Investing in education is one of the most worthwhile things you can do. Yes, it’s expensive but certain careers depend on you receiving a Bachelors’s Degree. The good news is there are a range of loans to help you afford the costs and companies including Aspire and opting for an income-driven repayment plan.
Many people find that their student loans impact their finances, and it’s common to spend years trying to pay the debt off. As of 2018, student loan debt amounts to $1.5 trillion in the US, but there are numerous ways in which you can ease the financial burden of student loan repayments, including income-based student repayment loans.
Specialists predict that by 2023, 40% of people will default on their student loan repayments. Income-based repayment loans can help you manage your finances, and they calculate the repayments according to your income. Are they worth looking into? In this review, we’ll find out more about the plans and explore the pros and cons of choosing one.
What Is An Income-Driven Repayment Plan?
An IDR plan describes four different repayment plans which are determined by your income. These plans are only available for federal loans, and each works differently.
Revised Pay As You Earn (REPAYE)
REPAYE plans cap your repayments to 10% of your discretionary income and the government forgives the remaining debt after 20 to 25 years of repayments. As of 2015, REPAYE replaced the original Pay As You Earn Plan. You can find out more about REPAYE here.
Income-Contingent Repayment Plan
Income-contingent repayment plans differ from others because they incorporate the Parent Plus loan. However, the repayments are usually a little higher than alternative plans.
Income-Based Repayment Plan
This plan is the most popular because it allows you to change your repayments as your family grows, which gives you more flexibility over your repayments.
How To Qualify For Income-Driven Repayment
Unfortunately, not everyone is eligible for income-driven repayment plans. There are certain criteria you must meet and you can find out if you’re suitable on the Government Loan website. You must prove that your income doesn’t allow you to afford the monthly repayments or you have other debts to pay and are on a low income.
When applying for the loan, you should provide information about your income and the size of your family. You might also have to show proof of your earnings in the form of pay slips and some providers will ask for a letter from your employer.
Income-Driven Repayment Forgiveness
Once you’ve made numerous payments, you can apply for income-driven repayment forgiveness. This is a complicated process, and there are many rules that apply. The best thing about repayment forgiveness is that once you meet the required number of payments set out by your loan, the government wipes out the rest of your debt.
The repayment plan you choose defines when you’ll be able to apply for income-driven repayment forgiveness.
The REPAYE plan forgives debt after 20 years of repayments, as long as you received the loan as an undergraduate. If the loan was for a graduate course, you’ll have to make payments for 25 years.
Income-Contingent Repayment plans are forgiven after 25 years of repayments with no exceptions.
Income-Based Repayment plans are more complex. If you borrowed after 2014 you’ll receive forgiveness after 20 years of payments. However, if you borrowed before 2014, you have to make 25 years of payments.
If you’d like to estimate your repayments and when you’ll meet the forgiveness criteria, this helpful calculator from the VIN Foundation can help you.
The Advantages of Income-Driven Repayment Plans
Now you know what income-driven repayment plans are, it’s time to decide if they’re right for you. Let’s look at the benefits they offer.
Of course, the biggest benefit of income-driven repayment plans is the forgiveness incentive after meeting the initial payment criteria. Once you’ve repaid the loan for 20 or 25 years, it’s wiped by the government which means you can focus on saving for retirement.
Low Monthly Payments
If you have an IBR or PAYE plan, the repayment amounts must be lower than if they were part of a standard 10-year repayment plan. The biggest advantage of this is that lower monthly payments mean you can budget and enjoy life more.
We can’t predict what will happen in life, and fixed loan repayments can cause problems if your circumstances change. The biggest problem with fixed repayments is they don’t take into account growing families, or if you or your spouse become unemployed.
Luckily, income-driven repayment plans are based on what you earn and your other financial responsibilities. If you lose your job, or can’t meet your current payment amounts, the plans will accommodate you and lower your monthly repayments.
Public Service Forgiveness
Individuals that work in public service roles, such as law enforcement can benefit from shorter repayment plans. The Public Service Loan Forgiveness program applies to several roles and those who are eligible can have their debts wiped with no tax after 10-years of payments.
The Disadvantages of Income-Driven Repayment Plans
While there are many benefits of income-driven repayment plans, we must also consider income-driven repayment disadvantages.
Income-driven repayment plans are great if you’re on a limited income, but the loans take longer to pay off. Most student loans come with a 10-year repayment period, so individuals with higher incomes can free themselves of the debt quickly.
There are many companies that are committing themselves to help their employees relieve themselves of debt quicker. Before entering into an income-driven repayment plan, we recommend you check if your employer offers a benefits scheme from a company such as FutureFuel.
You’ll Pay Taxes
When your debt is forgiven after 20-25 years, you still have to pay taxes on the remaining amount. However, the Public Service Forgiveness Program is tax free.
You Must Provide Your Income
Each year, you must provide your updated income and family information to the government. Failure to do this results in your removal from the income-driven repayment plan and you’ll return to a standard 10-year plan.
As your monthly payments will be lower than the standard repayment plans, your interest will increase over time. If you can afford the standard repayment plan, you won’t pay as much interest and can be debt-free quicker.
You Might Not Qualify
Only federal loans qualify for income-driven repayment schemes, so if you have a private loan you won’t be able to use the program. Private loans often come from banks and other lenders, while the government issues federal loans. The Student Aid website has a helpful chart that shows which loans qualify.
What’s the Verdict?
As with most things, there’s no simple yes or no answer whether income-driven repayment plans are right for you. We recommend you think about your current income, and how it’s likely to increase in the future. You should choose a 10-year standard repayment plan if you can afford it because you’ll pay less overall.
If you’re on a low income and can’t meet your monthly repayment schedule, then it’s worth looking into an income-driven repayment plan. Student loan income-driven repayment is a flexible way to invest in your education and build the career you dream of.
Think about your personal circumstances and make a choice based on which type of repayment scheme offers you the highest degree of flexibility.