Should I Use An Income-Driven Plan To Repay My Student Loan?
College Students

Should I Use An Income-Driven Plan To Repay My Student Loan?

EPF May 14, 2019

Structuring your federal student loan repayments as a percentage of your income is a great way to stay on top of your debt and ensure outflows stay within your budget.

To choose a repayment plan that’s right for you, check out the four options below:

  • Revised Pay As You Earn (REPAYE) structures your payment as 10% of your discretionary income.
  • Pay As You Earn (PAYE) also structures your payment as 10% of your discretionary income, but the number cannot exceed the number from the REPAYE Plan above.
  • Income-Based Repayment (IBR) structures your payment as 10% of your discretionary income if you took out your student loan before July 1, 2014 and 15% of your discretionary income if you took out your student loan on or after July 1, 2014.
  • Income-Contingent Repayment (ICR) structures your payment as 20% of your discretionary income or as a comparable 12-year fixed payment, adjusted for your income.

Now, the most important words you’ll notice above is ‘discretionary income.’

The U.S. Department of Education determines this figure by calculating the difference between your annual income and 100% to 150% of the poverty line income for a family of the same size that lives in the same state. Federal authorities consider this number an appropriate buffer to determine what you can afford to pay each month.

 

What Other Variables Are Used To Determine My Student Loan Repayment?

Beyond just annual income, other factors come into play to determine your monthly payment:

 

The Size Of Your Family And The State You Live In:

To calculate your discretionary income, a heavy emphasis is placed on comparable families and comparable regions. To make the adjustment fair, the U.S. Department of Education first assesses the poverty line income for a family of the same size that lives in your state. In almost all cases, the larger your family, the lower your monthly payment under all of the income-based plans above.

 

Your Tax Status And Whether You File A Joint Tax Return:

When you file your taxes individually, your monthly payment is unaffected and is based on the variables mentioned above. However, if you file a joint tax return, your monthly payment is determined as a combination of yours and your spouse’s income. Because positive spousal earnings on a joint tax return increases your annual income, your federal student loan payment will increase in the process.

 

Whether Or Not Your Spouse Has Federal Student Loan Debt:

If your spouse also has outstanding federal student loan debt – and you file your taxes jointly – it can override the negative affect of joint income. Keep in mind though, private student loans are not applicable and only federal student loans work for this adjustment. Now, when there are two debt balances, you’re allowed to separate the two loans and structure each on an individual basis. Thus, your loan repayment reverts back to what you saw using an individual tax return, which allows you to avoid the downside of joint status.

 

How Many Years Will It Take To Repay My Student Loan?

Under each plan, payments are structured so the entire balance is repaid over 20 to 25 years. As a side benefit, if a portion of your federal student loan balance is leftover at the end of your plans maturity, it qualifies for loan forgiveness and you don’t have to repay the leftover amount.

  • REPAYE Plans are repaid over 20 years for undergraduates and 25 years for graduate or professional students.
  • PAYE Plans are repaid over 20 years.
  • IBR Plans are repaid over 25 years if you took your student loan before July 1, 2014 and 20 years if your took out you student loan on or after July 1, 2014.
  • ICR Plans are repaid over 25 years.

As well, if you suffer periods of unemployment or there are times where your annual income declines during the payback period, your monthly repayments can drop to zero and still count toward your total allowable 20 to 25 years.

 

Will My Student Loan Repayment Stay Constant Throughout The Entire Term?

Before jumping into an income-repayment plan, make sure you realize it’s not an installment loan and payments are not fixed. With income-driven plans, your monthly payments are variable and will change if your income status or family makeup changes. Like we mentioned above, if you suffer economic hardship, your monthly payments can decrease all the way to zero. However, if you land a new job or your salary increases, your payments will rise right along with it. Second, your family makeup also plays an important role. If you get married or have children – and don’t file a joint tax return – your monthly payment will almost certainly decline.

To keep your income and family status current, you have to provide annual updates to your loan provider regarding your family and financial circumstances. Even if no changes have occurred, it’s still necessary to file an annual report. Keep in mind though, your loan provider will send you a reminder letting you know an update is in order.

When a material change has occurred, you have to submit a new application for your income-repayment plan. Here, you fill out the reason for the new application as “to recalculate your payment immediately.”

Elite Personal Finance

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