There are two major types of repayment plans- balanced based plans and income based plans. Essentially, balanced based plans involve the borrower paying the student loan in full over a period of time, whereas income based plans calculate the borrower’s monthly payment using the borrower’s income, and if the borrower is unable to repay the loan within a certain number of years, the remaining balance is forgiven. Generally, the income based plans benefit the borrower much more than the balance based plans because they have lower monthly payments and you are not paying the loan in full.
Balance Based Repayment Plans
These plans require a minimum monthly payment of $50.00 and the borrower can change plans at least once a year
- Ten Year Standard Payment- This is the plan the U.S. Dept. of Education puts your student loans in if you do not select a plan. It amortizes the loan over a 10 year period.
- Graduated Payment- This plan is for 10 years also, but payments start out low and adjust up every two years.
- Extended Payment- This plan allows for loans that exceed $30,000 to be paid over a period of 25 years.
- Extended Graduated Payment- This plan allows for loans that exceed $30,000 to be paid over a period of 25 years, with payments starting out low and increasing every 2 years.
Income Based Repayment Plans
These plans have specific eligibility criteria that can be complicated. For instance, eligibility for each program depends on the type of loan (Direct Loan, FFEL, Perkins, Parent Plus) and when the loan was taken out. In these plans, monthly payments can be zero in some cases. Borrowers who repay their loans through these types of plans have their remaining balances forgiven after 20 or 25 years. However, under the current state of the law, the forgiven balance is taxable.
- Income Contingent Repayment (ICR)- This plan factors both the borrower’s income and balance of the loan to calculate a monthly payment. The repayment term can be up to 25 years and any remaining balance at the end is forgiven. The negative element of this plan is that the larger the loan balance, the less helpful the ICR plan is. That is generally why the IBR plan is the preferred plan since it does not factor in the loan balance. This plan sunsets (no longer available) on 7/1/2024.
- Income Based Repayment (IBR)- This plan applies to Direct and FFEL loans taken out before 7/1/2014. This plan calculates the borrower’s monthly payments based on 15% of your disposable income after comparing your AGI (Adjusted Gross Income) to the poverty level for the family of equal size. The repayment term is 25 years and any remaining balance at the end is forgiven.
- New Income Based Repayment (New IBR)- This plan applies to Direct loans only and that are taken out on or after 7/1/2014. Payments are calculated at I 0% of the borrower’s monthly discretionary income and based on family size and household AGI. The repayment term is 20 years and any remaining balance at the end is forgiven.
- Pay As You Earn (PAYE)- This plan is similar to IBR, except monthly payments will be lower because the formula bases your payment on 10% of your disposable income rather than 15%. Furthermore, the repayment period is 20 years at which time any remaining balance is forgiven. This plan applies only to borrowers with both no balance before October 1, 2008 and new student loans incurred after October 1, 2011. This plan sunsets (no longer available) on 7/1/2024.
- Saving on a Valuable Education (SAVE)- This plan replaces the REPAYE plan. This plan applies to Direct loans only. This plan calculates the borrower’s monthly payments based on 10% of discretionary income for graduate loans and 5% of discretionary income for undergraduate loans; and, if the borrower has both graduate and undergraduate loans, payments are based upon a weighed average of between 5% and 10% of discretionary income. The repayment term is between 20 and 25 years and any remaining balance at the end is forgiven. This plan generally will provide the lowest monthly payment of all the income based repayment plans.
