After graduation and your six-month federal student loan grace period, it’s time to start paying your dues.
If you are on the Standard Repayment Plan, you’ll pay at least $50 a month for 10 years. But there are other ways to pay back your student loans through income-driven repayment plans. These federal plans include:
• Income-Based Repayment Plan (IBR)
• Income-Contingent Repayment Plan (ICR)
• Pay As You Earn Repayment Plan (PAYE)
• Revised Pay As You Earn Repayment Plan (REPAYE)
Not all plans have the same repayment strategy, and not all federal loans qualify for income-driven repayment, so it’s best to find the one that aligns with your financial situation before committing to a plan.
For most income-driven plans, your new monthly payment is a portion of your discretionary income. Discretionary income is the money that isn’t devoted to other necessary bills, like rent or a car loan. Instead, it’s money you have leftover after all mandatory payments are made. Money that might be otherwise used for things like dining out or shopping.
On an Income-Based Repayment plan, about 10 – 15% of your discretionary income will be your new monthly payment. The Department of Education guarantees that your new repayment will never be more than what you paid through the Standard Repayment Plan.
IBR periods are 20 to 25 years, depending on when you borrowed money. If you still owe money after that, any remaining balance is typically forgiven.
Keep in mind that the term of the repayment plan is from when you started the IBR, not when you started repaying your student loans. For example, if you began IBR five years after you graduated, your IBR period starts then. It doesn’t consider any payments before IBR as part of the term.
The Difference Between Income-Driven Repayment Plans
Deciding which IDR (Income-Driven Repayment) plan is right for you (and that you may qualify for) depends on your financial situation and your loan type(s). Here’s what they all mean:
• IBR (Income-Based Repayment Plan) — based on your income and family size. The potential IBR payment must be less than what you would pay under the Standard Repayment Plan to qualify .
• ICR (Income-Contingent Repayment Plan) — your monthly payment is adjusted based on your income. It might not lower your payments as much as other plans, but it’s the only IDR plan that allows Parent PLUS Loans.
• PAYE (Pay As You Earn Repayment Plan) — you’ll never pay more than the fixed Standard Repayment Plan amount. Payment is 10% of your discretionary income. Any remaining balance after 20 years of payments is forgiven.
• REPAYE (Revised Pay As You Earn Repayment Plan) — there are no income eligibility requirements for this IDR. Anyone with qualifying student loans can apply for REPAYE. Keep in mind that you could end up paying more per month under this plan than the Standard Repayment Plan. If you’re okay with a higher monthly payment, then REPAYE might work for you.
Here’s a helpful grid from the Department of Education that shows which federal student loans qualify for which IDR plans.
Alternatives to Income-Driven Repayment Plans
Aside from the Standard Repayment Plan, there are a few options to consider instead of IDR.
If you have federal student loans, you can get a Direct Consolidation Loan. This will move all your eligible federal student loans into one monthly payment. Your new interest rate is the weighted average of all your loans, rounded up to the nearest eighth of a percent.
This can be helpful if you have many smaller loans that each have a minimum monthly payment. It typically won’t lower your monthly payment, however, but it can make it manageable and easier to keep track of. Only federal loans are eligible for a Direct Consolidation Loan.
Refinancing is similar to consolidation. You get one loan to replace all your other loans, but it’s a new loan with a new interest rate from a private lender or bank. Your credit report and other personal financial factors are considered to see if you’re a responsible borrower. If you don’t qualify you on your own, you might need a cosigner.
Many lenders allow you to refinance all your student loans, not just federal student loans. So, if you have a mix of private and federal student loans, refinancing will create one new loan with one payment to replace them.
If you qualify for a lower interest rate, you might end up paying less through refinancing than you would through an IDR plan. The interest rate you qualify for can vary depending on factors like how much you owe, your current loan terms, your credit score, and other personal financial information.
Keep in mind that refinancing doesn’t guarantee a lower payment or interest rate. Along with that, different lenders offer different terms. Because of this, refinancing isn’t always the best option for everyone.
Make sure you compare all the costs before signing up for one plan over another. Also, if you refinance your student loans with a private lender you will lose access to federal benefits such as deferment, Public Service Loan Forgiveness (PSLF), and all IDR plans.
Now that you know how income-based repayment is calculated, you can determine if IBR or a different plan is best for you. Depending on your income, expenses, and financial goals, you might have a few options that best suit your needs.
Don’t settle for the first plan you find, and carefully weigh all your options as you decide which one is right for you.
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SoFi Student Loan Refinance
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Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.