How Income-Driven Repayment Plans Work

Income-driven repayment plans are designed to help federal student loan borrowers who are struggling to afford the standard repayment plan. These plans use your income, family size, and state of residence to determine your monthly payment. Depending on your situation, you may be able to choose from up to four different income-driven repayment plans, each with its own monthly payment calculation and repayment period.

Types of Income-Driven Repayment Plans

There are currently four income-driven repayment plans available for eligible federal loan borrowers:

• Income-Based Repayment (IBR): Caps payments at 10% of your discretionary income if you received your loan before July 1, 2014, with forgiveness after 20 years. For those who receive their loan on or after that date, the payment is 15% of your discretionary income with forgiveness after 25 years.
• Pay As You Earn (PAYE): Cuts your monthly payments to 10% of your discretionary income and offers forgiveness after 20 years of repayment. To qualify, you must have received your loan on or after October 1, 2007, and taken out a direct loan or a direct consolidation loan after October 1, 2011.
• Saving on a Valuable Education (SAVE) Plan: Formerly the Revised Pay As You Earn (REPAYE) plan, the SAVE plan sets your monthly payments at 10% of your discretionary income (5% starting July 2024). Your repayment term will be 20 years if all of your loans are undergraduate loans, but if any of your loans were for graduate study, the term will be 25 years.
• Income-Contingent Repayment (ICR): Your monthly payment will be the lesser of 20% of your discretionary income or the amount you’d pay on a fixed 12-year repayment plan, adjusted according to your income. Your repayment plan will be extended to 25 years. This is the only income-driven repayment plan available to parents who took out parent PLUS loans.

Pros and Cons of Income-Driven Repayment Plans

Pros

• Immediate Relief: Provides an immediate reduction of your monthly payment, relieving some of the pressure on your budget.
• Avoid Default: Helps you avoid missed payments and default, which can negatively impact your credit history and financial wellness.
• Potential Forgiveness: Depending on your future income, you may be able to keep a low payment and get forgiveness once you’ve reached the end of your repayment term.

Cons

• Annual Recertification: You need to recertify your income and family size every year. If your income grows or you forget to recertify, your monthly payment may increase.
• More Interest: With lower monthly payments, less of what you pay goes toward paying down the principal balance of your loans, which means more interest over time.
• Eligibility Restrictions: Depending on the type of loans you have and your financial situation, you may not be able to get on the income-driven plan you want.

How to Apply for Income-Driven Repayment

Whether you’re planning to apply for an income-driven repayment plan or you’re just thinking about it, here’s how to go through the process:

1. Contact your loan servicer and explain your situation to get advice on whether income-driven repayment is right for you and which plan to choose.
2. Visit the Federal Student Aid website to apply online or download the paper application form.
3. Provide your name, Social Security number, address, and contact information.
4. Choose a plan or request that your loan servicer put you on the plan that gives you the lowest monthly payment.
5. Share information about your family size, marital status, and, if applicable, information about your spouse.
6. Provide income information and include documentation, which may include a pay stub, a tax return, or a tax transcript.
7. Finish answering the remaining questions and sign the application, then submit it directly to your loan servicer.

Note that if you have multiple federal loan servicers, you’ll need to submit a separate application to each one. And remember, you’ll need to resubmit this application every year—your loan servicer will send you a reminder when it’s time—to avoid potential issues.

Continue Making On-Time Payments to Build Your Credit Score

Whether or not you choose to get on an income-driven repayment plan, it’s important to make your student loan payments on time every month. If you’re late by 30 days or more, the late payment may get reported to the credit reporting agencies, which could damage your credit score.

As you make payments on your student loans and take other steps to build your credit, use Experian’s free credit monitoring service to track your progress and address potential problems as they arise.

Contact O1ne Mortgage for Your Mortgage Service Needs

If you’re looking for expert advice and assistance with your mortgage needs, look no further than O1ne Mortgage. Our team of experienced loan officers is here to help you navigate the complexities of the mortgage process and find the best solution for your financial situation. Call us today at 213-732-3074 to speak with one of our knowledgeable representatives and get started on your path to homeownership.