If you are struggling to keep up with your standard repayment plan on your federal student loan, you could qualify for a different plan that lets you make lower monthly payments.
According to a report by the U.S. Government Accountability Office, as of 2012, 51% of Direct Loan borrowers were eligible for the Income-Based Repayment Plan, however in 2014, that went down to just 13%. The Department of Education directly issues Direct Loans to students or parents, although loans can be serviced by third parties. 6% of borrowers use a different income-driven repayment plan.
The president and CEO of Student Loan Hero, Andrew Josuweit, says the reason people don’t switch payment plans is that “it is harder for borrowers to figure out which plan they are eligible for and the financial impact of these plans.” In fact, there are some that don’t even know there are different repayment plans available.
#1 Standard Plan
If you do not choose a different plan, you will be automatically enrolled in this one. With the Standard Plan, you will make equal monthly payments of at least $50 for a maximum of 10 years. Using this plan, you could pay the least amount of interest over the loan’ lifetime, but your monthly payment could be higher than with other plans. If you can swing this monthly payment, it this can likely be your best option.
#2 Extended Plan
With the Extended Plan, your loan term extends to a maximum of 25 years, and you are able to choose either a graduated or fixed repayment schedule. Most times, your monthly payments will be less than they would be on the Graduated or Standard plan; however, you are going to pay more interest over the loan’s lifetime.
If you have more than $30,000 in Direct Loans, you qualify for the extended plan. Either way, you have to be a new borrower and you cannot have any outstanding federal loans as of October 7, 1998. Loans need to be distributed after that date.
#3 Graduated Plan
The Graduated Plan, like the Standard Plan, has a term of up to 10 years, but with the Graduated Plan, over time your monthly payments are going to increase, generally once every two years. The Graduated Plan could be a smart option for you if right now you cannot afford a high monthly payment, but in the future you will be able to do that. For example, you will have an increase in earning potential. When you use the Graduated Plan, you will pay more in interest over the loan’s lifetime than you would with the Standard Plan, because lower initial payments lead to the accumulation of more interest.
#4 The Pay as You Earn Repayment Plan (PAYE)
The Pay as You Earn Plan offers low monthly payments that are the same or less than the monthly payments would be under the Standard Plan, with a maximum term of 20 years. However, should you pay your loan over a 20-year term, lower monthly payments will result in more interest accruing than with the Standard Plan. After 20 years of qualifying monthly payments, the balance is forgiven.
To qualify for the Pay as You Earn Plan, it is required that you have a partial financial hardship, which happens when your annual loan repayment is greater than 10% of the difference between your adjusted gross income and 150 of the household poverty limit in the state you reside. To remain on this plan you are required to report your income annually.
For you to qualify for the Pay as You Earn Plan, as of October 1, 2007, you have to be a new borrower and on or after October 1, 2011 you must receive a loan disbursement. Also, you may have received disbursements between these dates, but a minimum of one disbursement needs to be after October 1, 2011.
#5 Revised Pay as You Earn Plan (REPAYE)
REPAYE is comparable to the PAYE repayment plan, but there is one main difference. Up until now, to qualify for the PAYE plan on or after October 1, 2007, you had to have taken out your loan. With the REPAYE plan, it doesn’t matter when you took out your Direct Loan, just as long as you are able to meet the other criteria to qualify for the PAYE plan. Over time, it is likely that REPAYE will replace the other income-based plans, but for now you can still enjoy the benefits from these other options that are still available.
#6 Income-Contingent Repayment Plan (ICR)
There is a maximum term of 25 years for the Income-Contingent Repayment Plan, at which point the government will forgive the balance of the loan. The monthly payment will be the fixed monthly payment necessary to repay the loan over a 12 year period, or the least of 20% of your discretionary income, that is based on the difference between your AGI and 100% of your poverty guideline.
With the ICR Plan, there are no income eligibility requirements, but your income and the amount that is owed determine eligibility rather than your income and poverty line determining the monthly payment. With the Income Contingent Repayment Plan, you may have higher monthly payments than you would with IBR or PAYE, and they may even be higher than with the Standard Plan.
The Income Contingent Repayment Plan is the only income-driven option for parents with FFEL loans or Direct Plus loans.
#7 Income-Sensitive Repayment Plan (ISR)
The Income-Sensitive Repayment Plan applies only for FFEL loans, which after July 1, 2010 have not been issued. This plan is based solely on your annual income to determine your monthly payment. You can choose a monthly payment amount between 4% and 25% of your monthly income, but there is a minimum interest payment payable monthly. Annually, you have to report your income or you need to switch to the Standard Plan. The ICR Plan has no loan forgiveness, and because of the minimum payments, you might have to pay more than you would with another income-driven plan.
#8 Income-Based Repayment Plan (IBR)
Under the Income-Based Repayment Plan, your monthly loan payments change as your income changes. However, you will pay a maximum monthly payment that is no higher than what you would have paid under the Standard Plan.
After July 1, 2014, the maximum monthly payment for borrowers is usually 10% of discretionary income, which is determined by calculating the difference between your AGI and 150% of the federal poverty guideline. From one year to the next, your monthly payments can vary as your situation changes. If you borrowed before July 1, 2014, the maximum payment is usually 15% of your discretionary income.
To be eligible for the Income-Based Repayment Plan you have to be a new borrower and, as of October 1, 2007, you cannot have any outstanding FFEL or Direct loans, and you must meet the hardship qualification, which means your monthly payments on the Standard Plan must be more than 15% of your discretionary income. Unless you annually submit proof you’ll revert to the Standard Plan.
As of July 1, 2014 the IBR Plan can have a term of up to 20 years for new borrowers or 25 years for borrowers with an outstanding loan on July 1, 2014.
The lower monthly payment and longer term mean you will pay more in interest than you would with the Standard Plan. After 25 years of qualifying payments, the government forgives the balance owed. For new borrowers, it happens 20 years. You are responsible for paying income tax on the amount of the loan forgiven.
The cheapest option to repay your federal student loans is to stick to the Standard Plan, but if you are having trouble making your monthly payment, there are a number of alternatives.