A single borrower earning $30,000 a year with $40,000 in federal education loans would pay $171.94 per month in an income-based plan versus $319.50 under an income-contingent repayment plan, according to Finaid.org’s loan payment calculator.
The income-based program caps monthly payments at 15 percent of discretionary income, which is based on income, family size and federal poverty guidelines. This applies to single borrowers earning less than $50,000 and to married borrowers with two children who earn less than $100,000.
Income-based repayment plans, part of the College Cost Reduction and Access Act of 2007, won’t replace income-sensitive and income-contingent repayment plans. Income-based repayment plans don’t have a minimum monthly payment, and the 15 percent monthly cap on payments is lower than the 20 percent cap on an income-contingent repayment plan. The government pays the interest for the first three years and the maximum repayment period is 25 years. After that, any remaining debt will be discharged and treated like taxable income.
Income-based repayment is available to participants in the Direct Loan program and the federally guaranteed student loan program. But they are not available for private student loans, Parent PLUS loans or consolidation loans. Income-contingent repayment is only available in the Direct Loan program.
If you’re considering making the switch to income-based repayment, pay attention to the term on your loan. A 25-year loan under an income-based plan can still cost more than a 10-year loan under a different plan.
To apply for income-based repayment plans, contact your lender. Maybe you are among the estimated 1 million borrowers that will get some much needed relief in an economy that’s not giving breaks to those who desperately need them.
Stacey Tisdale is a regular contributor to The Root.