does. Regardless of your financial hardship, visit SimpleTuition and click on the refinance widget, which will provide you with information on how to make your finances more manageable, leaving you with enough each month to enjoy life to the fullest.
How do I get started with the Income-Based Repayment Plan?
The Income-Based Repayment plan is a new payment option for student loan borrowers, intended to help those who have a high debt level compared to their income. It was created to help people who have a hard time making their student loan payments in a typical 10-year repayment plan. If you have federal student loans, such as Stafford or GradPLUS loans, you may be able to reduce your monthly payments. You may even be able to eliminate your student loan payments altogether, depending on your income and the size of your family.
Do borrowers still have to pay interest on student loans with the Income-Based Repayment Plan?
The answer depends on your situation. In some cases, your new, reduced student loan payment may not cover the interest that has accrued on your student loans. If that’s the case, the government will pay that interest on your Subsidized Stafford Loans for the first three years you take part in the Income-Based Repayment plan. After three years, and for all other loan types that are part of the plan, the interest will be added to the total amount you owe, just like any other type of loan repayment.
This means that your debt may grow if your reduced payments are low enough. However, any interest you still owe after 25 years of making qualifying payments will be forgiven.
Income Sensitive Repayment Plans
Income sensitive repayment plans are alternatives to income contingent plans as a means to provide repayment of money that was taken for college funding. As suggested by the name, income sensitive repayment allows people who have used the Federal Family Education Loan Program (FFLEP) to decide what percentage of their income should go towards making a repayment on the loan.
How it Functions
Income Sensitive Repayment (ISR) work by setting up plans that focus on a fixed rate payment basis. This rate is usually fixed somewhere between 4% and 25% and you will have the advantage of selecting the rate that suits you (payment is always either equal to or greater than the interest that accrues). Even then, you must keep in mind that payments will eventually increase over time, as they will change when your income changes.
It is essential for borrowers to reapply to the income sensitive repayment plan every year. When reapplying you must also make sure that you have the paperwork regarding your income tax returns and/or W-2 statements, since these documents are mandatory for the application to be made.
How Income Sensitive Repayment Effects Repayment
Income sensitive repayment works to decrease the monthly payment when compared to the standard method of repayment. Standard plan’s limitation to a ten-year repayment plan impacts the size of the monthly payments by increasing the amount of the payments. Therefore, you should understand that with an income sensitive plan you would be paying a larger amount at the end of the allotted time frame as compared to the standard repayment method. In other words, under the income plan, you will have to pay much more in the way of interest. If you are considering the income sensitive repayment plan, then you should also look into others such as the extended or graduated repayment options, which might prove to be more beneficial.
Income Contingent Repayment Plan
Income contingent repayment (ICR) plans have been designed specifically to cater to students who might have a low income in the future. These students usually wish to pursue a career in a government field or in public service, which means that they might be earning less than those working in other fields. For such students, the government wishes to make repayment of student loans easier by providing the option of the income contingent repayment plan. Notably, ICR bases its repayment calculation on the borrower’s income, family size and the total amount borrowed. The monthly payment, which is calculated and decided annually, is subject to change in cases of changes in the family size or in family income, making it easier for students to return loans.
How ICR Plans Function
Income contingency repayment plans are options of loan repayment made available by the U.S Department of Education and they are effective alternatives to Income Sensitive Repayment (ISR). Take note: these types of loans may take up to a time span of 25 years to complete, but keep in mind that after the allotted 25 years, the remaining loan is discharged. (However, the debt that is discharged is treated as taxable income by the government, which means that you will be liable to pay taxes 25 years from the time the loan is initiated.) Overall, this plan will give you enough time to save when you start your career and since the payable tax after the allotted 25 years is the net present value of the tax, you will find the relatively small amount easier to pay.
Since the interest rate is fixed throughout the course of the repayment plan, you will find that the sum payable every year will not increase by much and that it will be payable at a rate much lower than others. Furthermore, with this method of repayment, you will be able to reap the benefits of 10% capitalization on interest.
Income Contingent Repayment Calculator
The ICR calculator is an invaluable comparison tool, which is available online and that is also free to use. It can be used to compare paying off an eligible loan under the ICR plan and other standard repayment options. When using the calculator, all fields must be filled in. Zeroes must be entered into the fields where there is no other value to put in. Commas, decimals, and dollar signs may not be used. Once all the values are filled in, you must click the calculator button, which will give the student estimated initial monthly payment amounts for each repayment plan, helping the student to make an educated decision when choosing the right repayment plan.