Put into effect on December 21, 2012, students will now be able to enter into a “Pay As You Earn” student loan repayment plan. According to the US Department of Education, the new plan will cap monthly payments at 10 percent of discretionary income for eligible borrowers, compared to the 15 percent cap for the current income-based repayment plan.
With three income-sensitive plans now available — which is right for you?
Income-Based
The income-based repayment (IBR) plan forgives balances after 25 years. Most loans are eligible for this payment plan. The ones not eligible are any PLUS loans made to parents or private student loans. Payments do not exceed 15 percent of discretionary income, but you must have a financial hardship and provide annual documentation of your wages.
Income-Contingent
The income-contingent repayment (ICR) plan also forgives balances after 25 years. Only direct loans not made to parents are eligible. When considering IBR or ICR plans, it is important to keep in mind that if filing jointly, both you and your spouse’s income will be considered when calculating monthly payments. Also, you may have to pay taxes on any loan amount forgiven under the IBR or ICR plans.
The major difference between the IBR and ICR is the type of loans eligible. The IBR plan is for both direct loans and Family Federal Education Loans (FFEL). The FFEL program was eliminated in March of 2010. The ICR is only for direct loans.
Pay As You Earn
The newest repayment option, Pay As You Earn, goes into effect at the end of 2012. The plan allows balances to be forgiven after 20 years. The same loans eligible under the ICR plan is eligible for the Pay As You Earn plan. This plan, however, caps monthly payments at 10 percent of discretionary income, but you must have a financial hardship to qualify.
So which of these loan repayment plans are right for you?
As a recent graduate myself, struggling to repay my loans, I would suggest the Pay As You Earn repayment plan to be the best option if eligible. If you are not eligible for the Pay As You Earn, the IBR or ICR plan is best.
When researching available repayment options available to you, try to avoid placing yourself into an extended repayment plan. These plans gradually increase over time and unfortunately there is no guarantee that your income will increase in comparison to your increase in monthly payments.
Always remember that the sooner you payoff your student loan, the less you will pay in interest. Many recent graduates feel that student loans are considered good debt and choose to extend their repayment plan as long as possible. It is important to keep in mind how much you will be paying in interest the longer you are in repayment. A student loan debt is a debt and can prevent you from purchasing a home or qualifying for any large purchase.
