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April 26, 2024

Understanding Income-Driven Repayment Plans for Student Loans

Do you have a student loan still weighing you down? If so, there’s a chance you are struggling with payments. In matters relating to federal student loans, deciding on how to pay it off is essential. It can make a huge difference in your school life. Securing a student isn’t as challenging as planning the repayment. However, there are numerous ways to pay off the federal student loans. Choosing a government income-based repayment plan can bring relief. One of the common repayment plans you may opt for is an income-driven repayment plan. This move can actually make it easier to repay the student loan.

Instead of relying on the standard repayment plan of 10 years, why not try this option? The IDR plan gives borrowers a significantly lower monthly payment depending on their income, the type of loan, family size etc. It’s a much better option than getting a debt consolidation loan from the personal loan apps. The IDR plan is usually lower than the standard repayment plan. At a glance, income-driven repayment plans have benefits. But, it is important to understand how it works and the pros and cons.

What Does Income Driven Repayment (IDR) Means?

Also called the income-related plan, the IDR plan is often used to make federal student loan payments easily affordable. However, remember that the IDR plan only applies to federal student loans; a private NBFC loan used for your education expenses isn’t applicable.

  • There are different types of IDR plans. They include;
  • Income Contingent Repayment (ICR)
  • Pay As You Earn (PAYE)
  • Income Based Repayment (IBR)
  • Saving on Valuable Education (SAVE).

All these repayment plans are different in various details and requirements for a person to qualify. For instance, the discretionary income is taken into account, repayment terms, etc.

How You Can Apply for an IDR Plan

Before you are allowed to apply for the student loan income-based repayment plan, you should submit an IDR request to be accepted first before going ahead with the plan;

Step 1: Head to the Federal Student Aid Government site and log in or sign up. To create the account, you will have to provide a Social Security Number and a contact number or an email.

Step 2: Choose the plan type you need to apply for. You can select the IBR/PAYE/ICR/SAVE.

Step 3: Feed in your personal details and spousal details.

Step 4: Next, enter the income details and the size of your family.

Step 5: After that, submit the information and wait for the assessment.

Make sure you update your income and personal details every year. The federal government will then assess if you can qualify for the plan you requested and give you a lower monthly amount you should pay as per your situation.

 Pros of IDR Plans

The IDR comes with many benefits for those who qualify. Many would like to consider learning these pros before making the decisions. The benefits range from helping unemployed individuals to offering the needed flexibility to aid you in dealing with unplanned situations. These are the main benefits of the IDR plan;

Helps unemployed persons

IDR plans are an awesome option for those borrowers who’re yet to get employed and are going through economic hardships deferment, already exhausted the eligibility for the unemployment deferment etc. The plans will come in handy for a borrower after a payment pause and when the interest waiver has expired. Because the plan’s payments are usually dependent on the income you are earning, the payment might be zero if you have no income.

Monthly payments are low

IDR plans to give borrowers affordable student debt repayments. The payments are usually based on discretionary income. Normally, the repayment plans offer the borrower a lower monthly payment. In general, a borrower may qualify for a lower loan payment with a plan if their loan debt at the time of graduation is more than the annual income.

The balance is forgiven

Usually, the remaining debt is forgiven after some years of repayment, which is often after 20 to 25 years. However, the term of repayment will depend on the type of IDR. For ICR and IBR, the term of repayment is 25 years. This also applies to borrowers who graduate with loans under the SAVE type.

As for the PAYE, the term of repayment is normally 20 years. It also applies to borrowers with undergraduate loans for the SAVE type. This balance is always taxed, but if you are eligible for a public service loan forgiveness, you won’t be taxed.

Unlike the NBFC personal loan, the balance on student loans can be easily forgiven under the IDR plan. It offers tax-free loan forgiveness to students after 10 years if the borrower qualifies for the public service loan forgiveness.

Credit score isn’t affected

The IDR plan doesn’t affect the credit score of borrowers. As long as the borrower makes the agreed monthly payments, it is reported on their credit reports. Even if the payment is zero, it will still be stated in the reports. This will not affect your score, but being responsible with payments is the best thing to do.

Cons of IDR Plans

Here are the downsides of taking part in IDR plans for student loans;

You may pay more interest

Even though the small payments are good budget-wise, they could mean paying more on interest over the loan life. As time goes by, you will be accruing more interest.

The loan can take longer to repay

Since you are paying a lower amount every month, it may take a long period, about 10 years, with a standard repayment plan before you finish paying the debt. Currently, the IDR plans have stretched the repayment for over 20 years.

More paperwork is needed

Unlike the instant loan without documents, IDR plans involve a lot of paperwork. First, you need to apply the IDR plan and be assessed before you are granted the request. You also need to recertify your income after every 12 months. All these needs proper and lots of paperwork.

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