U.S. student loan debt has more than tripled since 2006, according to data Federal Reserve Bank of St. Louisand as of the first quarter of 2021, Americans had $ 1.729 trillion in student loan debt.
For some student loan holders, paying off this debt is a huge burden. In 2019, 17% of adults with outstanding student loan balances were late in payments, according to data The federal reserve…
Although large-scale student loan forgiveness failed, some borrowers may find relief by signing up for an income-driven repayment plan.
Refinancing a student loan is also an alternative option for borrowers who want to save money but are not eligible for such plans. If you are interested in refinancing your private student loans, use a tool like Credible to compare student loan refinancing rates from several lenders at the same time without affecting your credit.
What is an income-driven repayment plan?
An income driven repayment plan is a student loan repayment plan in which monthly payments are based on your income and family size. Because it is based on these factors, it can be cheaper than a standard 10-year repayment plan.
Only eligible federal student loan borrowers are eligible to participate in income-based repayment plans. Unfortunately, there is no such option for private student loans.
However, one way manage private student loan debt consider the possibility of refinancing the loan. Use the online student loan refinancing calculator to understand what your new monthly payments might be.
Can an income-driven repayment plan help forgive my student loans?
When you sign up for an income-driven repayment plan, you can get a student loan balance forgiveness. The time it takes to forgive the loan balance depends on which income-based payment program you are participating in.
Here are four options for paying federal student loans based on income and their duration:
- Contingent income repayment plan (ICR) – 25 years
- Pay-as-you-go (PAYE) repayment plan – 20 years
- Income Based Repayment Plan (IBR) – from 20 to 25 years old (borrowed before July 1, 2014)
- Revised pay-as-you-go plan (REPAYE) – from 20 to 25 years old (postgraduate study)
With each plan, a percentage of your discretionary income goes towards your student loans. The PAYE and REPAYE programs require you to pay 10% of your discretionary income. The IBR plan requires you to pay 10% of your discretionary income; 15% if you took out a student loan before July 1, 2014. REPAYE requires you to pay 20% of your discretionary income.
Upon completion of each program, the loan balance will be written off in 20-25 years. However, if you participate in an income-driven repayment plan and are eligible for the Public Service Loan Forgiveness program, your loans can be forgiven after 10 years or 120 “qualifying” payments.
Pros and cons of income-driven repayment plans
Before signing up for an income-driven repayment plan, you should consider the pros and cons.
The pros of repayment plans include:
- Lower monthly payments
- Reduced loan amount
1. Lower monthly payments. Since your monthly payments are based on your discretionary income, they may be more affordable. For example, if you retirement with student loansyou may find it easier to pay for your day-to-day expenses in addition to your student loan payments.
2. Reduced loan amount. Writing off a portion of your student loan balance reduces the total amount you pay, freeing up money that you can use for other financial purposes.
The disadvantages include:
- Stay in debt longer
- Forgiven taxes
1. Stay in debt longer. If your goal is to get out of debt, using a repayment plan will keep you in debt for longer.
2. Taxes on the forgiven amount. Forgiven student debt may be taxed if current law changes.
If you are not eligible for an income oriented repayment plan and you have private student loans, you might consider refinancing your student loan. Use an online tool like Credible to view the rate table. which compares the rates of several student lenders at once.
If federal student loan payments are too high, an income-driven repayment plan can make them more affordable. After payments are made for a period of 10 to 25 years, the student loan balance can be forgiven. The time it takes to forgive your loans will depend on which type of income-driven plan you sign up for.
However, before signing up for this plan, consider the pros and cons. The downside is that this debt can affect you for decades. If your goal is to get out of debt soon, this may not be the best plan for you.
This option is not available to you if you have private student loans. If this is your case, you may want to consider refinancing to save money. Use a tool like Credible to get prequalified student loan refinancing rates without affecting your credit rating.
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