Borrowers of federal student loans who are having trouble meeting the financial obligations of the conventional repayment plan may qualify for an income-driven alternative repayment program. When calculating your monthly premium, these plans consider your household income, the number of people in your family, and the state where you live.

You may have the opportunity to choose from as many as four distinct income-driven repayment plans, each of which has its method for calculating the repayment of your monthly payment and the length of time over which it must be paid off. The operation of these plans, the advantages and disadvantages they provide, and the application process are covered in the following information.

The Mechanisms Behind Income-Based Repayment Plans

With an income-driven repayment plan, you can adjust the amount of your monthly student loan payment to be within your financial means, depending on the amount of money you bring in each month. Your monthly contribution will be 10%, 15%, or 20% of your expendable income, which is calculated based on your household's income, the size of your family, and the state in which you live. This amount will be determined by the plan that you choose.

These plans also lengthen the time you have to make payments; the typical repayment plan gives you 10 years, while these plans give you 20 or 25 years. The remaining amount will be canceled if you finish your repayment term with an outstanding balance.

How to Determine whether You Are Eligible for an Income-Based Repayment Plan

Your eligibility for income-driven repayment plans might differ from one plan to another, as well as based on the sorts of loans you already have. First, borrowers with federal student loans are the only ones eligible for these programs; in general, private lenders do not make them accessible to their customers. However, not all federal student loans automatically qualify for the discount. For your existing debts to be considered for participation in some federal loan programs, you could be required to combine them.

In addition, two of the plans have a minimum annual income that participants must meet. You could be qualified for this program if, for instance, your monthly payment under the Pay As You Earn (PAYE) or income-based repayment plan is less than what it would be under the conventional repayment plan. If the total amount of your student loans is more than your yearly income or if they make up a considerable percentage of your annual income, you may also be eligible for these programs. Check out the Federal Student Aid program's webpage if you are uncertain whether you are eligible for income-driven repayment or get in touch with your loan servicer.

Types

Income-Based Repayment

If you acquired your loan before July 1, 2014, this plan will limit your monthly payments to 10% of discretionary income and will forgive the remaining balance after 20 years. Those who get their loan on or after that date will have their payments reduced to 15% of their discretionary income, and the remaining balance will be canceled after 25 years.

Pay As You Earn

This plan will reduce your monthly payments to 10% of your income over and above what is required to pay them, and it will forgive the remaining repayment once you have made payments for 20 years. Your payment won't go higher than the normal 10-year repayment plan amount, regardless of how much more income you bring in each month. To be eligible, your loan must have been obtained on or after October 1, 2007, at very latest. To qualify for this program, you must have also obtained direct loan or a direct consolidation loan.

Revised Pay As You Earn

Under this plan, your monthly payments will equal 10% of the income you have available to spend. If all of your loans were taken out for undergraduate studies, your repayment period would be twenty years; however, if any of your loans were taken out for graduate school, the term would be twenty-five years.

Income-Contingent Repayment

Your monthly payment under this plan will be the lesser of 20% of the income you have available for discretionary spending or the amount you would pay under a set 12-year repayment plan, which will be modified according to your income. Your repayment schedule will now be spread out over 25 years. Please take into consideration the fact that this is the only income-based repayment plan that is offered to parents who have obtained parent PLUS loans.

Pros

• It offers almost instantaneous comfort. If you are currently having trouble making ends meet, an income-driven repayment plan can give you an immediate decrease in your monthly payment and alleviate some of the strain that is being placed on your budget.

Cons

• You are required to retake the exam once every year. You needed to recertify your income and the number of people in your household annually. Depending on the plan you are now enrolled in, your regular payment can go up if your income goes up or you neglect to recertify for the plan.