After taking out the maximum amount of Stafford loans every year in college, I faced a daunting number when I graduated: $US25,478.
That was how much I owed the federal government.
Suffice to say that was an uncomfortable percentage of what I’d make in a year — before taxes.
Fortunately, the Department of Education offers several different options for students in similarly overwhelming circumstances.
If you’re struggling to make your monthly payments, it’s worth checking to see if you qualify for an income-based repayment plan.
You can quickly find out if you qualify by using the Department of Education’s Repayment Estimator tool. Experimenting with the calculator shows that generally, if the amount you owe monthly is high, relative to your current salary, you’re likely to qualify.
There are three different options to choose from, and all three will lower the amount of your monthly payment. Your interest rate won’t change, but you’ll be paying off your debt for about twice as long as the 10-year window given to borrowers enrolled in standard repayment. Loans under each of these plans will eventually be eligible for forgiveness.
Though I chose to stick with the standard plan and pay $US304 a month — I found a better-paying job, and didn’t want to accumulate any additional interest by taking longer to pay off my debt — income-based plans can be a lifesaver if you’re having a hard time getting by.
Here’s how they compare:
Income-based repayment (IBR)
Under the income-based repayment plan, your monthly payments will generally equal 15% of your discretionary income, or 10% if you’re a new borrower who took out loans on or after July 1, 2014.
What that means depends on three factors: your family size, where you live, and how much money you make.
The difference between that number and your income is considered discretionary income.
For instance, let’s say that you’re unmarried with no children, earn $US50,000 a year, and live in Massachusetts.
- The poverty guideline for the 48 contiguous states is $US11,770 for a family of one.
- 150% of that would be $US17,655.
- That means that your discretionary income would be $US32,345.
- Your annual payments would then come to $US4,851.75, or $US2,156.33 for new borrowers.
- Divided by twelve, you’re looking at $US404.31 a month, or $US215.63 if you’re a new borrower.
Under IBR, you’re also guaranteed that your monthly payments won’t exceed what they would be under the 10-year Standard Repayment Plan. Chances are, this is the plan that you’re already on: Unless you specifically asked for a different plan when you started paying off your loans, you were placed on the standard plan.
The easiest way to find out what you’d actually pay under IBR is to use the Department of Education’s Repayment Estimator. It will automatically calculate the balances and interest rates for each of your federal loans when you log in, so you just need to fill in your family size, tax filing status, state of residence, and adjusted gross income.
Who qualifies: Using the Repayment Estimator will also tell you whether or not you should apply for income-based repayment. If your monthly payment would be less under IBR than with the standard plan, then you qualify. Most kinds of federal loans are eligible, as long as they were made to students instead of parents.
When outstanding loans are forgiven: After 25 years, or 20 for new borrowers
Pay as you earn (PAYE)
The Pay As You Earn plan is also based on your discretionary income, using the same calculation as IBR. However, your monthly payment amount will be lower: generally only 10% of your discretionary income. The Repayment Estimator can help you figure out exactly what that might look like.
Who qualifies: If you wouldn’t benefit from having your payment amount based on your income, you won’t qualify. PAYE also has additional eligibility requirements that make it different from IBR. You must have been a new borrower with no outstanding federal loan balance on or after October 1st, 2007, and received a disbursement from a Direct Loan on or after October 1st, 2011. Generally speaking, that means that people who graduated in the class of 2012 or later are eligible to apply.
With PAYE, certain loans, such as FFEL and Perkins loans, are only eligible if you consolidate them. Before you do that, it’s worth considering if you’ll lose any benefits, like a lower interest rate.
When outstanding loans are forgiven: After 20 years
Income-contingent repayment (ICR)
Calculating what you’ll pay with income-contingent repayment is a bit more complicated. It could be 20% of your discretionary income. Or, it could be the amount that you’d pay on a 12-year standard repayment plan (as opposed to the 10-year standard repayment plan, which is more common), multiplied by a percentage factor that’s determined by your income. Whichever of those two yields the lower amount is what’s used to figure out your monthly payment.
The best way to understand exactly what ICR would look like for you is to use the Repayment Estimator, which will also tell you how much interest you’ll accrue as a result. ICR extends your repayment period to 25 years, so it’s possible that you’ll end up paying significantly more in interest in the long run.
Who qualifies: Unlike IBR and PAYE, ICR is open to everyone. It doesn’t matter how high your income is. However, you may find that your payments under ICR are higher than they would be with the standard 10-year repayment plan, so it’s not necessarily a better option.
It’s also worth thinking about your career plans before you commit to ICR. Your payment is always based on your income, so if you’re not making a lot of money now but move up a higher-paying job in the future, you may end up paying more each month than you would have if you’d stuck with the standard repayment plan.
All federal loans are eligible for ICR, but some types, including FFEL and Perkins loans, will need to be consolidated.
When outstanding loans are forgiven: After 25 years
What about private loans?
These three programs only apply to federal loans. If you’re having a hard time paying back a private loan, it’s worth contacting the lender and seeing what options are available. You may be able to get a reduced interest rate or a longer repayment period by consolidating the loan, or work out an alternative payment plan.
You can also consider requesting deferment or forbearance on your federal loans, then funelling that money towards your private loan instead. In order to do that, you’ll need to prove financial hardship, meaning either that you’re unable to find full-time employment or the total that you owe each month is 20% or more of your monthly gross income. Since your loans will continue accruing interest during the period your payments are paused — making them even more expensive when you resume — you may want to save this as a last resort.