Income Sensitive Repayment Plan

June 27, 20220
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Income Sensitive Repayment Plan

Introduction

An income-driven repayment plan can be a lifesaver for borrowers who are struggling to make their student loan payments. It can also help federal student loan borrowers who want to lower or manage their monthly payment amount, even if they’re not in financial distress. Income-driven repayment plans were designed to help keep your payments at a manageable level based on your income and family size. In this post, we’ll walk you through how these plans work, as well as some of the pros and cons of using them.

When you’re struggling to make your federal student loan payments, an income-driven repayment plan can help by reducing your required monthly payment amount.

Income-driven repayment plans can help by reducing your required monthly payment amount. If you’re struggling to make your federal student loan payments, an income-driven repayment plan can be an excellent way to lower the cost of repaying your loans. Many people find that their monthly payments are reduced enough with these plans that they can afford to pay off their debt quicker than they would on the standard 20-year repayment term or graduated repayment schedule.

A number of different repayment plans are available, based on your income and family size.

The “income-driven repayment plan” is one of several types of federal student loan repayment plans available to borrowers. Income-driven plans typically cap the amount you pay each month at a percentage of your discretionary income, which means that your monthly payment will be lower if it’s based on your income and family size than if it’s based on the standard 10-year repayment plan.

Another type of repayment plan is called an “income-sensitive” plan. While this term can be used to describe any type of income-based repayment (IBR) or Pay As You Earn (PAYE) loan program, it can also refer specifically to Revised Pay As You Earn (REPAYE), a newer version of PAYE that was introduced in December 2015.

All of the plans are based on a percentage of your discretionary income, which is the difference between your adjusted gross income and 150% of the poverty guideline for your family size and the state in which you live.

All of the plans are based on a percentage of your discretionary income, which is the difference between your adjusted gross income and 150% of the poverty guideline for your family size and state in which you live. Discretionary income is used to determine your monthly payment amount.

Your family size and state are used to calculate what would be considered a reasonable amount for you to pay toward student loans each month, compared to how much you actually pay.

Your family size and state are used to calculate what would be considered a reasonable amount for you to pay toward student loans each month, compared to how much you actually pay.

The poverty guideline is the same for all states, but it’s based on your family size and the number of people in your household who are under age 65. For example, if you live alone with no dependents and have an annual income of $50k/year or less (or $18k/month), then this is considered “low income.” If you have 2 dependents living with you who are between ages 6-18 years old or under 20 years old and attending school full time (and their parents’ incomes aren’t counted), then that household would make up three persons in total; therefore they would fall into “very low income” category.

The percentage of your discretionary income that’s used to calculate your monthly payment differs from plan to plan.

The percentage of your discretionary income that’s used to calculate your monthly payment differs from plan to plan. The percentage ranges from 10% for some plans to 15%, 20%, or 25%. This calculation is based on your income and family size.

No matter which plan you choose, all remaining balances will be forgiven after 20 or 25 years of qualifying payments. This means that if you still have a balance left after 20 or 25 years, it will be forgiven as long as you’ve made all required scheduled payments during that time period.

  • You can choose a plan that is best for you.
  • You can choose a plan that will help you pay off your student loans faster.
  • You can choose a plan that will lower your monthly payment.
  • You can choose a plan that will forgive your remaining balance after 20 or 25 years.

For example, if you have $35,000 in outstanding loans and made all required payments for 20 years under an income-driven repayment plan, the remaining balance would be forgiven after those 20 years. However, the forgiven amount may be taxable.

If you have $35,000 in outstanding loans and made all required payments for 20 years under an income-driven repayment plan, the remaining balance would be forgiven after those 20 years. However, the forgiven amount may be taxable.

What If I’m Still In School?

If you’re still in school, the amount forgiven on your federal student loans is considered a nontaxable payment of principal (the same principal amount that would be repaid if your loan had not been discharged) and it does not affect your ability to take advantage of Public Service Loan Forgiveness or other loan forgiveness programs.

Conclusion

Figuring out which income-driven repayment plan is best for you can be tricky. You should seek the help of a professional, who can walk you through the process and make sure you’re making an informed decision about your finances.