For certain federal student loan holders, income driven repayment programs are payment options. As the name implies, your monthly payment is dependent on your salary and family size if you enroll in an Income-Driven Repayment plan. On an income-driven loan plan, the annual contribution would be smaller than the regular repayment plan. For borrowers with little to no wages, the payment may also be zero. There are many positives of income-driven installment schemes, but there are some pitfalls to remember.
For borrowers who are struggling to repay their student loans, especially at the conclusion of the COVID-19 payment delay, the reduced debt payments will make income-driven repayment plans a good choice. However, even though the outstanding debt is forfeiture after 20 to 25 years of repayment, the forgiveness of the loan could be taxable.
What is an Income-Driven Repayment Plan in Masters Degree Loans?
Income-Based Repayment (IBR) is the most commonly available federal student loan income-driven repayment (IDR) option that has been available since 2009. Depending on their salary and family size, income-driven repayment programs will help borrowers keep their debt payments manageable with payment limits. IBR will then, after 25 years of qualifying contributions, repay the outstanding debt, if any.
There are four income-driven repayment plans.
- Income-Contingent Repayment (ICR)
- Income-Based Repayment (IBR)
- Pay-As-You-Earn Repayment (PAYE)
- Revised Pay-As-You-Earn Repayment (REPAYE)
What are the Advantages of Income-Driven Repayment?
Lower monthly payments
This is immense, and the reason many students, in the first place, opt for this plan. It simply means that the premiums would be cheaper than those of a ten-year package if you want to go through an income-based contract. Additionally, for young adults, the first years after graduation are a financially risky time. Instead of digging into your bank account, your wallet would be incredibly useful in paying percentages of your salary.
The remaining balance is forgiven
The outstanding student loan debt is forgiven after 20 to 25 years of payments. The repayment period is based on the form of repayment guided by wages. For ICR and IBR, and for applicants who have secondary school loans under REPAYE, the maturity period is 25 years. For PAYE and creditors who only have undergraduate loans under REPAYE, the repayment period is 20 years. This balance is charged, though, until you apply for forgiveness of a public service loan.
Public Service Loan Forgiveness
You will be eligible to use an Income-Based Repayment Package to help lower your monthly costs if you serve in some public service jobs AND have the remainder on your debt repaid even earlier than those that are enrolled. In particular, the balance will be forgiven in 10 years if you apply, rather than the 20-25 years necessary for jobs in the public sector.
Payments are tied to your income
Income-driven repayment programs encourage you to negotiate a reduction in the monthly cost from your servicer if you have recently undergone a change in the economic situation. On a fixed repayment schedule, if you experience financial distress, such as a work loss or wage cut, you face delinquency and default. Your monthly contribution would reflect your current financial reality with revenue-driven repayment strategies.
Your monthly payments won’t be altered if your income increases
Your principal would remain the same if your salary changes as you are making a repayment plan. The principal is the amount you promised to pay back initially. If your lender checks your account and agrees that payments may rise, your monthly payments could change. Your lender will inform you if the adjustment in your salary will impact your payments.
What are the Disadvantages of Income-Driven Repayment?
Although income repayment programs can make monthly student loan payments more manageable, these measures have some potential disadvantages.
Over time, you’ll pay more interest
Income-driven systems extend the repayment cycle from the normal 10 years to 20 or 25 years. More interest in your loans would accrue if you were going to repay your loan any longer. That ensures that you can pay more for these plans, even if you qualify for forgiveness.
On the forgiven balance, you will pay taxes
You will possibly pay off your loans before redemption kicks in. But, unless you apply for Public Sector Loan Forgiveness, the forgiven amount would be taxed as income if you have a balance left at the completion of the repayment term.
The income of your partner will contribute to the payment sum
if you’re married, the income of your spouse could even be factored into the amount of your student loan payment. Your combined benefit will still be used to measure compensation under the income-driven arrangement if you file taxes jointly. Although if you file taxes separately from your partner, only REPAYE can measure payments using all of your salaries.
You need to qualify every year
There is a requirement for annual paperwork. Every year, borrowers must recertify their income and family size. Your debts will be included in the regular installment schedule if you meet the deadline. The accrued but deferred interest would be capitalized if you file the recertification late, applying it to the loan balance.
You could end up with higher payments
Based on your net income, each income-driven plan changes your monthly payments. As noted above, you may need to recertify your records periodically, and your payment will also adjust depending on this.
You would almost definitely end up with higher student loan costs if you start making more money. Fortunately, two of the programs never expect you to spend more than you can for the Regular 10-year contract, Income-Based Repayment and Pay As You Earn (PAYE).
The other two options, though, do not set any limitations to how high your monthly cost will be. Under those situations, you could end up spending more than you would have on the initial schedule. Likewise, if you quit an income-driven plan, your usual bill will also increase.