Which is the Best Income Driven Repayment Plans?
Income-driven repayment plans might be a good option for you to repay your student loans. This article breaks down different options you might have.
If you're struggling to afford your student loan payments, income-driven repayment (IDR) plans can help free up some room in your budget. By assigning payments based on your income and family size, IDR plans all but guarantee a smoother repayment experience.
There are multiple types of IDR plans, and the right choice for one borrower may be the wrong choice for another. We'll walk you through the available options and help you decide with this simple guide to income-driven repayment.
What is Income-Driven Repayment?
The default payment option for federal student loans is the standard plan, which has a 10-year term. For some borrowers, payments under the standard plan make up a huge portion of their monthly income. This makes it harder for them to reach other financial goals, like buying a house, starting a family, or investing for retirement.
Income-driven repayment (IDR) uses a borrower's income and family size to determine their monthly payment instead of only using their debt total. Loan terms are also longer on IDR plans, but the most crucial difference is that borrowers can have the remaining loan balance forgiven after 20 or 25 years. That option is not available with the extended or graduated repayment plans.
Income-driven repayment options first began in 2007, and new options were introduced during the Obama administration.
Unlike Public Service Loan Forgiveness (PSLF), the remaining balance forgiven on an IDR plan may be treated as taxable income. However, in 2021, Congress passed a law that made IDR forgiveness tax-free through 2025. If your loans will be forgiven in 2025 or before then, you won't owe any taxes. Some student loan experts believe Congress will extend this ruling, but that is still up for debate.
If you have Perkins or FFEL loans, you must consolidate them into a Direct Consolidation Loan to qualify for an IDR plan. Otherwise, only Direct Loans are eligible.
Types of Income-Driven Repayment Plans
All IDR plans determine your monthly payment based on your income and family size. The federal government uses that information to calculate your discretionary income, which is the difference between your annual income and 150% of the federal poverty guidelines for your family size.
Here's how the plans differ:
Income-Based Repayment (IBR)
If you first took out loans before July 1, 2014, then IBR payments will be 15% of your discretionary income. If you took out loans on or after July 1, 2014, then payments will be 10% of your discretionary income. Your monthly payment will never be more than what you would pay on the 10-year standard plan.
The term is 20 years if you're a new borrower on or after July 1, 2014, and 25 years if you became a borrower before July 1, 2014.
Pay As You Earn (PAYE)
PAYE calculates payments as 10% of your discretionary income, and the term is 20 years. Under PAYE, your monthly payment will never be more than what you would pay on the 10-year standard plan, no matter your income.
Revised Pay As You Earn (REPAYE)
With REPAYE, the monthly payment is 10% of your discretionary income. The term is 20 years if your loans were only used for an undergraduate degree and 25 years if your loans were used for both undergraduate and graduate degrees.
With REPAYE, the monthly payment will always be 10% of your discretionary income. If your income increases substantially, the monthly payment under REPAYE may end up being more than what you would owe with the 10-year standard plan. Borrowers with high incomes should be careful about choosing REPAYE as their IDR option.
Income-Contingent Repayment (ICR)
Monthly payments on ICR are either 20% of your discretionary income or the monthly amount you would pay on a fixed 12-year plan. ICR plans are less popular than other IDR options because they often lead to a higher monthly payment. The repayment term is 25 years.
Parents who borrowed Parent PLUS loans can consolidate their loans into a Direct Consolidation Loan to become eligible for ICR, which is their only IDR option.
Which Income-Driven Repayment Plan Is Best?
The best income-driven repayment plan depends on your particular situation, which loans you have, and when you borrowed them.
Fortunately, the federal government provides a loan simulator illustrating which IDR plan will result in the lowest monthly payments and the lowest total repaid over time. Visit the official site to plug in your information.
Refinance Your Student Loans
Each IDR plan requires that you wait 20 or 25 years before your loans are forgiven. If you want to get rid of your student loans sooner rather than later, you can refinance them for a lower interest rate to save money while paying off the balance.
Refinancing student loans through Juno lets you choose from three different lending partners: Earnest, Splash, and Laurel Road. Fixed interest rates start at 2.25% APR, and variable interest rates start at 1.63% APR.
Borrowers who refinance with Earnest or Laurel Road will qualify for an interest rate that is .25% lower than what they would qualify for if they refinanced with Earnest or Laurel Road directly.
Borrowers who refinance with Splash through Juno will get a $500 bonus if they refinance between $50,000 and $150,000, and a $1,000 bonus if they refinance more than $150,000. This bonus is only available if you refinance with Splash through Juno.
Juno can help you find the most affordable possible rates on refinancing student loans. Juno negotiates on behalf of borrowers with partner lenders to help each student qualify for the best refinance rates they can given their financial situation.
Zina Kumok is a freelance writer specializing in personal finance. A former reporter, she has covered murder trials, the Final Four and everything in between. She has been featured in Lifehacker, DailyWorth and Time. Read about how she paid off $28,000 worth of student loans in three years at Conscious Coins.
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