Student loans can be a huge financial burden when you first start working, especially if you are self-employed. Paying off your student loans is just one of the cornerstones of managing your money after graduation. Fortunately, there are several payment plans for low income earning holders of federal student loans.
Income-Driven Repayment Plans (IDR)
Most of these payment plans fall under the umbrella of income-driven repayment plans. Any monthly student loan payments will vary based upon your income and family size. In some cases, the monthy payment could be $0 per month. Generally, payments are a percentage of your discretionary income. Each year, you will need to update your income and family size information. Any remaining balance in your account at the end of repayment period is forgiven. Repayment periods are typically 20 or 25 years.
While we explain the details of the various IDR plans, the simplest way to discover which one is best for you is to use the repayment simulator offered by the U.S. Department of Education, which will tell you the best option.
Income Based Repayment Plan
The most common IDR plans is the Income-Based Repayment (IBR) plan. IBR plans cap your monthly payments based on your income and family size. This doesn’t apply if the loan was made to your parents.
The first step is determining your income. Whether you qualify for an IBR plan depends on your income relative to 150% of the poverty level. The rule regarding eligibility is that if it takes more than 15% of the amount you earn above 150% of the poverty level to pay off the loan on a 10-year payment plan, you qualify.
In summary, if you earn less than 150% of the poverty level, your payment will be $0.
For loans taken out before July 1, 2014, when you earn more, your payment will be capped at 15% of your discretionary income and after 25 years of qualifying payments, your outstanding loan balance will be forgiven. For loans taken out from July 1, 2014, your payment will be capped at 10% of your discretionary income, and after 20 years of qualifying payments, your outstanding balance will be forgiven.
Income Contingent Repayment Plan
The Income Contingent Repayment (ICR) Plan is similar to and predates the IBR Plan in that both forgive the loans after 25 years. The big difference is that ICR can only be used with the Federal Direct Loan Program and Parent PLUS Loans. This is typically best for borrowers who are parents.
The monthly payment requirement is higher with the bar at 20% of your discretionary income versus 15% (or 10% depending upon when you started your IBR plan).
Pay As You Earn (PAYE) Plan
Another popular repayment plan is known as Pay As You Earn (PAYE) and is similar to IBR but applies only to Federal Direct Loans made to the students. To be eligible, you must be a new borrower who has taken out your first federal student loan after September 30, 2007, and received at least one disbursement of a Direct Loan after September 30, 2011.
The requirements for this program are less strict, with the bar set at 10% of your income above the 150% of poverty level. Any outstanding balance on your loan after 20 years will be forgiven.
Saving on a Valuable Education (SAVE) Plan—formerly the REPAYE Plan
The SAVE plan is the newest IDR plan. It permits Direct Loan borrowers to cap monthly student loan payments to 10% of monthly discretionary income. Undergraduate loans have a repayment period of 20 years, while graduate or professional loans have a repayment period of 25 years. The payments are capped at 10% of your income above the 225% of poverty level, and if your payment doesn’t cover interest, the government will cover it for the first three years.
Several changes are also set to take effect in July, 2024. Among these changes include undergraduate loan payments decreasing from 10% to 5% of discretionary income, possible loan forgiveness in 10 years, the ability to consolidate and receive credit for all payment progress, and possible forgiveness credit for deferments. Check out 6 Things You Should Know About the SAVE Plan for more details on how these changes will impact you.
One last point to remember about all of these programs, should you qualify, is that if your payment doesn’t cover the interest, it will continue to accrue and capitalize into the loan (unless paid by the government). If it doesn’t cover the principal, it will also continue to accrue.
Before changing student loan repayment plans, plug your information into the Education Department’s Repayment Estimator to see what you’ll owe on each plan.
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