Income-Driven Repayment Plans: The Easy Guide

The Student Loan Burden and the Promise of IDR

You might feel the pressure of student loan debt holding you back. Across the country, student loan debt totals over $1.57 trillion. That’s a huge jump — 88% — in only the last ten years. This means that graduates in 2020 left school owing an average of $38,792. Because of these loans, you might have to wait longer to buy a house or save for retirement. You might even have to choose a job you don't love just to pay your bills. No worries though, solutions exist to make your student loan payments more manageable.

If you are struggling with student loans, Income-Driven Repayment (IDR) plans can help. These plans can make your monthly payments more affordable. With an IDR plan, your monthly payment depends on your income and family size. This means that you'll never have to pay more than you can afford. And, after you make a certain number of payments, any remaining debt gets forgiven! IDR plans are a great option for anyone who wants to make their student loans more manageable.

You have a few different IDR plans to choose from: SAVE, IBR, PAYE, and ICR. Each plan has its own unique set of rules and benefits. Later on, you can learn more about how these plans work and which one might be the best fit for you.

Understanding IDR Plans: Aligning Repayment with Your Financial Reality

IDR Core Mechanics

Income-Driven Repayment (IDR) plans base your monthly student loan payments on what you can afford to pay. Every year, you give your loan servicer information about your income and family size. They use this information to calculate your "discretionary income," which is the amount of money you have leftover after paying for basic necessities. Your monthly payment will be a percentage of your discretionary income. Once you make the required number of payments over 20 or 25 years, your remaining student loan balance is forgiven.

How IDR Plans Work

Let's say you graduated in 2020 with the average student loan debt of $38,792. Under the Standard Repayment Plan, your monthly payment would be about $424. That's a big chunk of your paycheck! But if you enroll in an IDR plan, you could pay a lot less. For example, under the Income-Based Repayment plan, you might only pay $58 per month. Plus, after making payments for 20 or 25 years, the rest of your debt is forgiven. The exact amount you'll pay and how long it takes will depend on your income, family size, and which IDR plan you choose. Keep in mind, the forgiven amount may be taxed as income. There are different IDR plans with different timelines for forgiveness and payment amounts, so choosing the right one for you is important.

Addressing Concerns about IDR Plans

You might be hesitant to enroll in an IDR plan because you’ve heard some things that worry you. For instance, you may have heard that your loan balance can actually grow under IDR. This is called "negative amortization," and it can happen when your monthly payment is less than the interest accruing on your loan. While this is a valid concern, the newest IDR plan, SAVE, eliminates this problem by covering any unpaid interest for borrowers making their regular monthly payments. Another common concern is the tax implications of loan forgiveness. Currently, you will have to pay income taxes on any amount forgiven under IDR plans (except for the Public Service Loan Forgiveness program). While the tax bill could be large, you’ll only have to pay it many years from now.

Spotlight on SAVE: A New Era of Borrower-Friendly Repayment

Introducing the SAVE Plan

You should consider the SAVE plan as a way to manage your student loan debt! The SAVE plan, or Saving on a Valuable Education plan, is the newest IDR option and offers borrowers significant benefits. SAVE shields more of your income from repayment calculations compared to other IDR plans. This means you keep more money in your pocket each month! With SAVE, you won’t have to worry about your loan balance growing because of unpaid interest as long as you make your monthly payments. And if you borrowed $12,000 or less, you can become debt-free in just 10 years through SAVE’s faster forgiveness option.

SAVE Eligibility Requirements

The SAVE plan is available to most federal student loan borrowers. Direct Subsidized and Unsubsidized Loans, Direct Grad PLUS Loans, and Direct Consolidation Loans that do not include Parent PLUS loans qualify for the SAVE plan. Borrowers with Parent PLUS loans or Direct Consolidation loans that paid off Parent PLUS loans are not eligible for SAVE. FFELP loans and Perkins loans may need to be consolidated into a Direct Consolidation Loan to be eligible. Private student loans are not eligible for the SAVE plan, or any other IDR plan.

Applying for the SAVE Plan

Borrowers can typically apply for the SAVE plan online through the StudentAid.gov website. The application process is designed to be straightforward and user-friendly, requiring borrowers to provide basic information about their income and family size. The online portal streamlines the enrollment process, making it easy for borrowers to submit their application and manage their repayment plan. However, due to ongoing legal challenges, the Department of Education has temporarily suspended SAVE plan processing. This means that new applications are not currently being processed, and borrowers already enrolled in SAVE have been placed in an interest-free administrative forbearance. The Department of Education is providing updates on the situation and instructions for borrowers on the official SAVE plan page at ed.gov/SAVE.

Exploring Other IDR Plans: Choosing the Right Fit

Applying for the SAVE Plan

You can usually sign up for SAVE on the StudentAid.gov website. The application asks for basic information, like your income and family size, and shouldn’t take you long to fill out. The online portal helps you enroll and manage your repayment plan. However, the Department of Education isn't processing SAVE applications right now because of legal challenges. Current SAVE borrowers are in an interest-free forbearance until the legal situation is resolved, which could take a while. This also means that you won't get credit toward IDR or PSLF forgiveness if you apply now. For the latest updates and instructions, go to the SAVE plan page on ed.gov/SAVE.

Eligibility for Each Income-Driven Repayment Plan

To figure out which plan is right for you, you first need to know if you're eligible. All IDR plans have different rules about which loans and borrowers qualify. Generally, you need to have federal student loans, like Direct Loans or FFELP loans. Parent PLUS Loans and private loans usually aren't eligible, though you might be able to consolidate Parent PLUS Loans into a Direct Consolidation Loan to qualify for certain plans. Your eligibility will also depend on your income, family size, and when you took out your loans. Some plans, like PAYE, have additional requirements based on when you received your first federal student loan. If you have older FFELP loans, you might have to consolidate them to qualify for some of the newer IDR plans, like PAYE and REPAYE. You can use the Department of Education’s Loan Simulator Tool or contact your loan servicer to find out which plans you qualify for.

Selecting an IDR Plan

When choosing an IDR plan, borrowers should consider their income, family size, loan balance, and long-term financial goals. For borrowers with lower incomes and smaller loan balances, the SAVE plan offers the fastest path to forgiveness, with loan balances of $12,000 or less forgiven after 10 years of qualifying payments. Borrowers with higher incomes who prioritize paying off their loans more quickly might benefit from the IBR or PAYE plans. Online resources, such as the Department of Education's Loan Simulator, can help borrowers compare repayment options and project long-term costs. Additionally, loan servicers can provide personalized guidance to help borrowers make informed decisions.

Unemployment and Student Loans: Managing Repayment During Challenging Times

Managing Student Loans While Unemployed

When you’re unemployed, paying off your student loans can be a real struggle. You might be dealing with a tight budget and uncertain job prospects, making those monthly payments feel overwhelming. Even though you’re unemployed, you are still responsible for your student loan payments unless you make arrangements with your lender. You can explore options for deferment or forbearance, which let you pause payments for a period of time. Federal loans have standardized benefits for all borrowers, such as income-driven repayment plans and graduated repayment plans. Private student loans have more variation in the programs they offer for borrowers. It is crucial to contact your lender as soon as possible to discuss available options and avoid defaulting on your loans.

Options for Federal Student Loan Borrowers During Unemployment

If you're unemployed and struggling to make your federal student loan payments, you have several options. You can apply for unemployment deferment, which allows you to temporarily stop making payments for up to three years. Keep in mind that interest may still accrue on your loans during this time. Forbearance is another option that can provide a temporary break from payments. However, the terms of forbearance and whether interest accrues vary depending on the type of loan and your lender. You can also switch to an income-driven repayment (IDR) plan, which bases your monthly payments on your income and family size. If your income is low, your payments could be as low as $0 per month. Remember that it's important to contact your loan servicer to discuss your options and choose the best one for your situation.

Options for Private Loan Borrowers

Unlike federal student loans, private student loans don't have the same standardized options when you're struggling to make payments. Each private lender sets its own rules for things like deferment and forbearance. This means you'll need to contact your lender directly to find out what options are available to you. Some private lenders might offer deferment or forbearance for a limited time if you're facing financial hardship, including unemployment. They may also have other programs, such as unemployment protection or the possibility of refinancing to lower your monthly payments. It's important to communicate with your lender and explore all your options to avoid potential negative consequences like late fees and damage to your credit.

Communicate With Your Loan Servicer

You must talk to your loan servicer as soon as you become unemployed. They can help you understand your options and find a solution that works for your situation. Ignoring your loans or waiting until you're behind on payments will only make things worse. It could lead to late fees, a damaged credit score, and even legal action. Proactive communication can help you avoid these negative consequences and make managing your student loans during unemployment less stressful.

Consequences of Non-Payment: The Importance of Staying on Track

Consequences of Missing Payments

If you miss a student loan payment, your loan becomes delinquent. This means you are behind on your payments. Late fees will start to add up, and your loan servicer will report the delinquency to the credit bureaus, which can hurt your credit score. If you continue to miss payments, your loan will eventually go into default. Default has serious consequences. You could lose access to federal student aid and other government benefits. Your wages could be garnished, and your tax refunds could be seized. The government may even sue you to collect the debt. Default can severely damage your credit, making it difficult to get a loan, rent an apartment, or even get a job in the future. It's crucial to stay in contact with your loan servicer and make arrangements to avoid default if you're struggling to make your payments.

Impacts of Late Student Loan Payments

Missing a student loan payment results in immediate consequences. Your lender will assess late fees, increasing your overall debt. Additionally, the late payment appears on your credit report, lowering your credit score. A lower credit score makes it more challenging to secure loans, such as credit cards, auto loans, and mortgages. It may even impact your ability to rent an apartment or get a job.

Reaching Out to Your Loan Servicer

When you're facing challenges with student loan repayment, you need to reach out to your loan servicer immediately. They are your best resource for understanding your options and finding a solution that fits your situation. Open communication is key to avoiding the negative consequences of missed payments, such as late fees, damage to your credit, and even default. By working with your loan servicer, you can explore possibilities like deferment, forbearance, or switching to an income-driven repayment plan. Remember, they want to help you succeed in repaying your loans, and reaching out early is always the best course of action.

Empowering Borrowers to Navigate the Student Loan Landscape

Understanding and Utilizing IDR Plans

You can take charge of your student loan debt by understanding and utilizing Income-Driven Repayment (IDR) plans. These plans provide a safety net, especially during times of unemployment or financial hardship. You can adjust your monthly payments based on your income and family size, potentially lowering them to as little as $0. It's essential to remember that communication is key. Reach out to your loan servicer as soon as you encounter repayment difficulties. They can guide you through available options, including deferment, forbearance, or switching to an IDR plan. Proactive communication helps you avoid the negative consequences of missed payments, like late fees and damage to your credit score, ultimately leading to a smoother and more manageable student loan repayment journey.

Taking Control of Your Student Loan Repayment

You have the power to shape your student loan repayment journey. Don't feel overwhelmed or helpless. Start by understanding all of your repayment options, including income-driven repayment plans, which can offer lower monthly payments based on your income. Then, reach out to your loan servicer and have an open and honest conversation about your situation. Together, you can create a plan that works for you and avoid the stress and potential consequences of falling behind on payments. Remember, taking control and making informed decisions will set you on the path to successfully managing your student loans and achieving your financial goals.

Taking the Next Step in Your Student Loan Journey

You can find additional resources to help navigate your student loan repayment journey. Visit the official websites studentaid.gov and ed.gov/SAVE for comprehensive information about federal student loan programs, including details about IDR plans like SAVE. Explore student loan calculators and simulators available online to estimate your potential monthly payments under different repayment plans and gain a clearer picture of your financial obligations. Seek guidance from reputable financial advice websites and organizations to get personalized advice and support in managing your student loan debt. Remember, taking control of your student loans starts with being informed and seeking help when you need it.