What are the Pros & Cons of Repayment Plans?
Income Driven Repayment Plans (IDRs)can be a great option for many, but it's ultimately up to you to decide if the risk is worth the reward. Keep in mind that there are both advantages and disadvantages to switching plans, and you know your situation better than anyone. We encourage you to use the information below to decide on which plan, if any, will be the best option for you.
First, take a look at the below chart to see a quick overview of each of the IDR plans and how they differ.
Provides an option during unemployment
IDRS can help unemployed borrowers who have already gone through options such as unemployment deferment, economic hardship deferment or forbearances. Since payments are based on your income, your payment could be as low as $0.
Results in lower monthly payments (in most cases)
IDRS provide more affordable monthly loan payments as they are based on your discretionary income. Oftentimes, these plans provide borrowers with the lowest monthly payment available to them. In simple terms, borrowers qualify for a lower monthly payment if their total student loan debt at graduation exceeds their annual income.
Payments could be $0
As mentioned in the first point, low-income borrowers may qualify for a student loan payment of $0. This is calculated by determing if the borrower’s adjusted gross income is less than 150% of the poverty line (IBR, PAYE and REPAYE) or 100% of the poverty line (ICR). The great thing about this is that if your monthly payment does result in $0, it still counts toward loan forgiveness.
To put this amount into perspective, here are two examples:
- Borrowers who earn the federal minimum wage, which is currently $7.25 per hour, and work 40 hours per week earn less than 150% of the poverty line for a family of 1.
- Borrowers who earn $15 per hour earn less than 150% of the poverty line for a family of 3.
Plans include partial loan forgiveness
Dpending on the plan you decide to switch to, after 20 or 25 years in repayment, the remaining student loan balance is forgiven. However, keep in mind that, this balance is taxed unless you qualify for public service loan forgiveness. You can read more about PSLF here: Public Service Loan Forgiveness (PSLF)
Interest is paid on subsidized loans
The federal government will pay for all or part of the accrued but unpaid interest on some loans in some IDRs.
- During the first three years, the federal government pays 100% of the accrued but unpaid interest on subsidized loans in IBR, PAYE and REPAYE and 50% of the accrued but unpaid interest on unsubsidized loans in REPAYE.
- For the remainder of the repayment term, the federal government pays 50% of the interest on all federal student loans in REPAYE. All other interest remains the responsibility of the borrower and may be capitalized if it remains unpaid, depending on the repayment plan.
Credit scores aren’t negatively affected
IDRs will not hurt your credit scores. Borrowers who make the required monthly loan payment will be reported as current on their debts to credit bureaus, even if the required payment is $0.
Not everyone qualifies
Eligibility for income-driven repayment is mostly limited to federal student loan borrowers, so private loan borrowers are unable to take advantage of the majority of them
It is also important to note that Parent Plus loans are not directly eligible for income-driven repayment, but may become eligible for ICR by including the Parent PLUS loans in a Federal Direct Consolidation Loan.
Most private student loans do not offer IDRs. Although IBR is available for both FFELP and Direct Loans, ICR, PAYE and REPAYE are available only for Direct Loans.
Your total student loan balance may increase
It is possible for student loans to be negatively amortized under the income-driven repayment plans. Negative amortization occurs when the loan payments you are making are less than the new interest that accrues that month. This causes the loan balance to increase.
If you eventually qualify for partial loan forgiveness, this will not matter much, but it is worth noting. Just know that if this is the case, you may not see that your total loan balance will actually show much change over the years.
Partial loan forgiveness comes with taxes
Unlike forgiveness with PSLF, the loan forgiveness after 20 or 25 years in IDRs is taxable under current law (the only exception comes with recent legislation in 2021 by the Biden adminstration that allows for those who qualify to pay meet the IDR requirements between now and 2026 will not have to pay taxes on the forgiven amounts of the loans). The reason for these taxes is due to the fact that the IRS treats the cancellation of debt as income to the borrower.
There are some options however, and you can find them outlined below:
- If the borrower is bankrupt, with total debt exceeding total assets, the borrower can ask the IRS to forgive the tax debt by filing IRS Form 982.
- You might also propose an offer in compromise by filing IRS Form 656.
- The final option, other than paying off the tax bill in full, is to seek a payment plan of up to six years by filing IRS Form 9465 or using the Online Payment Agreement Tool. (Please note that IRS charges interest on payment plans). You may also be required to sign up for auto-debit if the tax debt is $25,000 or more.
Being married may result in higher payments
Some IDRs include a "marriage penalty". If the borrower gets married and their spouse has a job, the monthly loan payment may increase as it's based on total income. If you file a joint return, the loan payment is based on the combined income of you and your spouse.
With ICR, IBR and PAYE, the loan payment is based on just the borrower’s income if the borrower files federal income tax returns as married filing separately. However, filing a separate tax return causes the borrower to miss out on certain federal income tax deductions and tax credits, such as the Student Loan Interest Deduction, American Opportunity Tax Credit (AOTC), the Lifetime Learning Tax Credit (LLTC), the Tuition and Fees Deduction, the Education Bond Program and various child and adoption tax credits. This may outweigh the plan benefits.
With REPAYE, the loan payment is based on joint income regardless of the tax filing status.
Payments can (and likely will) increase over time with certain plans
Loan payments will increase as income increases under certain IDRs. There is no standard repayment cap on the loan payments in the ICR and REPAYE repayment plans, so loan payments can increase without bound as income increases.
You have to recertify each year
There is an annual paperwork requirement. Borrowers must recertify their income and family size every year. If you miss the deadline, your loans will be placed back in the standard repayment plan. Another penalty is that if you file the recertification late, the accrued but unpaid interest will be capitalized, adding it to the total loan balance.
It's a long commitment (even with partial loan forgiveness at the end)
20 or 25 years is a big commitment to a debt. Since standard repayment plans are set to be paid within 10 years, borrowers who choose IDRs will be in debt longer and may pay more interest due to the longer repayment term.
If you choose an IDR, you are locked into that repayment plan. Repayment plan lock happens because the loan payments will jump if you switch from an IDR to another repayment plan. The loan payments will be based on the loan balance when you change repayment plans, not the original loan balance. This can make the new monthly loan payments unaffordable and defeat the purpose of the initial switch.
Ultimately, we encourage everyone to consider all factors before making a switch and consulting a financial advisor or student loan counseling professional if they are unsure of which path to take.
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