Somewhat recently, certain income-driven repayment options have become increasingly popular.  They are designed to be affordable for the borrower and offer some attractive benefits including lower payments and possible loan forgiveness.  Here we’ll explore the alphabet soup of income-driven repayment options.

First let’s define discretionary income.  Your discretionary income is calculated as your income (typically Adjusted Gross Income) minus 1.5 times the poverty guideline for your family size and state of residence.  For example, for a family of four in any of the lower 48 states, the poverty guideline is $24,600.  Therefore, every dollar of income over $36,900 ($24,600 x 1.5) is considered discretionary income.   Your discretionary income will be recalculated each year based on income from the prior year.

PAYE (Pay As You Earn): Under PAYE, your monthly payment is generally 10% of your discretionary income.  These payments must be made for 20 years in order to qualify for loan forgiveness.  As your discretionary income increases, so too will your monthly payment, but your monthly payment will never be more than the 10-year standard repayment amount.

REPAYE (Revised Pay As You Earn): Under REPAYE, your monthly payment is 10% of your discretionary income, but it is not capped at the 10-year standard repayment amount.  The repayment period is 20 years for undergraduate study but 25 years if any loans under the plan were for graduate or professional study.

IBR (Income-Based Repayment): Under IBR, your monthly payment is generally 15% of your discretionary income.  These payments must be made for 25 years in order to qualify for loan forgiveness.  As your discretionary income increases, so too will your monthly payment, but your monthly payment will never be more than the 10-year standard repayment amount.  If you are a new borrower (no loans prior to 7/1/14), your payment is 10% of your discretionary income, and payments are only required for 20 years.

ICR (Income Contingent Repayment): Under ICR, your monthly payment is 25% of your discretionary income, but, similar to REPAYE, it is not capped at the 10-year standard repayment amount.  Forgiveness is granted after 25 years.  ICR mainly benefits those with Parent PLUS loans as these loans are not eligible for the other income-driven repayment plans.

Loan Forgiveness: Currently, the amount of loans forgiven is treated as taxable income in the year of forgiveness.  If you expect to have a portion of your loan balance forgiven following 20 or 25 years of payments, be prepared to have cash on hand to pay the tax bill.

In addition to your discretionary income, which income-driven repayment plans you qualify for depends partly on the date your loans were taken and the type of loans.  Only Direct Loans qualify for REPAYE, PAYE, and ICR.  However, certain other loans could be consolidated into a Direct Consolidation Loan to qualify for REPAYE, PAYE, and ICR.  Before consolidating, you should carefully consider the pros and cons.  Although consolidating simplifies management of your loans and may provide additional repayment options, you may give up certain benefits if you consolidate.

There are also differences in how interest is treated amongst the various repayment plans.  Depending on the size of your loans, your monthly payment under an income-driven plan may not cover the interest that accrues.  If that’s the case, the government may cover the excess interest for the first three years under PAYE and IBR and possibly longer under REPAYE.  Whether or not interest is capitalized also varies amongst the programs.  If interest is capitalized, any unpaid interest is added to the principal balance, and future interest is calculated on the new, larger amount.

As you can see, there are several factors to consider when choosing which repayment plans you are eligible for and which make the most sense for your situation.  If you need help choosing the best option for your situation as well as finding a balance between student loan repayment and addressing your other financial goals, we are here to help.  Contact us today to meet one of our professionals with the experience and expertise to provide the answers you need.

 

Securities, Investment Advisory and Financial Planning Services offered through qualified Registered Representatives of MML Investors Services, LLC, Member SIPC, 12 Cadillac Drive, Suite 440, Brentwood, TN  37027 (615) 309-6300. Continuum Planning Partners is not an affiliate or subsidiary of MML Investors Services, LLC or its affiliated companies.  CRN201905-210638

Continuum Planning Partners Post Author
BRYAN POWELL, CFP®

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