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What should I know about federal student loans and income-driven repayment plans?



What is it? An income-driven repayment plan ties your monthly federal student loan payment to your income. It helps ensure that you’re only being charged an amount that you can afford. For some people, the monthly payments are $0.

Why should I do it? It’s important to enroll in an income-driven repayment plan if you’re having trouble keeping up with your federal student loan payments. The plans help you avoid falling behind or going into default. Going into default generally means that you have not made a payment in more than 270 days. If this happens, your wages may be garnished without a court order. You could lose out on your tax refund or Social Security check. Your credit score could suffer.

Am I eligible? If you have a federal student loan, you are likely eligible. One major exception is if you have Parent PLUS loans (in which case you will want to talk to an expert for individualized advice on how to enroll for an income-driven repayment plan). A Parent PLUS loan is a student loan taken out by a parent to finance their child’s education. If you have private student loans (loans offered by the school, a bank, or other financial institution and not backed by the federal government) you are not eligible for the federal income-driven repayment plans. If you have private loans, you will need to contact your specific lender to see if they offer any options as to those specific loans.

How do I apply? In less than 10 minutes, you can enroll! We have a step-by-step guide that is available here. Broadly, you’ll need to take two steps:

  • Choose your plan. As shown below, there are four possible plans that you can choose from. Each plan is slightly different. When you apply, you can also check a box that tells your loan servicer to choose the plan with the lowest monthly payment. Your loan servicer is the Company that you interact with regarding your student loans. They’re the company that collects the payments from you (examples include Navient or Great Lakes).
  • You can apply on-line at https://studentaid.gov/app/ibrInstructions.action. Alternatively, you can send a physical copy of the application to your loan servicer. Once you’re enrolled, you’ll need to verify your income each year. If you want to re-verify your income on-line, you can do so at the same website above. If you want to re-verify your income on paper, then you will need to work with your loan servicer  to do so.

What are the different plans? There are four different plans, each with slightly different terms and conditions. Generally speaking:

  • REPAYE: Most direct loan borrowers are eligible for this option. A direct loan borrower is someone who borrowed a loan directly from the federal government (rather than a loan borrowed from a bank or financial institution that is then backed by the federal government). The REPAYE plan requires a monthly payment of about 10% of your “discretionary income” (money you have left over from your post-tax income after paying for necessary expenses like rent, utilities, and food). There’s no cap on what you could pay, so if you anticipate that you’ll earn more money soon, this may not be the best option. At the end of 20-25 years, any outstanding balance on your loan will be forgiven by the government (“loan forgiveness”).
  • PAYE: If you are a direct loan borrower and took out your loan after July 1, 2014, you are eligible for this plan. It requires a monthly payment of 10% of your discretionary income. You will never pay more than what you would pay in a standard repayment plan. Loan forgiveness occurs at the 20-year mark.
  • IBR: This plan is open to most borrowers and requires a monthly payment of between 10%-15% of your discretionary income. It is also capped, and loan forgiveness occurs after 25 years.
  • ICRP: This plan is open to most direct loan borrowers and charges 20% of any earnings above the federal poverty level. Loan forgiveness occurs at the 25-year mark.

Note: The plans handle interest on the loans slightly differently. If you think you might leave the plan down the road, you should read more on how interest works under each plan. And, if you’re married, you should also look at how your spouse’s income will be treated under each plan. Finally, if any part of your loan is forgiven after 20-25 years, you may be required to pay income tax on that amount.

What if I consolidated my loans or plan to consolidate them? If you only have federal loans, then consolidation could impact the type of IDR plan you’re eligible for. If you consolidate a private loan with a federal loan, you would be doing so with a private lender and would lose your eligibility for a federal IDR plans.

What if I have more questions? If you have questions about what type of loans you have, how to apply, or which plan is right for you, you should contact your loan servicer or call the Federal Student Aid Ombudsman Group at the Department of Education at 1-877-557-2575. You can also book an appointment with an advisor at College Now Greater Cleveland. Their website is: https://www.collegenowgc.org/adult-programs-and-services/.

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