Updated on 07.15.16

Struggling With Student Loans? How to Lower Your Payments

Income-based repayment plans can provide some breathing room on Federal loans.

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If you’re struggling to make your student loan payments, one option to explore is income-driven repayment plans.

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These plans are available to federal borrowers to help manage student loan debt. Under these plans, monthly payments are lower than under the Standard Repayment Plan. They make it so what you’re paying every month is tied into your income and family size. Often, this makes your monthly payment more manageable and could temporarily be as low as $0.

Before you apply, there are some things you should understand about income-driven repayment plans. Keep in mind that any private loans are not eligible for any of these income-driven plans. This can also include if you consolidated your private loans with federal loans. Also, if any of your loans have already been in default, you aren’t eligible for these repayment plans. If you have questions on whether your loans qualify, call your lender.

Pros of Income-Driven Repayment Plans

  • A lower, more manageable payment.
  • Enrolling in one of these plans can help you avoid delinquency and default.

…and Cons

  • Since you’re lengthening the amount of time you’re paying on these loans, you are likely to pay more money overall than you would on a Standard Repayment schedule.
  • Even though any remaining balance may be forgiven, you may still need to pay taxes on the amount that gets canceled.

Types of Income-Driven Repayment Plans

There are currently three different income-based plans offered for federal loans. The requirements, eligible loans, payment amounts, and repayment periods are different for each. When deciding which plan is right for you, call your lender. You can use the U.S. Department of Education’s Repayment Estimator to see what you qualify for and estimate your monthly payment.

Income-Based Repayment Plan (IBR)

  • Eligible loans: Direct Subsidized, Direct Unsubsidized, Direct PLUS loans (for graduate or professional students), Direct Consolidation Loans (but not if they were consolidated with PLUS loans made to your parents), both Subsidized and Unsubsidized Federal Stafford Loans (from the Federal Family Education Loan, or FFEL, Program), Federal Perkins Loans if they were consolidated into a Direct Consolidation Loan, and FFEL Consolidation Loans that didn’t repay any of the PLUS parent loans. (Note: Private loans and any federal loans that have been defaulted on are not eligible.)
  • How your payment is determined: Your payment is generally 15% of your discretionary income. Your discretionary income is figured by the difference between your income and 150% of the poverty guideline for your family size and the state you live in. However, your payment will not be more than it would be under the Standard Repayment Plan. For new borrowers after July 1, 2014, your payment is 10% of your discretionary income.
  • How long you’ll be paying these loans: 25 years if you are not a new borrower (on or after July 1, 2014) and 20 years for new borrowers

Pay-as-You-Earn Repayment Plan

  • Eligible loans: Direct Subsidized, Direct Unsubsidized, Direct PLUS loans (for graduate or professional students) that were consolidated into a Direct Consolidation Loan, Direct Consolidation Loans (but not if they were consolidated with PLUS loans made to your parents), both Subsidized and Unsubsidized Federal Stafford Loans (from the FFEL program) that were consolidated into a Direct Consolidation Loan, Federal Perkins Loans if they were consolidated into a Direct Consolidation Loan, and FFEL Consolidation Loans that didn’t repay any of the PLUS parent loans and were consolidated into a Direct Consolidation Loan. (Note: Private loans and any federal loans that have been defaulted on are not eligible.)
  • How your payment is determined: This is generally going to make your payments 10% of your discretionary income. Just like with the IBR plan, your discretionary income is calculated in the same way, and your payment won’t be more than it would be in the 10-year Standard Repayment amount.
  • How long you’ll be paying these loans: 20 years

Income-Contingent Repayment Plan (ICR)

  • Eligible loans: Direct Subsidized, Direct Unsubsidized, Direct PLUS loans (for graduate or professional students) that were consolidated into a Direct Consolidation Loan, Direct Consolidation Loans, both Subsidized and Unsubsidized Federal Stafford Loans (from the FFEL program) that were consolidated into a Direct Consolidation Loan, Direct PLUS Loans made to parents if consolidated, Federal Perkins Loans if they were consolidated into a Direct Consolidation Loan, and FFEL Consolidation Loans (including loans that paid PLUS parent loans) and were consolidated into a Direct Consolidation Loan. (Note: Private loans and any federal loans that have been defaulted on are not eligible.)
  • How your payment is determined: It will either be 20% of your discretionary income or what you’d be repaying on a fixed payment plan over the course of 12 years.
  • How long you’ll be paying these loans: 25 years

Common Questions About Income-Based Repayment

How Do I Know If I’m Eligible for Income-Driven Repayments?

For the Pay-As-You-Earn plan, you’ll need to be a new borrower as of Oct. 1, 2007, with a received disbursement of a Direct Loan on or after Oct. 1, 2011. For both the IBR and Pay-As-You-Earn, your payment would need to be less than what it would be under the Standard Repayment Plan. Of course, if your amount was higher, you’d probably not want to pursue these plans anyway.

If your federal student loan debt is higher than your annual discretionary income or is a significant portion, you will generally qualify for these plans. There isn’t any initial income eligibility requirements for the Income-Contingent Plan.

What Happens at the End of My Repayment Period?

If you still have a balance left, your loans are forgiven. Keep in mind that you may need to pay taxes on the amount that is forgiven.

Income-Driven Repayment Plan With a Public Service Loan Forgiveness Plan

Yes, you can have both. As you might already know, there are jobs that can offer loan forgiveness, one of which is the Public Service Loan Forgiveness Program, also known as PSLF. If you’re eligible, your loans will be forgiven after 10 years instead of the 20 or 25 years for everyone else.

What Happens If My Income Changes?

If you start earning more money, less money, or if your family size changes (i.e., you have a baby or get married), your payment is likely to change, too. You’ll update your loan provider each year with this information.

How Do I Apply?

You can apply by visiting StudentLoans.gov or going directly through your lender. You’ll need to provide proof of your AGI (adjusted gross income) by submitting your tax return. If you’re married, you’ll need to submit your spouse’s AGI, too.

If you haven’t filed income taxes in the last two years, or your income is significantly different from your previous tax return, you’ll need to submit an official pay stub from your employer. You’ll be required to share your family size as well.

In some cases, you’ll need to report your total federal loans and the interest rate from other lenders as well. You’ll also need to know if the amount of federal loans your spouse has if you’re married and the interest rate for those as well.

Keep in mind that you may still have a payment due before your income-driven repayment plan gets approved. You’re still required to make your payment even though you applied for these plans. If you can’t make this payment, call your lender immediately to see if they are willing to change your date or work with you in another way. The same is true for deferments. If you apply for a deferment, you still need to make a payment if something is due before it gets approved.

Other Options

If you don’t qualify for one of these income-driven repayment options, there are still other things to explore if you’re having trouble making your monthly payments. It’s always a good idea to first call your lender, explain your situation, and see how they can help. Here are a few other options:

Graduated repayment plan: With this plan, your payments will start out lower and increase every two years. If you’re just starting your career, and expect to earn raises or increase your income down the road, this could be a good option for you. You’ll make payments for up to 10 years, except for Direct Consolidation and FFEL Consolidation Loans, and your payments will never be less than the interest that accrues between payments.

Extended repayment plan: Under this plan, you’ll pay fixed or graduated for up to 25 years. Generally, this plan will offer a lower monthly payment than the Standard or Graduated Repayment Plans. Like the income-driven plans, only certain loans qualify.

Consolidation: Depending on your loans, current interest rate, and credit history, you might be able to consolidate your multiple student loans into one loan. If you’re able to get a lower interest rate, your payments could be lower. But don’t forget there are both pros and cons for student loan consolidation.

With loan consolidation, you might be exposed to variable interest rates, lose your borrower benefits, get a longer repayment period, or you might not even get a lower interest rate. If you’re struggling with multiple private loans, this could be something to look into to see if you qualify for a lower interest rate. However, most experts will tell you never to consolidate a private loan with a federal loan, since once you do that, you’ll lose those federal loan benefits like exploring loan forgiveness, going on an income-driven plan, applying for a deferment, and more.

Deferment: Depending on your loan, you might be eligible for a deferment, which is a period of time you do not need to make payments. If you can’t find a full-time job while you’re actively looking, you can apply for an Unemployment Deferment. If you are working but still financially struggling, you might qualify for an Economic Hardship Deferment. You might also qualify if you’re in school at least half time, in a fellowship program, or on active duty in the military. You’ll need to apply for this deferment through your loan provider and might need to show documentation.

Forbearance: If you don’t qualify for a deferment but are still struggling to make payments, you might be able to request a forbearance from your provider. During your forbearance, you’ll either stop making payments completely or make a reduced payment. Interest will continue to accrue on your loans during the forbearance, which will vary depending on your lender. Call your lender to see if you qualify, what the terms are, and how you can apply.

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