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7 Main Steps For Managing Student Loan Debt After Graduation

Graduating from college can be a huge milestone, but it often comes with a hefty sidekick—student loan debt. For many people, paying off that debt can feel overwhelming, especially if the monthly payments are high compared to their income. That’s where Income-Driven Repayment (IDR) Plans come in. These plans are designed to make student loan payments more manageable by basing your monthly payments on your income and family size, rather than the total amount you owe.

In this blog post, we’ll dive into what income-driven repayment plans are, how they work, and what benefits they offer to help you manage your student loan debt more effectively.

What Are Income-Driven Repayment Plans?

Income-Driven Repayment Plans are federal student loan repayment options that cap your monthly loan payments at a percentage of your discretionary income. Essentially, the less you earn, the lower your monthly payment will be. If your income is low enough, your payment could even be as little as $0 per month.

These plans are available to borrowers with federal student loans, and they provide relief by extending the repayment term and reducing the monthly financial burden. There are four main types of Income-Driven Repayment Plans:

Saving on a Valuable Education (SAVE) Plan

Pay As You Earn (PAYE) Plan

Income-Based Repayment (IBR) Plan

Income-Contingent Repayment (ICR) Plan

Each plan has slightly different eligibility requirements and terms, so it’s important to understand which one might be the best fit for you.

How Do Income-Driven Repayment Plans Work?

Income-driven repayment plans adjust your monthly payments based on your income and family size. Payments are typically set between 10% and 20% of your discretionary income, depending on the specific plan you choose. Your discretionary income is the difference between your adjusted gross income and 150% of the federal poverty guideline for your family size and state of residence.

Here’s how it works in a few simple steps:

  1. Submit Your Income Information: To apply for an IDR plan, you’ll need to provide proof of your income, usually by submitting your tax returns or pay stubs. If your income changes over time, you’ll need to update your loan servicer with your new information so they can adjust your payments.

 

  1. Calculate Your New Monthly Payment: Based on your income and family size, the plan will calculate your monthly payment. This amount will likely be much lower than what you would pay under a standard repayment plan, especially if your income is low relative to your debt.

 

  1. Make Adjustments Annually: Every year, you’ll need to recertify your income and family size. Your monthly payment will be adjusted accordingly if your income changes or your family grows. If your income increases significantly, your payment will also increase.

 

  1. Extended Repayment Period: Most income-driven plans extend the repayment period to 20 or 25 years. After this period, if you still have a balance remaining, it may be forgiven.

Types of Income-Driven Repayment Plans

Saving on a Valuable Education (SAVE) Plan

  1. Payment Amount: The SAVE plan offers payments that are capped at 5% of your discretionary income for undergraduate loans. For borrowers with both undergraduate and graduate loans, the payment will be based on a weighted calculation using 5% for undergraduate loans and 10% for graduate loans.

 

  1. Repayment Period: The repayment period under the SAVE plan is 20 years for undergraduate loans and 25 years for loans that include both undergraduate and graduate loans. After making qualifying payments for this period, any remaining loan balance will be forgiven.

 

  1. Eligibility: The SAVE plan is available to borrowers with federal direct loans, making it accessible to a wide range of federal student loan borrowers. This includes people who have older loans or more recent loans, as long as they have direct loans.

 

  1. Interest Subsidy: One of the standout features of the SAVE plan is its interest subsidy. If your required monthly payment doesn’t cover all the interest that accrues on your loan, the government will pay the difference.

 

The SAVE plan is ideal for borrowers with low to middle incomes or those with large amounts of student debt, as it provides a manageable payment structure. Additionally, the interest subsidy can help reduce the overall cost of the loan. However, like other income-driven plans, if your income significantly increases over time, your monthly payments may also rise since they are based on your income level.

Pay As You Earn (PAYE) Plan

  • Payment Amount: The PAYE plan caps your monthly payments at 10% of your discretionary income, but it won’t exceed what you would pay under the standard 10-year repayment plan. This makes PAYE more affordable for borrowers with lower incomes while ensuring that payments remain manageable.

 

  • Repayment Period: The repayment period for PAYE is 20 years. After making qualifying payments for this duration, any remaining loan balance is eligible for forgiveness.

 

  • Eligibility: PAYE is available to borrowers who took out their first federal loan after October 1, 2007, and have taken out a direct loan on or after October 1, 2011. Additionally, borrowers must demonstrate that their payment under PAYE would be lower than what they would pay under the standard repayment plan.

 

  • Interest Subsidy: PAYE provides a limited interest subsidy. If your monthly payment doesn’t cover the full interest on your subsidized loans for the first three years, the government will pay the remaining interest, preventing the balance from increasing due to unpaid interest during this time.

 

PAYE is a good option for borrowers with relatively lower incomes who need affordable payments and who took out loans more recently. However, like other income-driven repayment plans, your payments will increase if your income grows, although they are still capped by what you would have paid under the standard plan.

Important Updates for 2024:

As of recent updates, the PAYE plan is still available for those who applied before July 1, 2024. However, due to ongoing legal adjustments and the introduction of the Saving on a Valuable Education (SAVE) Plan, new enrollments in PAYE are limited. Borrowers who applied between July 18 and August 9, 2024, may still be approved ​(MOHELA)​(U.S. Department of Education).

These updates reflect the changing landscape of income-driven repayment plans, so it’s important to stay informed if you’re considering or already enrolled in PAYE.

Income-Based Repayment (IBR) Plan

  • Payment Amount: For borrowers who took out loans before July 1, 2014, monthly payments are capped at 15% of your discretionary income. If you took out loans after July 1, 2014, your payments will be capped at 10% of discretionary income. These payments will never exceed what you would pay under the standard 10-year repayment plan, ensuring affordability for borrowers with lower incomes.

 

  • Repayment Period: For new borrowers (after July 1, 2014), the repayment period is 20 years. For borrowers with older loans, the repayment period is 25 years. Any remaining balance after this period of qualifying payments will be forgiven. However, borrowers may have to pay taxes on the forgiven amount as it may be considered taxable income.

 

  • Eligibility: IBR is available to borrowers with federal student loans who demonstrate partial financial hardship. This means your payment under the IBR plan must be lower than what you would pay under a standard repayment plan. The plan covers a range of loans, including Direct Subsidized and Unsubsidized Loans, and FFEL loans, but excludes Parent PLUS loans.

 

  • Interest Subsidy: If your IBR payment is not enough to cover the full interest accruing on your subsidized loans, the government will subsidize 100% of the unpaid interest for the first three years. This prevents your loan balance from growing due to unpaid interest, offering some relief in the early stages of repayment.

Important Updates 2024:

With the recent updates to IDR plans in 2024, IBR remains an option for borrowers who do not qualify for the newer SAVE Plan. However, it’s worth noting that the SAVE plan may offer more affordable terms for some borrowers, so it’s a good idea to explore both options to determine which is best for your financial situation.

IBR is particularly beneficial for borrowers with high debt relative to their income, but like other income-driven plans, your payments may increase as your income grows, though they will always be capped to ensure manageability. Make sure to recertify your income annually to remain in the plan and continue receiving the benefits.

Income-Contingent Repayment (ICR) Plan

  • Payment Amount:The ICR plan calculates payments based on the lesser of 20% of your discretionary income or the amount you would pay on a fixed repayment plan over 12 years, adjusted for your income. Unlike other income-driven plans like PAYE or IBR, ICR generally results in higher payments due to its 20% cap, which is larger than the 10% or 15% caps seen in other plans (FCAA)​(Edfinancial).

 

  • Repayment Period: The repayment period for ICR is 25 years. After making qualifying payments for 25 years, any remaining loan balance is forgiven. However, this forgiven amount may be considered taxable income under IRS rules, meaning you might owe taxes on the forgiven balance​ (Edfinancial).

 

  • Eligibility: The ICR plan is available to all federal student loan borrowers, including borrowers of Parent PLUS loans, if they are consolidated into a Direct Consolidation Loan. This makes ICR the only income-driven repayment plan available to Parent PLUS borrowers. Borrowers are not required to demonstrate financial hardship to qualify for ICR​(FCAA)​(Edfinancial).

 

  • Interest Subsidy: Unlike PAYE or IBR, the ICR plan does not offer a government interest subsidy on subsidized loans, meaning that if your payment does not cover the interest, the unpaid interest may capitalize, increasing the total loan balance over time​(Edfinancial).

2024 Updates:

With the introduction of the SAVE Plan in 2024, which offers more favorable terms, some borrowers are opting to switch from older plans like ICR. However, ICR remains the go-to option for Parent PLUS loan borrowers after consolidation. Additionally, the government has made it easier for borrowers to switch between repayment plans without resetting their progress toward loan forgiveness​ (The Student Loan Sherpa)​(FCAA).

ICR is a solid option for those who do not qualify for other income-driven repayment plans or for Parent PLUS borrowers seeking income-based payment terms. However, due to higher payments and lack of interest subsidies, it may be less attractive compared to newer options like SAVE or more traditional plans like PAYE and IBR.

Benefits of Income-Driven Repayment Plans

Income-driven repayment plans offer a number of benefits, especially for borrowers who are struggling to make their payments. Here are some of the biggest advantages:

1. Lower Monthly Payments

The most immediate benefit of an IDR plan is the lower monthly payment. Because your payments are based on your income, they’ll be more affordable if you’re earning less. This can be a lifesaver for people just starting out in their careers or dealing with financial difficulties.

 

2. Loan Forgiveness

After 20 or 25 years of payments (depending on the plan), any remaining balance on your loan will be forgiven. This can be particularly helpful for people with large amounts of student loan debt that would take decades to pay off under a standard repayment plan.

 

3. Protection During Financial Hardship

Income-driven plans adjust your payments based on your current financial situation. If you lose your job, have a drop in income, or face other financial challenges, your payment could drop to $0, giving you breathing room while you get back on your feet.

 

4. Flexible Payments

As your income changes, your payments will adjust accordingly. This means if you get a raise or start earning more, your payments will increase—but they’ll still be manageable based on your income level.

Considerations Before Choosing an IDR Plan

While income-driven repayment plans can be a great option for many borrowers, there are a few things to keep in mind:

Longer Repayment Period: Because the repayment period is extended to 20 or 25 years, you’ll be in debt for a longer time. Over the course of that time, you’ll also pay more in interest compared to the standard repayment plan.

Tax Implications of Loan Forgiveness: While loan forgiveness is a major perk of IDR plans, it’s important to note that the forgiven amount may be considered taxable income. That means when your loan is forgiven, you could face a large tax bill.

Annual Recertification: You’ll need to update your income information every year to stay on the plan. If you forget to recertify, your payments could revert to the amount under the standard repayment plan, which might be higher than you can afford.

 

How to Apply for an Income-Driven Repayment Plan

Applying for an income-driven repayment plan is straightforward. You can apply online through the Federal Student Aid website, or you can contact your loan servicer directly for assistance. When you apply, you’ll need to provide information about your income and family size to determine your eligibility and calculate your payment amount.

 

Final Thoughts

Income-driven repayment plans can be a lifeline for borrowers struggling with student loan payments. By basing your monthly payments on your income, these plans offer flexibility, lower payments, and the possibility of loan forgiveness after 20 or 25 years. If you’re looking for a way to make your student loan payments more manageable, an income-driven repayment plan could be the solution you’ve been searching for. Just remember to carefully consider your options, and choose the plan that best fits your financial situation and long-term goals.

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