In the sluggish return of jobs, many graduates have found they are underemployed. There has been significant media coverage exploring the debt plight of students who struggle to make ends meet and not let student loan debt ruin their lives. It also brought to the national spotlight the need for income-based payment programs.
There are three basic income derived payment plans: The Pay As You Earn, the Income-Based Repayment, and the Income-Contingent Repayment. Each has slightly different terms and provisions; however, finding one that benefits your situation can significantly change your financial outlook.
- Pay As You Earn (PAYE)
Pay as you Earn keeps your monthly payment to 10% of your income. It also allows for you to earn tax forgiveness in 20 years. This program only applies to new borrowers and your first federal loan must have been entered into on or after October 1, 2007. The other requirement is that you must have a financial hardship. Loans with payment scheduled that exceed 10% of your disposable income. It’s also changed based on family size.
- Income-Based Repayment (IBR)
Income based repayment plans base the percentage of your loan that you must repay on when you first borrowed funds for school. The loans must belong to new borrowers signed on after July 1, 2014. As a borrower in the IBR program, you qualify for tax forgiveness after 20 years and you must be in at least a partial financial hardship to be eligible.
- Income-Contingent Repayment (ICR)
The income contingent repayment plan calculates monthly pay plan on your adjusted gross income (also your spouse’s income if you are married). The calculator also takes into account your family size, for example, number of dependents. The requirements for this payment plan only allows greater qualification terms than the PAYE and IBR so those who do not qualify for those plans may find some payment relief from the ICR.
Each plan has interest accumulation and capitalization protections. Begin by considering the affordability of your current repayment plan. Another good place to start is by work on the Department of Education repayment website to help you determine which plan is best for you.