By LOUIS DENICOLA
If you have a federal student loan, are on a standard repayment plan and are struggling to make your monthly payment, you may qualify for a different plan that allows you to make lower monthly payments.
According to a U.S. Government Accountability Office report, 51 percent of Direct Loan borrowers were eligible for the Income-Based Repayment Plan as of 2012, but only 13 percent of borrowers used it in 2014. Direct Loans are issued directly by the Department of Education to students or parents, although the loans are often serviced by third parties. 6 percent of borrowers used a different income-driven repayment plan.
Andrew Josuweit, CEO and president of Student Loan Hero, says one of the reasons more people don't switch payment plans is, "it's hard for borrowers to figure out which plans they're eligible for and what the financial impact of these plans will be." Some borrowers may not even be aware of the different repayment plans available to them.
1. Standard Plan
You'll automatically be enrolled in this plan if you don't select a different one. With the Standard Plan, you'll make equal monthly payments - $50 minimum - for up to ten years.
The Standard Plan may result in you paying the least amount of interest over the lifetime of your loans, but the monthly payment might be higher than with other plans. If you can afford the monthly payment, this may be the best option.
2. Graduated Plan
As with the Standard Plan, the Graduated Plan has up to a ten-year term. However, on the Graduated Plan, your monthly payments will increase over time - usually once every two years.
The Graduated Plan may be a good option if you can't afford a high monthly payment now but will be able to in the future - say, if your earning potential increases. When using the Graduated Plan, you'll pay more in interest over the lifetime of the loan compared to the Standard Plan. This is because the lower initial payments lead to relatively more interest accumulating.
3. Extended Plan
On the Extended Plan, the loan term is extended up to 25 years, and you can choose a fixed or graduated repayment schedule. Your monthly payments are usually less than they'd be on the Standard or Graduated Plan, but you'll pay more in interest over the lifetime of the loan.
If you have over $30,000 in Direct Loans or FFEL loans, you could be eligible for the extended plan. In either case, you must be a new borrower - no outstanding federal loans - as of October 7, 1998 and the loans must be distributed after that date.
4. Income-Based Repayment (IBR) Plan
Under the Income-Based Repayment (IBR) Plan, your monthly loan payments will change with your income. However, the most you'll ever pay monthly is the same as what your payment would have been under the Standard Plan.
The maximum monthly payment for borrowers after July 1, 2014 is generally 10 percent of your discretionary income, which is the difference between your adjusted gross income (AGI) and 150 percent of the federal poverty guideline. Your monthly payments may vary from year to year as your circumstances change. If you were a borrower before July 1, 2014, the maximum payment is generally 15 percent of your discretionary income.
To be eligible, you must be a new borrower with no outstanding Direct or FFEL loans as of October 1, 2007, and have a partial financial hardship. To meet the hardship qualification, your monthly payments on the Standard Plan must be more than 15 percent of your discretionary income. You'll revert to the Standard Plan unless you resubmit proof of your income each year.
The IBR Plan can have a term of up to 20 years for new borrowers as of July 1, 2014 or 25 years for borrowers that had outstanding loans on July 1, 2014.
The longer term and lower monthly payment mean you'll pay more in interest compared to the Standard Plan. The government forgives the balance after 25 years' worth of qualifying monthly payments (20 years for new borrowers). You're responsible for paying income tax on the amount forgiven with all income-based plans.
5. Pay As You Earn Repayment (PAYE) Plan
As with IBR, the PAYE Plan offers low monthly payments (equal to or less than the monthly payment under the Standard Plan) and a maximum repayment period of 20 years. If you pay the loan over 20 years, the lower monthly payments lead to more interest accruing compared to the Standard Plan. After 20 years' worth of qualifying monthly payments, the remainder is forgiven.
The PAYE Plan requires you to have a partial financial hardship qualification, which is when your annual loan repayment exceeds 10 percent of the difference between your adjusted gross income and 150 of the poverty limit for your household size in your state of resident. To remain on this plan, you'll need to report your income each year.
To qualify for the PAYE program, you must have been a new borrower as of October 1, 2007, and received a loan disbursement on or after October 1, 2011. You could have also received disbursements between those dates, but at least one disbursement must be after October 1, 2011. FFEL loans are only eligible for PAYE once they're consolidated.
6. Revised Pay As You Earn (REPAYE) Plan
REPAYE is similar to the current PAYE repayment plan but with one key difference: Until now, in order to qualify for the PAYE plan, you needed to have taken out your loan on or after October 1, 2007. With the REPAYE plan, it no longer matters when you took out your Direct Loan, as long as you meet the other criteria for qualifying for a PAYE plan.
REPAYE is likely to replace the other income-based plans in time, but for now you may still benefit from the other options available.
7. Income-Contingent Repayment (ICR) Plan
The Income-Contingent Repayment (ICR) Plan has a maximum term of 25 years. The government forgives the balance after that point.
The monthly payment is the lesser of 20 percent of your discretionary income, based on the difference between your AGI and 100 percent of your poverty guideline, or the fixed monthly payment needed to repay the loan over 12 years.
There's no income eligibility requirement for the ICR Plan, but your income and the amount owed rather than your income and poverty line determine the monthly payment. You may have higher monthly payments with the ICR Plan than with IBR or PAYE, and in some cases it could be greater than the Standard Plan.
The ICR Plan is the only income-driven option for parents with Direct Plus or FFEL loans.
8. Income-Sensitive Repayment (ISR) Plan
The Income-Sensitive Repayment (ISR) Plan is only for FFEL loans - which haven't been issued since July 1, 2010. Unlike other income-driven plans, the monthly payment is solely based on your annual income. You can choose the monthly payment amount, between 4 and 25 percent of your monthly income, but there's a minimum payment of the interest due each month.
Like with the other income-driven plans, you'll need to report your income annually or switch to the Standard Plan.
There's no loan forgiveness under the ICR Plan, and because of the minimum payment requirements, you may need to pay more than you would on another income-driven plan.
Sticking to the Standard Plan is the cheapest option for repaying your federal student loans, but there are many alternatives if you have trouble with the monthly payment. Andrew says, "Income-driven repayment plans should be viewed as short-term solutions to help manage cash flow and avoid default, not long term debt repayment options." Remember, you can switch repayment plans at any time. Qualifications and benefits vary from plan to plan, and you can compare plans by speaking with your servicer or using the estimator tool.
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