Income-Driven Repayment for Student Loans: What's Your Best Option?

Extending the time it takes to pay off a student loan makes it more expensive but will lead to lower payments.
By John Sandman ,

Reducing student loan payments can become a must-have for anyone looking to cut the amount of his monthly obligations. Reduced payments also result in a prolonged payoff--and make those loans more expensive--but can mean the difference between staying current and going into default.

"Income-driven repayment is a generic term that refers to all of the repayment plans that base monthly payment on a percentage of discretionary income," said Mark Kantrowitz, a financial aid expert. "ICR, IBR, and PAYER are all different types of income dependent repayment plans."

The monthly payment under ICR, for example, is based on a percentage of the borrower’s discretionary income--and that's where this gets tricky. Discretionary income is the amount an individual's adjusted gross income (AGI) that exceeds 100% of the poverty line—a minimum income standard and moving target based on family size and what state you live.

When it comes to federal loans made by the Department of Education, there are different monthly payment schemes for each plan.

--Income-Contingent Repayment (ICR): The borrower pays 20% of Adjusted Gross Income minus 100% or the Poverty Line. Available only to people with Direct Loans.

--Income-Based Repayment (IBR): The borrower pays 15% of Adjusted Gross Income minus 150% of the Poverty Line. IBR is available to people with FFELP loans (the Federal Family Education Loan Program) and Direct Loan borrowers as of July 1, 2009. New loans ceased to be made under FFELP in July 2010, when the program was ended.

--Pay-As-You-Earn Repayment (PAYER): The borrower pays 10% of Adjusted Gross Income minus 150% of the Poverty Line. Available to all borrowers who have at least one loan disbursed on or after October 1, 2011

--Revised-Pay-As-You-Earn-Repayment (REPAYER): The borrower pays 10% of Adjusted Gross Loan forgiveness minus 150% of the poverty line. REPAYER, a do-over of PAYER, will be available to all borrowers by the end of next month.

--The Public Service Loan Forgiveness Program (PSLF): Applies to any income-driven repayment plan. Loans can be forgiven in ten years if the borrower works full-time in a public service job and the loans are in the Direct Loan program and are current.

Great Lakes Higher Education Corporation, one of the Big Four student loan servicers--the others are Navient (formerly Sallie Mae), the National Education Loan Network (NelNet) and Pennsylvania Higher Education Assistance Agency (PHEAA)--points out on its website that you start with the IBR/Pay As You Earn/ICR Repayment Plan Request page on The Department of Education's StudentLoan.gov website to see what plans you could qualify for.

"Each year you'll need to reapply in order to remain eligible for the lowest monthly payment amount," Great Lakes said. "As your income, family size and state of residence change, so will your monthly payment amount."

"Your exact plan varies based on your loan types and specific situation," Great Lakes added. "If you reapply each year and qualify, you may have reduced monthly payments for up to 25 years. Any remaining balance may be forgiven. However, you may be required to pay income tax on the amount that's forgiven."

As Great Lakes points out, "Because income-driven repayment plans generally extend the payment period, you may pay more money over the life of your loan."

It all wraps back to tuition, and what you paid to go to school may be what comes back to haunt you in your after-school life. It's one reason why students who chose for-profit colleges over community colleges could be selling themselves short.

"If a program is offered at both a for-profit college and a community college, the program will be cheaper at the community college, because the state subsidizes the community college," said Kantrowitz. For-profit colleges generally, he said, "are charging more than the combination of tuition and subsidy at the community college, but it is unclear by how much. And it is unclear why the student chooses to enroll at the for-profit college when the community college are a cheaper option."

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