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Managing student loan debt is a struggle for many Americans. More than seven million borrowers are in default, and millions more are unable to afford the required minimum monthly payment.
If you have outstanding student loan debt, there two options that can reduce your required monthly payment:
- Enrolling in a government sponsored repayment plan (this article)
- Refinancing your student loans with a private lender
I encourage you to evaluate each available option if you are struggling with your student loan debt.
What is a Student Loan Repayment Plan?
Student loans come in two varieties – federal and private. Most students borrow directly from the federal government, but private lenders have become far more competitive in the last decade, and many offer lower interest rate loans than the federal government right now.
The biggest advantage provided by federal student loans are the government sponsored repayment plans discussed in this article. Private student loans are ineligible for any government repayment plans.
As of 2017, the government offers three traditional repayment plans and four income-based plans. The plan specifications vary considerably, as discussed in the sections below.
Traditional Repayment Plans
There are three traditional repayment plans, none of which are dependent on your income. Borrowers are enrolled in the standard 10-year plan automatically. To enroll in a different plan, you must contact your loan servicer and request the change.
|Plan Name||Repayment Term||Important Notes|
|Standard||10||Fixed, 10-year payment schedule|
|Extended||25||Fixed, 25-year payment schedule|
|Graduated||10||Monthly payment increases every two years|
For the most part, these plans are very similar. The standard plan offers a fixed 10-year repayment schedule where every monthly payment will be the same dollar amount.
The extended plan is identical to the standard plan, but the repayment schedule is 25 years (instead of 10 years). That means your monthly payment will be less, but you will pay more interest over the life of the loan.
The graduated plan retains the 10-year repayment schedule but changes the required monthly payment. Your initial monthly payment is much lower, but the payment amount increases every two years. Even though the early payments are a reduced dollar amount, the loan still accrues interest at the stated rate, which means you will pay more interest over the life of the loan (when compared to the standard repayment plan).
Out of these traditional options, the default standard payment plan is the best option for most people because it minimizes the amount of interest paid.
Income-Driven Repayment Plans
An income-driven repayment plan sets your monthly student loan payment at an amount that is based on your income and family size. Each year you must “recertify” your income and family size, and your required monthly payment amount may increase or decrease if your income or family size changes from year to year.
There are four different income-driven repayment plans available:
|Plan Name||Repayment Term||Monthly Payment (% of discretionary income)||Important Notes|
|Income-Based Repayment (IBR)||20 years if you're a new borrower on or after July 1, 2014.|
25 years if you borrowed before July 1, 2014
|10% if you're a new borrower on or after July 1, 2014.|
15% if you borrowed before July 1, 2014
|If you meet the 2014 requirement, IBR terms are competitive with PAY and REPAYE|
|Income-Contingent Repayment (ICR)||25 years||20%||The worst option on the list, but the only plan available to parent PLUS loan borrowers|
|Pay As You Earn (PAYE)||20 years||10%||The gold standard with strict eligibility requirements|
|Revised Pay As You Earn (REPAYE)||20 years for undergraduates|
25 years for graduate/professional
|10%||Every borrower (with eligible federal direct loans) qualifies for REPAYE|
Maximum monthly payments are set at 10-20% of discretionary income, depending on the plan. Discretionary income is defined as the difference between your Adjusted Gross Income (AGI) and 150% of the poverty guideline for your family size.
With IBR and PAYE plans, your monthly payment amount is based on your discretionary when you first begin making payments. But your monthly payment cannot ever exceed the amount you would pay using the traditional 10-year repayment plan.
If your income ever increases to the point that your calculated monthly payment amount would be more than the 10-year standard repayment plan, you’ll remain on the PAYE or IBR plan, but your payment will no longer be based on your income. Instead, your required monthly payment will be the same amount that you would pay under the traditional 10-year plan.
Under the REPAYE and ICR plans, your payment is always based on your discretionary income, regardless of any future changes in your income.
Income Tax Treatment
PAYE, IBR, and ICR allow you to choose your preferred income tax status. Married individuals can file jointly and have monthly payments based on joint AGI (and combined student loan debt), or file separately and have monthly payments based on individual AGI (and individual student loan debt).
Under REPAYE, married borrowers must use combined household income to determine discretionary income; no option to file separately is provided.
Remember that all income-based repayment plans set your monthly payment as a percentage of discretionary income. Filing jointly will increase your total AGI and discretionary income, but also provide more tax deductions and tax credits. When one spouse has significant student loan debt or significant earnings, there can be a benefit to filing separately.
The easiest way to compare your options is by using the free federal repayment estimator.
Repayment Terms and Loan Forgiveness
Under PAYE and New IBR, if a borrower has not repaid the loan in full after 20 years of qualifying monthly payments, any outstanding balance on the loan will be forgiven. Under the old IBR structure, loan forgiveness requires 25 years of payments.
REPAYE offers loan forgiveness after 20 years if the loans being repaid were borrowed for undergraduate study. If the loans were used for graduate or professional study, the borrower will be required to continue making payments for 25 years before forgiveness of any remaining balance.
With all income-driven plans, any forgiven loan balance will be treated as taxable income (in the year forgiven).
If you qualify, the Public Service Loan Forgiveness (PSLF) program is more generous than the forgiveness offered through income-driven repayment plans.
The PSLF program forgives the remaining balance on your federal loans after you have made 120 qualifying monthly payments under a qualifying repayment plan (all traditional and income-driven repayment plans qualify) while working full-time for a qualifying employer (most government and non-profit organizations). Furthermore, you won’t owe any taxes on the forgiven loan balance, making PSLF a no-brainer if you work for a qualifying organization.
Each of the seven available repayment plans has specific eligibility requirements.
Loan Type Requirements
Direct federal loans, federal consolidation loans, and direct PLUS loans made to students are eligible for all traditional and income-based repayment plans.
PLUS loans made to parents are eligible for all traditional repayment plans, but ineligible for all income-driven repayment plans.
Federal consolidation loans that include Parent PLUS loans eligible for all traditional repayment plans and the ICR repayment plan.
Private student loans are ineligible for all federal repayment plans. The repayment schedule varies by lender.
Loan Date Requirements
To qualify for the PAYE plan, you must be a new borrower as of October 1, 2007, and must have received a direct loan disbursement on or after October 1, 2011.
IBR is available to everyone, but the terms vary by loan date. The better (new) IBR plan is limited to individuals who first borrowed after July 1, 2014.
REPAYE and ICR are available to everyone.
PAYE and IBR require that you demonstrate a “Partial Financial Hardship (PFH)” to establish eligibility.
To satisfy the Partial Financial Hardship condition, the monthly payment you would be required to make under the income-driven plan must be less than what you would pay under the standard 10-year repayment plan. Generally, this will occur when your outstanding loan balance is greater than your annual discretionary income, which is defined as the difference between your Adjusted Gross Income (AGI) and 150% of the poverty guideline for your family size.
REPAYE and ICR do not require that you demonstrate a Partial Financial Hardship (PFH).
Choosing a Student Loan Repayment Plan
Any outstanding federal loan is automatically enrolled in the standard 10-year repayment plan. To choose any other traditional or income-driven plan, you must contact your federal loan servicer and request the change. If you need assistance, you can log into your Federal Student Aid account to view information about your federal student loans and the contact information for your loan servicer.
To determine the best repayment plan for your situation, you can use the free federal repayment estimator and have a discussion with your loan service. If you decide that an income-driven repayment plan is the best option for you, you can apply directly through the official government website.
If you successfully enroll in one of the income-driven plans, you will need to recertify your income and family information each year. Remember that your monthly payment is determined by your discretionary income, which is determined by your family size. If you fail to recertify your information, there are consequences.
If you have private student loans, the only way to reduce your monthly payment is by refinancing your loans at a lower interest rate.
Have you chosen or changed your student loan repayment plan recently? I’d love to hear about your experience in the comments section below.