4 Income-Driven Student Loan Repayment Plans For Federal Loans

Employees can avail of income-driven student loan repayment plans for federal loans.

They will only pay an amount based on their income and family size.

These are great options for those with outrageously high-interest payments.

Check out the different types of income-driven repayment plans.

Types of Income-driven Student Loan Repayment Plans

1. Pay As You Earn Repayment Plan (PAYE Plan)

The government launched the Pay As You Earn Repayment Plan (PAYE Plan) in October 2011 during the Obama administration.

Former U.S. President Barack Obama had promised debt relief during his campaign.

PAYE was then dubbed the “Obama Student Loan Plan.”

How the loan works: PAYE sets a cap based on the students’ discretionary income or what remains after taxes and living expenses.

Monthly payment: 10 percent of student’s discretionary income

Who is eligible: Direct Loan borrowers

Pros: Borrowers can apply for loan forgiveness. After making 20 years of qualified payments, they can ask for the remaining balance to be forgiven.

Cons: PAYE was limited to students who received William D. Ford Direct Loans after October 1, 2007.

US college grads: you could lower your student loan repayments thanks to Obama's PAYE plan https://t.co/5uZoF4bHeG via @NPR

— Student.com (@Student) November 17, 2015

2. Revised Pay As You Earn Repayment Plan (REPAYE Plan)

The government introduced the Revised Pay As You Earn Repayment Plan (REPAYE Plan) in 2015 because PAYE had too many restrictions.

How the loan works: REPAYE provides a more generous interest subsidy compared to other plans.

Similar to other plans, REPAYE covers the unpaid monthly interest on subsidized loans for up to three years.

However, after that, REPAYE also covers 50% of the interest on both subsidized and unsubsidized federal student loans.

Who are eligible: Direct Loan borrowers

Pros: Borrowers who did not qualify for PAYE became eligible under REPAYE. These are borrowers who took out loans before October 2007 or stopped borrowing as of October 2011.

Cons: Spouses’ incomes are counted under REPAYE. This means that the student’s monthly loan payment could go up.

If you haven't read up on the Revised Pay As You Earn Repayment Plan for student loans, do so today! Very helpful. https://t.co/nMRu3otiry

— The Finance Bar™ (@thefinancebar) January 18, 2016

3. Income-Based Repayment Plan (IBR Plan)

The U.S. government launched the Income-Based Repayment Plan (IBR Plan) in 2009.

Borrowers must have enough debts compared to their incomes to qualify for a reduced payment.

How the loan works: IBR uses a scale to determine how much the borrowers should pay. Those earning below 150% of the poverty level will have $0 required loan payment. Those earning more will pay more.

Monthly payment: 10 percent of their discretionary incomes (for students who took loans on or after July 1, 2014); 15 percent of discretionary income (for those who borrowed money before that date)

Who are eligible: Direct Loan borrowers and FFEL borrowers

Pros: The loans will become eligible for forgiveness if borrowers still have a balance once the repayment period is over.

Cons: Almost all federal loans are eligible for IBR except for loans provided to parents of students.

You can now benefit from the income based repayment plan if you meet the criteria. Check this blog post to know i… https://t.co/Kdlmm4iCR1

— USStudentLoanCenter (@USSLC1) June 7, 2017

4. Income-Contingent Repayment Plan (ICR Plan)

The Income-Contingent Repayment Plan (ICR Plan) is the oldest of all income-driven student loan repayment plans.

The newer plans provide lower interest.

However, ICR is the only option available for those who availed of Parent PLUS loans.

How the loan works: To qualify for the ICR Plan, Parent Plus borrowers must avail a federal direct consolidation loan.

Monthly Payment: Borrowers can choose the lower amount between these two options: (a) 20 percent of your discretionary income, or (b) the monthly fee for a repayment plan with a fixed payment for 12 years based on your income.

Who are eligible: Direct Loan borrowers, including those who availed of Parent Plus loans

Pros: The cap under ICR is 20% and borrowers can eventually save more on interest compared to the IBR Plan.

Cons: Borrowers may end up with higher monthly payments under ICR compared to other plans.

Student loan borrowers entering the Income Contingent Repayment plan will have access to the following benefits. https://t.co/ymiLcNDPt6

— USStudentLoanCenter (@USSLC1) June 8, 2017

Advice from Experts on Income-Driven Student Loan Repayment Plans

Financial experts, in an article on Nasdaq.com, gave practical advice about income-driven student loan repayment plans:

Certified Financial Planner Carrie Houchins-Witt:  Income-driven student loan repayment plans are a good option for students and their families. The monthly payments are based on the borrower’s ability to pay, not on interest rate fluctuations. This matches the loan payments with the student’s ability to pay.

Financial advisor Laura Scharr-Bykowsky: Do not to overpay for college education. It’s a big mistake to go to an expensive college but end up with a low-paying job.

Certified College Funding Specialist Brett Tushingham: Do not take out a loan that is more than what you need. Study all your options for funding your college education.

Check out this video from Money MD about income-driven repayment plans for student loans:

Check out if you qualify for income-driven student loan repayment plans for federal loans. It’s a great option for employees who will only pay an amount based on their income and family size.

Would you have any advice for students about income-driven student loan repayment plans? Share them in the comments below!