Choosing the Right IDR Plan for Student Loans

Posted on June 20, 2019 at 4:05pm by
income driven repayment plan

Did you know that student loan debt is currently at $1.5 trillion nationwide? Not only are student loans at an all-time high, more than 5 million borrowers are in default. A Brookings Institution study expects the number of defaults to continue increasing. However, many federal student loan borrowers may not realize that they could be eligible to enroll in an income-driven repayment plan (IDR plan).

IDR programs allow you to cap your monthly payments to a percentage of your discretionary income. Depending on the types of federal loans you carry, you could have several options for reducing your payments by utilizing an IDR repayment plan.

The Income-Based Repayment Program (IBR)

The IBR program was one of the first income-driven plans offered by the Department of Education. With the IBR program, your monthly payments could be set at 10 to 15 percent of your discretionary income.

However, you must have certain types of federal student loans to be eligible for enrollment. Specifically, you need eligible Direct Loans or FFEL Loans (Federal Family Education Loans). In addition to this requirement, your payments cannot be the same or more than what they would have been under a standard 10-year repayment plan.

Depending on when you received the loans, your payments could be either 10 or 15 percent of your discretionary income. You can also receive loan forgiveness after making payments for 20 to 25 years.

The Revised Pay As You Earn (REPAYE) Program

REPAYE is a relatively new repayment program offered by the Department of Education. With REPAYE, your student loans are set at 10 percent of your discretionary income. To enroll in this program, you would need eligible Direct Loans, Stafford Loans or Graduate PLUS Loans. After making 20 years of payments, you could receive loan forgiveness.

However, there is a downside to the REPAYE program that is seldom mentioned. If you are married, your spouse’s income will factor into your monthly payment amount. Depending on how much your spouse makes, this could be problematic.

The Pay As You Earn Program (PAYE)

The Pay As You Earn Program (PAYE), like the REPAYE program, allows you to cap your monthly payments to 10 percent of your discretionary income. However, unlike the REPAYE program, many loans are not eligible. You must also demonstrate partial financial hardship to qualify.

REPAYE is an expansion of the PAYE program that made more people eligible. There are other important requirements listed on the Department of Education’s website. After you complete 20 years of payments, you could receive loan forgiveness.

The Income-Contingent Repayment Program

The Income-Contingent Repayment Program (ICR) is the fourth option offered by the Department of Education. Like the REPAYE program, there is no financial hardship requirement. With the ICR program, your payments are set at 20 percent of your discretionary income.

Several types of loans are eligible for this program. You may be able to enroll if you have eligible Direct Loans. Stafford Loans, FFEL Loans and Perkins Loans are eligible if consolidated into a Direct Loan. This same rule applies for some of the other programs mentioned in this article. After 25 years of timely payments, you may receive loan forgiveness.

Some Things to Keep in Mind

There are some downsides to income-driven repayment programs. First, the IRS considers the forgiven amount as taxable income. You will have to pay taxes on your forgiven student loans. Although federal legislators have introduced bills to address this issue, nothing has passed.

You should also consider how your spouse’s income could affect your repayment strategy. This is especially important if you are considering enrolling in REPAYE. Depending on how much debt you have, an IDR plan could make it take more time to pay off your student loans.

Finally, you should keep in mind that the Trump administration may eliminate all of these programs. Trump’s administration is attempting to replace the four IDR plans with one IDR plan.

Contact Our Kansas City Student Loan Lawyers to Learn More

Do you have questions about student loans? We can help you address issues with repayment. Contact our Kansas City student loan lawyers to schedule a consultation. Neil Sader is a student loan and bankruptcy attorney with national recognition.