This website has already discussed ways that individuals can pay off their student loans early by earning extra money and cutting expenses to save additional cash. However, for many student debt borrowers, it might not make sense to pay off student loans early. Indeed, the availability of income-driven repayment plans means that individuals can eventually have their student debt forgiven after a period of timely payments.
I never seriously considered income-driven repayment plans during my student debt repayment saga. I did not fit into the categories of people that would benefit most from income-driven repayment plans, and since student loans stressed me out, I simply wanted to pay off my debt as soon as possible. However, I always kept income-driven repayment in mind in case something happened in my life that made income-driven repayment more appropriate for my situation.
This website has already provided some information about income-driven repayment options, and our guest writers will discuss their own experiences with income-driven repayment in more detail. However, in order to provide a comprehensive guide about repayment options, this article will more fully discuss all the factors that should be considered when determining if an income-driven repayment plan is right for you.
For those of you who do not know, income-driven repayment is a repayment option available for most federal student loans. Under this repayment option, borrowers solely need to pay a set percentage of their income to student loans each month for a certain period of time. After this period has elapsed, no future payments are required, and any remaining student debt is forgiven.
The percentage of income that must be devoted to student loans and the number of years for repayment vary depending on when the student loans were originated and what particular plan is selected. However, a borrower will generally need to only pay ten or fifteen percent of their income a month to student debt for twenty or twenty-five years in order to have their student debt forgiven under an income-driven repayment plan. In addition, borrowers who work in public-service fields generally only need to pay ten percent of their income a month to student loans, and after ten years, their remaining student debt is forgiven.
There are two types of people who unequivocally should consider income-driven repayment plans. Generally, if your student debt balance is larger than your annual income, and you do not expect your annual income to increase drastically, you might be a good candidate for income-driven repayment. It is typically assumed that if there is this much disparity between your debt and income that it would make the most sense to repay student loans under an income-driven repayment plan. Furthermore, anyone in public service who plans to stay in the public sector for ten years should also consider income-driven repayment plans. A ten-year horizon for student debt repayment is not too long, so it usually just makes sense to have student loans taken care of through income-driven repayment if you are in the public sector.
It should be noted that there are certain student debt borrowers who cannot avail themselves of income-driven repayment plans. Since income-driven repayment is only available for borrowers who have student loans originated by the federal government, student debt borrowed from private banks cannot be repaid through an income-driven repayment plan. Of course, private loans typically do not have interest rates as high as federal loans, but borrowers with private loans cannot enroll in income-driven repayment plans. In addition, borrowers who refinance their student loans are not eligible for income-driven repayment plans. This is because government loans lose their status as being eligible for income-driven repayment once they are refinanced. Of course, refinanced loans typically have much lower interest rates, and this website will soon discuss some of the benefits of refinancing that usually make up for the fact that refinanced loans are not eligible for income-based repayment.
For individuals who do not fit into these two categories, it is more difficult to determine if income-driven repayment is the best repayment option. If you work in the private sector and think that you can pay off your student loans in ten to fifteen years, it might not make sense to apply for income-driven repayment. In this situation, you will pay off your student loans before the time period involved in income-driven repayment, and enrolling in income-driven repayment might cost you money in accrued interest. However, if you estimate that it would take you fifteen years or longer to pay off your student loans, it might make sense to enroll in an income-driven repayment plan.
Furthermore, if you are the type of person who stresses out about student debt, it might make sense to use the strategies discussed on this website to pay off your student loans early rather than use income-driven repayment. For some, seeing interest accrue on student debt can be extremely unnerving, and these individuals might want to be more active in attacking their student loans. Also, there is some political uncertainty about income-driven repayment plans. For instance, there have been proposals in the past administration and the current one to cap the total amount of debt forgiveness available under income-driven repayment plans. In addition, there have also been discussions about changing the number of years one needs to make payments through income-driven repayment and the percent of discretionary income that must be devoted to student loans each month under this repayment option. If this uncertainty unnerves you, it might just make sense to work towards paying off your student loans early.
Furthermore, if you have an entrepreneurial spirit, and do not want to be discouraged from making more money, then income-driven repayment might not be right for you. Friends of mine have struggled with career decisions because they did not want to earn additional cash, since income-driven repayment takes away a set percentage of your income each month. If the idea of being limited in this way unnerves you, then income-driven repayment might not be the correct repayment option.
All told, income-driven repayment can be a lifesaver for certain student debt borrowers, since it allows individuals to pay off massive amounts of student debt within a reasonable amount of time. However, there are a number of factors that must be considered when deciding if an income-driven repayment plan is right for you.