If you can’t afford your student loan payments, signing up for an income-based repayment plan can help. (iStock)
Student loan debt in the US has more than tripled since 2006, according to the Federal Reserve Bank of St. Louis, and Americans currently owe $ 1.729 trillion in student loans in the first quarter of 2021.
For some student loan holders, paying back these debts is a tremendous burden. In 2019, 17% of adults with outstanding student loan balances were behind on their payments, according to the Federal Reserve.
Although student loan issuance has not yet reached widespread use, some borrowers can get relief by signing up for income-based repayment plans.
Student loan refinancing is also an alternative option for borrowers who want to save money but do not qualify for such plans. If you’re interested in refinancing your home student loan, use a tool like Credible to compare student loan refinance rates from multiple lenders at the same time without affecting your creditworthiness.
5 WAYS TO OBTAIN THE BEST REFINANCE PRICE ON STUDENT LOANS
What is an Income-Based Repayment Plan?
An income-based repayment plan is a student loan repayment plan that bases your monthly payments on your income and family size. Because it is based on these factors, it can be cheaper than the standard 10-year repayment plan.
Only federal student loan borrowers who meet certain requirements are eligible to sign up for income-based repayment plans. Unfortunately, there is no similar option for private student loans.
However, one way to manage private student loan debt is to consider refinancing your loan. Use an online student loan refinance calculator to get a feel for what your new monthly payments could be.
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Can an income-based repayment plan help my student loans be waived?
If you sign up for an earnings-based repayment plan, it is possible that your student loan balance may be waived. How long it will take for your remaining loan to be waived depends on which income-based payment program you sign up for.
These are the four income-based federal student loan payment options and how long they last:
- Income-Dependent Repayment Plan (ICR) – 25 years
- Pay-as-you-ear repayment plan (PAYE) – 20 years
- Income-Dependent Repayment Plan (IBR) – 20 to 25 years (loaned before July 1, 2014)
- Revised Pay-As-You-Ear (REPAYE) plan – 20 to 25 years (diploma course)
Each plan uses a percentage of your disposable income towards your student loans. With the PAYE and REPAYE programs, you have to pay 10% of your freely disposable income. The IBR plan requires you to pay 10% of your disposable income; 15% if you took out your student loan before July 1, 2014. REPAYE requires you to pay 20% of your disposable income.
After completing each program, your remaining loan amount will be waived after 20 to 25 years. However, if you sign up for an income-based repayment plan and qualify for the Public Service Loan Program, your loans can be waived after 10 years or 120 “qualifying” payments.
Advantages and disadvantages of income-oriented repayment plans
Before you sign up for an income-based repayment plan, weigh the pros and cons.
advantages
The benefits of repayment plans include:
- Lower monthly payments
- Reduced loan amount
1. Lower monthly payments. Since your monthly payments are based on your disposable income, they could be cheaper. For example, if you retire with a student loan, you may find it easier to pay for daily expenses in addition to your student loan payments.
2. Reduced loan amount. When part of your student loan is waived, it reduces the total amount you will pay back, freeing up money that you can use towards your other financial goals.
disadvantage
The disadvantages include:
- Stay in debt longer
- Taxes on the waived amount
1. Remain in debt longer. If your goal is to be debt free, an amortization plan can keep you in debt longer.
2. Taxes on the waived amount. The student debt waived may be taxed if applicable law changes.
If you don’t qualify for an income-based repayment plan and have personal student loans, you can consider refinancing the student loan. Use an online tool like Credible to view a rate table that compares the rates of multiple student lenders at the same time.
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The bottom line
If your federal student loan payments are too high, an income-oriented repayment plan can make them more affordable. After 10 to 25 years of making payments, your remaining student loan amount may be waived. How long it takes for your loans to be waived depends on the type of income-oriented plan you sign up for.
Before signing up for this plan, however, you should consider the pros and cons. One disadvantage is that this debt can affect you for decades. If your goal is to be debt free soon, this may not be the best plan for you.
This option is not available to you if you have a personal student loan. If this is the case for you, you can consider refinancing instead to save money. Use a tool like Credible to get pre-qualified student loan refinancing rates without hurting your creditworthiness.
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Do you have a finance-related question but don’t know who to contact? Email the Credible Money Expert at moneyexpert@credible.com and your question could be answered by Credible in our Money Expert column.
source https://collegeeducationnewsllc.com/can-an-income-driven-repayment-plan-help-get-my-student-loans-forgiven/
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