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Student Loan Income Driven Repayment Plans

Christopher James

2022-01-31

The cost of a college education in the United States has been on the rise since the early 1980's. College tuition and fee prices have grown at an annual rate of 4% across all institutions, much faster than inflation or family incomes during that time. This increase in cost has left individuals with a heavier debt burden when they enter repayment after graduation.

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Income Driven Repayment

With such rapidly increasing costs, student loans can place a significant financial strain on individuals who are just beginning their careers and families. Keeping up with student loan monthly payments can make it even more difficult to buy homes and accumulate wealth over the course of their lives.

Fortunately, there is hope for undergraduate borrowers whose total direct student loan debt exceeds their annual income by more than $17,500. The U.S. Department of Education offers an income-driven repayment plan that ensures that every individual receiving the benefit pays a manageable percentage of their discretionary income toward their federal student loans—regardless of how much they owe in student loans. This prepayment program is accomplished by capping monthly payments at 10% to 15% of discretionary income, depending on when the initial loan was received and how much was borrowed.

Discretionary income is defined as the amount earned above 150% of the poverty level for one's family size or state of residence, whichever is greater. For example, if you are single with no dependents living in New York City making $40,000 per year before taxes your annual discretionary income would be $31,200 ($40,000-$8,800). Thus, your monthly payment under the income-driven repayment plan would not exceed $318 per month (or 10% of $31,200).

The government offers four distinct types of income-driven repayment plans. For borrowers who received their first student loan after July 1st, 2014, there is only one option; Income-Based Repayment (IBR). Under this repayment plan, a borrower's monthly payments are capped at 10% of discretionary income for those making less than 150% of the poverty level and 15% for those earning more. In addition to capping the monthly payment at a percentage of discretionary income, anyone enrolled in IBR must submit their annual paperwork proving they still qualify for the plan. This paperwork ensures that all borrowers enrolled in IBR are still experiencing financial hardship and continue to benefit from income-based monthly payments.

While enrolling into an income-driven repayment plan can provide short-term benefits such as alleviating immediate financial strain, it is important to consider long-term consequences of having larger student loan debt balances. Payments made under these plans do not cover the interest accrued every month on their federal loans. So over time the amount owed continues to grow and can lead to higher monthly payments down the road or even loan forgiveness after 20 or 25 years (depending on when they first borrowed). These factors should be considered carefully before deciding whether enrolling in one of these plans is right for you.

What If I Don't Finish College?

If you feel there is a chance you might drop out of college before earning your degree it may be wise to limit the amount of federal student loans taken on and explore other options such as private student loans, scholarships, grants, or work-study programs. These alternatives can help keep your debt levels manageable and may avoid putting yourself in a situation where monthly payments are higher than necessary.

A thorough understanding of what income-driven repayment plans entail is essential for anyone with student loan debt seeking financial stability ahead. The market value of a college degree has shown to increase over time making this investment one worth carefully considering when contemplating how to pay off student loans successfully at a pace that works best for you.


Conclusion

While enrolling into an income-driven repayment plan can provide short term benefits such as alleviating immediate financial strain, it's important to consider long term consequences of having larger student loan debt balances. Payments made under these plans do not cover the interest accrued every month on their federal loans. So over time the amount owed continues to grow and can lead to higher monthly payments down the road or even loan forgiveness after 20 or 25 years (depending on when they first borrowed). These factors should be considered carefully before deciding whether or not enrolling into one of these plans is right for you.