The Income Driven plans are extremely popular and rightfully so. But they are also misunderstood as being “too good to be true.” Let’s quickly go over some of the benefits to better understand the good behind the income plans. We will go over these quickly and then hit on these benefits more in depth in later posts.
1) They are based on what you earn
Under the IBR your monthly payment will be 15% of your discretionary income and under the PAYE plan it will be 10% of your discretionary income (discretionary income is based on formula). In addition, your payment will never be more than the amount you would be required to pay under the Standard Repayment plan.
2) There is an interest payment benefit for the first three years
The government will cover any interest not covered by your payments for the first three years on subsidized loans. This does not happen for the Income Contingent Repayment Plan.
3) There is a cancellation of debt after a certain time period.
For IBR and ICR plans, after 25 years whatever debt is remaining will be cancelled. For PAYE, after 20 years, cancellation will occur. Any debt that is cancelled will be considered taxable income
4) These plans qualify for Public Service Loan Forgiveness
If while you are employed full time for a public service organization, you can make 120 qualifying payments to possibly qualify for forgiveness. In order to have a payment qualify, it must be under certain payment plans. IDR plans qualify for this. While other things are needed to qualify for PSLF, this is a major component.