You may have heard about income-driven repayment plans. These days, there are a lot of them to choose from.
It might seem difficult to choose an income-driven repayment plan when so many of the basic features of the plans look the same. After reading this post, you’ll be armed with the knowledge you need to choose the best repayment plan for your situation.
Here are the basics:
Let’s start by looking at the basics. All of these plans set your payments based on a percentage of your income, and all of these plans forgive any remaining balance on your loans after a period of time. There are some obvious differences between the plans, sure, but the chart is so general that you don’t have enough information in the chart to make a smart choice.
If you’re interested in an income-driven plan, you probably want to pay as little as possible over the shortest period of time and have accepted that more interest may accrue on your loans as a result. Additionally, you should understand that you have to keep in touch with your loan servicer about your income each year in order to stay on these plans. So, Pay As You Earn would seem to be a natural choice. But there are very specific requirements you must meet to qualify for Pay As You Earn plan. The details matter.
Let’s dive in to the details.
What type of federal student loans do you have?
If you’re interested in an income-driven repayment plan, you will first want to determine whether your federal student loans are Direct Loans. If you borrowed any federal student loans before July 2010, there’s a good chance that some or all of your federal student loans are not Direct Loans.
If your loans aren’t Direct Loans, that doesn’t mean you can’t qualify for the best income-driven repayment plans—almost everyone can. You just need to consolidate first. If you don’t consolidate, the only income-driven repayment plan you might qualify for is the income-based repayment plan, and, as you saw, it wouldn’t give you the lowest payment.
After you have figured out whether you needed to consolidate, and done so, you’re ready to choose a plan.
Let the Department of Education choose the best plan for you
Don’t do difficult work that you don’t have to do. The details matter for these plans. And there are a lot of details. Instead of sorting all of this out yourself, make us, or, more accurately, your loan servicer, do the difficult work. Just go to StudentLoans.gov and start an “Income-Driven Repayment Plan Request”. (That’s the online income-driven repayment application.)
When you get to the “Repayment Plan Selection” section of the application (toward the end), you should not choose an income-driven repayment plan by name. Instead, choose this option:
If you do, your loan servicer will evaluate whether you are eligible for all of the income-driven repayment plans and put you on the best plan for you.
If you want to choose a plan on your own, you probably want to choose the Revised Pay As You Earn Repayment Plan.
For most borrowers, the Revised Pay You Earn Plan is the best choice because:
- all Direct Loan student borrowers are eligible for the plan,
- there are no date restrictions,
- there are no income restrictions,
- it offers the lowest payment of all the income-driven repayment plans,
- it offers the shortest repayment period for many, and
- it offers a generous interest benefit to keep your interest balance from growing
However, there are some borrowers who can’t or shouldn’t choose the Revised Pay As You Earn Plan.
Answer the questions below to see if you’re one of those borrowers.
Are you married? How do you file your taxes?
If you are married, you can choose to file a joint or separate income tax return. How you choose to file your taxes can have a large impact on income-driven repayment. There are two factors at play here—whether your spouse’s income will be used to calculate your payment and whether your spouse’s loan debt will be used to adjust your payment downward.
There are two things you need to consider
If you file jointly, for all plans, your income + your spouse’s income = income used to calculate payment.
If you file separately, then how your spouse’s income is treated depends on the plan:
For the Income-Contingent, Income-Based, and Pay As You Earn plans, only your income = income used to calculate payment.
For the Revised Pay As You Earn Plan, however, your income + your spouse’s income = income used to calculate payment.
Second, loan debt.
If it seems like using a joint income is going to disadvantage you, this isn’t the end of the story. If your spouse also has federal student loans, then we will figure out what percentage of the total debt is yours and multiply the payment based on a joint income by that percentage. This acknowledges that there are multiple federal student loan debts being repaid with the joint income. If your spouse has no federal student loan debt, however, then 100% of the debt is yours, and so there’s no adjustment to your payment.
What does this all mean? Though the Revised Pay As You Earn Plan is better for most, if you are married, file a separate return from your spouse, and your spouse doesn’t have federal student loan debt, then you will definitely be able to get a better deal under the Pay As You Earn Plan (if you are eligible for it), and, depending on your spouse’s income, you might even get a better deal under the Income-Based or Income-Contingent Repayment Plan. But, to get this better deal, you have to file separately from your spouse, and that might cost you more in taxes.
Did you borrow a federal student loan for graduate school?
Let’s talk about borrowing for graduate school. If you did, then the Revised Pay As You Earn Plan might not be for you.
Under the Revised Pay As You Earn Plan, the forgiveness clock runs for 20 years if you only borrowed for undergraduate study, and for 25 years if you borrowed even one loan for graduate study.
By contrast, the Pay As You Earn Plan has a 20-year forgiveness clock for all borrowers, undergraduate and graduate alike. So, if you qualify for Pay As You Earn and are a graduate borrower, it’s probably a better option for you. If you don’t qualify for Pay As You Earn, however, the Revised Pay As You Earn Plan is still better for you than the Income-Based or Income-Contingent Repayment Plans.
How recently did you start borrowing?
The Pay As You Earn Plan has many, but not all of the benefits as Revised Pay As You Earn, and, for some borrowers, it’s a better option. However, it’s also the plan that is available to the fewest number of borrowers. Specifically, to qualify for Pay As You Earn, you need to be a “new borrower” on or after October 1, 2007 who received a loan on or after October 1, 2011. That excludes a lot of people who have loans today.
Are you are a parent borrower?
Parent borrowers who want to repay their Parent PLUS Loans under an income-driven repayment plan can’t use the Revised Pay As You Earn Plan or any other income-driven repayment plan except for the Income-Contingent Repayment Plan.
The Income-Contingent Repayment Plan is the only plan that a borrower with this loan type can opt for. However, eligibility is not automatic. To become eligible, parent borrowers must consolidate their outstanding Parent PLUS Loans into a Direct Consolidation Loan. If you’re a parent borrower, you can do that by visiting StudentLoans.gov.
Let’s sum up.
The Revised Pay As You Earn is the best plan for most borrowers. However, if it’s not good for you for one of the reasons I mentioned above, then you should consider Pay As You Earn. If that doesn’t work for you, consider the Income-Based Repayment Plan. Finally, consider the Income-Contingent Repayment Plan.
Ian Foss has worked at the Department of Education since 2010. He just saved 33% on his student loan payments by switching from the Income-Based Repayment Plan to the Revised Pay As You Earn Repayment Plan.
Image by Getty Images