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Is an Income-Driven Repayment Plan Right for You?

Paying down student loans can be a huge financial burden if you’re worried about making ends meet. Luckily, you have several options for repayment—the trick is finding the one that will work best for your unique situation.

Income-driven repayment plans might be the right financial choice for you if you:

  • Can’t afford your current student loan payments.
  • Are worried about defaulting on your student loans.
  • Qualify for Public Service Loan Forgiveness.
  • Have low income but high debt.

If any of these situations is true for you, keep reading.


Which Plan Will Fit Your Situation Best?

There are four different types of income-driven repayment plans. All four of them cap payments between 10% and 20% of your discretionary income and forgive your remaining loan balance after 20 or 25 years of making payments.

Revised Pay As You Earn (REPAYE) plans are best if you:

  • Aren’t married.
  • Don’t have graduate student loans.
  • Have a high earning potential.

Pay As You Earn (PAYE) plans will be best for you if you:

  • Are married and have two incomes.
  • Have graduate student loans.
  • Have a low earning potential.

Income-Based Repayment plans might be your best option if you:

  • Don’t qualify for PAYE.
  • Have FFELP student loans.

Income-Contingent Repayment plans will be best for you if you:

  • Have parent PLUS loans.
  • Want to slightly reduce your payments.

Still not sure which income-driven repayment plan is right for you? Don’t sweat it. When you apply, you’ll have the option to allow your servicer to assign you to the plan that you qualify for and that will give you the lowest monthly payment. If you want to take a closer look at the plans yourself, try out Federal Student Aid’s Loan Simulator.


The Advantages of Choosing an Income-Driven Repayment Plan

The most obvious advantage of choosing one of these plans is that, because your payments are based on your income, you’re unlikely to be overwhelmed by the payment amount. Other advantages include:

  • You will never pay more than what you would have paid on the 10-year Standard Repayment Plan.
  • Payments are evaluated every year and are adjusted to fit your employment situation.
  • Payments are capped at 10% of your discretionary income if you received loan money after July 1, 2014.
  • Payments are capped at 15% if you received loan money before July 1, 2014.
  • You are eligible for loan forgiveness after 20 or 25 years.
  • The plans are available to both undergraduate and graduate students.
  • The plans can be changed.


Keep These Caveats in Mind Before You Commit

Income-driven repayment plans can make your monthly student loan payments more affordable. However, there are a few disadvantages to choosing one of these plans, so make sure you weigh them against the advantages before you pull the trigger.

You’re going to pay more in interest, simply because your term is going to extend past the standard 10 years to 20 or 25 years. That gives interest more time to accrue, which means you’ll ultimately pay more, even if you qualify for loan forgiveness at the end of your term.

You still have to pay taxes on the forgiven balance. Unless you qualify for Public Service Loan Forgiveness, the forgiven amount will be taxed as income.

You’ll need to recertify your family size and income every year. If the size of your family or your income changes, your payments will reflect that change. Don’t miss the recertification deadlines, because you’ll have to pay more until you re-enroll. Typically, interest will then be added to your principal balance.


How to Apply for an Income-Driven Repayment Plan

If an income-driven repayment plan sounds like it’s a good fit for your situation, applying is a relatively straightforward process. Simply fill out an application at studentloans.gov or request an application from your student loan servicer.

To complete the application, you will need to provide:

  • Information about the size of your family.
  • Your most recent federal income tax return or transcript.

If you don’t file taxes, you will need to provide other proof of any taxable income you’ve earned within the past 90 days, such as:

  • Pay stubs.
  • A letter from your employer listing your gross pay.
  • A signed statement explaining your income.

Keep in mind that your loan servicer can put your loans in forbearance while your application is being processed. However, interest will still accrue on your loans, increasing the amount that you owe.


Ready to Apply?

If an income-driven repayment plan sounds like the right financial choice for you, the next step is applying. Talk to your student loan servicer or fill out an application online to get started. Remember: you can change these plans if they are no longer the best option for your situation in the future.


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