Your Guide to Income-Driven Repayment (IDR) Options

The recent block on Biden's Student Loan Forgiveness Plan and the end of the federal student loan freeze are increasing financial stress, and rightly so! A surprising fact is that only 18% of the 45 million federal student loan borrowers have continued payments during this repayment break. This means that a whopping 82% of borrowers will soon have to restart payments, an expense they've not had for a while.

In light of this, income-driven repayment (IDR) plans are increasingly in the spotlight. Introduced by the Obama Administration in 2010, they've been helping many students navigate the repayment process. So let's explore what IDR plans are about, and their benefits and challenges.

What are Income-Driven Repayment (IDR) Plans?

Income-driven repayment (IDR) Plans. These plans base your monthly student loan payments on your income and family size, creating a sense of relief by aligning your payments with your financial capabilities.

Beware, by 2023, there are possible changes to the Revised Pay As You Earn (REPAYE) repayment plan by the Biden administration, which could affect your repayment roadmap. Stay tuned for updates that could influence your repayment strategy.

Understanding the Good and the Bad of Income-driven Repayments

While IDR plans certainly have benefits, they also come with potential downfalls:

Benefits:

• Reduced monthly payments: Payments are a percentage of your discretionary income, aligning perfectly with your budget.

• Potential loan forgiveness: After 20-25 years of payments under your IDR plan, the remaining balance might be forgiven.

• Flexibility: Diverse IDR plans can cater to various financial situations.

Possible Pitfalls:

• Extended debt lifetime: Lower payments could mean you remain in debt for longer.

• Interest accumulation: Over time, you might end up repaying more due to the amount of interest.

• Tax implications: The forgiven amount could be taxable.

Getting the best IDR to meet your financial demands means considering both the benefits and drawbacks.

Do You Qualify for an Income-Driven Repayment Plan?

To qualify for an IDR plan, certain conditions must be fulfilled:

• Federal student loans: Only Direct Loans and Federal Family Education Loan (FFEL) Program loans qualify for IDR plans.

• Financial need: Your current minimum monthly payment must exceed what you would pay under an IDR plan.

Also, it's crucial to understand the eligibility criteria, payment amount, and forgiveness timeline for each type of IDR plan. Certain plans cater to specific borrower needs.

Choosing the Ideal Plan - Balance Your Needs and Income

Several IDR plans exist, with each offering different advantages. Plans such as Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR).

Here's a basic breakdown of how they compare:

 

How Do I Calculate Discretionary Income?

Take your disposable income, which is the amount of money after taxes left, for example, in your paycheck. Subtract all of your necessities like paying for rent or housing, student loans, utilities, and food, and whatever is left over to spend, save, or invest is your discretionary income.

Pay As You Earn (PAYE)

The PAYE plan sets a high bar for borrowers to demonstrate they're experiencing 'partial financial hardship', implying an inability to afford standard repayments. This plan also caters to those holding direct loans issued after October 2007.

Pros:

• Our research shows that the PAYE plan can significantly reduce monthly payments for those who qualify.
• Payments are based on your income and family size, making this plan inherently fair and equitable.

Cons:

• The eligibility requirements are quite stringent, meaning not everyone will qualify.
• If your income increases over time, your payments might rise as well.

Latest Developments in Student Loan Relief: Biden's (SAVE) Plan (Formally REPAYE)

In a significant update for student loan borrowers, the Biden administration announced the Saving on a Valuable Education (SAVE) plan in July 2023, effectively replacing the existing REPAYE plan. Here are the key features of the new SAVE plan:

• Higher Income Exemption: The income exemption threshold is increased from 150% to 225% of the poverty line.
• No Unpaid Interest Accrual: Borrowers need not worry about unpaid interest for both subsidized and unsubsidized loans, provided scheduled payments are made.
• Spousal Income Exclusion: For married borrowers who file separately, spousal income is excluded from calculations.

Additional modifications to the plan are anticipated, expected to take effect in the summer of 2024.

Key Highlights from the White House:

• Lower Monthly Payments: This plan cuts the amount borrowers have to pay each month for undergraduate loans from 10% to 5% of discretionary income.
• Balance Forgiveness: Loan balances will be forgiven after 10 years of payments for those with original loan balances of $12,000 or less.
• Temporary "On-Ramp" to Repayment: A 12-month “on-ramp” from October 1, 2023, to September 30, 2024, will be instituted. Borrowers who miss monthly payments during this period will not be considered delinquent and will not be reported to credit bureaus, placed in default, or referred to debt collection agencies.

The SAVE plan ensures a more manageable repayment process for borrowers and reflects the administration’s continued commitment to making post-secondary education accessible and affordable for all.

For more detailed information, you can refer to the official fact sheet released by the White House.

Income-Based Repayment (IBR)

A personalized solution, the IBR program considers factors like your adjusted gross income (AGI), family size, and your state of residence to create a distinct repayment plan for each borrower.

Pros:

• This plan is flexible, adjusting to your unique financial situation.
• It caps your repayment amount at a percentage of your discretionary income, usually 10-15%.

Cons:

• Requirement to demonstrate 'partial financial hardship'
• Any forgiven amount after the repayment period can be considered taxable.

 

Income-Contingent Repayment (ICR)

With ICR, borrowers are promised access to Federal government-backed student loan benefits. This plan requires a borrower to make at least 120 payments as part of the Direct Loan program.

Pros:

• This plan’s eligibility criteria are less strict than other income-driven repayment plans.
• Parent PLUS loans can qualify after consolidation.

Cons:

• Payments under this plan can be higher than others.
• Only federal government-guaranteed student loans qualify.

By comparing these plans, you're better equipped to take a big leap towards financial wellness. Understanding the pros and cons can help you make the best decision for your future.

What Are The Possible New Changes to Income-driven Repayment in 2023?

On January 10, 2023, the Department of Education put forth a suggested update to the income-driven repayment (IDR) plan. If approved, this plan would replace the current REPAYE plan and could potentially enable an impressive 85% of student loan borrowers to become debt-free within a 10-year period.

Let's explore some notable features of this proposed updated REPAYE plan:

• Single borrowers earning less than $30,500 per year (or $62,400 for a family of four) won't have a required monthly payment.

• Other borrowers may have the opportunity to reduce their monthly payments by at least half, resulting in an average annual savings of approximately $2,000 for a four-year public university graduate when compared to the current REPAYE plan.

• Borrowers with $12,000 or less in debt will be eligible for student loan forgiveness after 10 years, as opposed to the current waiting period of 20 to 25 years. An extra year will be added for each $1,000 above that amount.

• For those who pay less than the monthly interest charge on their loans, the government will cover the remaining interest.

The aim of this revised IDR plan is to simplify student loan repayments by gradually phasing out new enrollments in PAYE and ICR plans and limiting borrowers' ability to switch to the IBR plan later on.

The Department of Education targets finalizing the new REPAYE plan by the end of 2023.

How to Apply for an Income-Driven Repayment Plan?

Starting your journey with an IDR plan involves the following steps:

• Apply online on StudentAid.gov or request a paper application from your loan servicer.

• Provide your income details (typically using your tax return information) and family size.

• Select your preferred IDR plan or request the lowest possible payment.

Make sure to update your income and family size every year to maintain your eligibility for the plan.

Student Loan Forgiveness - Is it for You?

If you can't repay your full student loan within your IDR plan term (typically 20-25 years), the remaining balance may be forgiven. However, keep in mind that this forgiven amount could be treated as taxable income. Its also important to take note that only about 11% of borrowers qualify for their loan debt to be forgiven after the 20-25 years.

Get Help From Your Organization’s Student Loan Repayment Assistance Benefit

Remember—student loan repayment doesn't have to be daunting. Are you eligible for the IDR plan? You're one step closer to achieving your financial wellness.

Your organizations's student loan repayment assistance platform can be a valuable resource for managing your student loan payments. This benefit can not only help employees achieve financial goals faster but also equip employers in attracting and retaining top talent. Not all employers offer or even know about this benefit. So reach out to your HR or Benefits manager and let them meet Paidly.

Combine the power of an appropriate IDR plan with your company's student loan repayment assistance platform to take control of your financial future.