Income Driven Repayment Plans: An Introduction

You can’t make your current payments on any of the payment plans that are available and extending your plan hasn’t worked. What is a person to do?

Born out of this problem came a solution. A payment plan that is set by your income and family size. Over the years it has been updated with different payment plans that if you qualify for, can get you lower payments than the previous plan.

The three plans available are the Income Contingent, Income Based, and Pay As You Earn. We will do a quick overview of each. We will then in the days and weeks to come go over the particulars as they relate to specific Income Driven plans.

The Income Contingent plan traditionally gives the highest payment. It also has no income limit unlike the other two but as a result can give payments higher than the standard plan if the borrower makes too much income. ICR is best if you have Parent PLUS loans since if you consolidate your loans, Parent PLUS loans are only eligible for ICR.

The IBR plan is the one that most borrowers (without Parent PLUS loans) will qualify for. It is good if you have FFELP loans or if you have older loans. This plan is usually significantly cheaper than the ICR plan.

The PAYE plan is the cheapest of the three but also the hardest to get onto. On 10/1/07 you would have had to either paid off your loans or never have received a loan  and have at least one loan after 10/1/11 (there are some caveats to this rule which we will go over in more detail). In addition in order to qualify the loans must be Direct Loans.

These loans also qualifies for cancellation in 25 or 20 years depending on which plan you are on (25 years ICR/IBR and 20 years on PAYE). In addition for the first three years of a PAYE or IBR, the subsidized loans have an interest subsidity for any amount that is not paid by the payment amount.

Like any program there are good (usually much more affordable payments) and bad (a lot more interest) sides. But it definitely provides a good option to sometimes otherwise strapped borrowers.  We will go over that over the next couple of months to help further educate you on these options.