Are you someone who is struggling with student loan repayments? If so, you are not alone.
The United States is currently undergoing a student loan debt crisis and experts say that nearly 40 percent of borrowers are likely to default on their loans by 2023. It’s amazing how easy someone can get so much money from the federal government while choosing to major in a subject that does not pay that much.
The Problem with Student Loan Repayment Schedule
Federal student loans generally have a standard repayment schedule, wherein you are supposed to repay the principal amount and the interest within a span of 10 years. The monthly payments are fixed and remain unchanged for the entirety of the repayment period.
Such a repayment schedule might not be a problem for you if you manage to secure a good job right after college and receive a substantial starting salary.
If, on the other hand, you do not have a stable job or a steady source of income or if you have substantial financial obligations (large family, high cost of living, personal debts, and so on), you might find it hard to cope with the repayment schedule.
If you find yourself in such a situation, an Income-Based Repayment (IBR) plan might be a good option for you.
What Is IBR and How Does It Work?
IBR is a debt-relief program offered by the federal government for people who are unable to keep up with their student loan repayments.
It is one of the four Income-Driven Repayment (IDR) plans offered by the government – the other three being Pay As You Earn Repayment Plan (PAYE), Revised Pay As You Earn Repayment Plan (REPAYE), and Income-Contingent Repayment Plan (ICR).
Unlike a standard repayment plan, IBR does not have fixed monthly payments which remain unchanged throughout the repayment period. The monthly payment is determined based on your income and it can be adjusted based on your financial situation.
How Your Monthly Payment Is Calculated
It is important to understand the payment terms of the loan before you sign up for it.
If your loan was issued before July 1, 2014, your monthly payment is usually capped at 15 percent of your discretionary income.
You are required to make monthly payments for a period of 25 years, after which you can become eligible for loan forgiveness.
If your loan was issued on or after July 1, 2014, your monthly payment is usually capped at 10 percent of your discretionary income. You are required to make monthly payments for a period of 20 years, after which you can become eligible for loan forgiveness.
Advantages of IBR
- The monthly payments are much lower compared to what you are likely to pay under the standard repayment plan.
- Your monthly payments can be adjusted based on your financial situation. Depending on the terms of the loan, you can recertify your repayment plan and lower your monthly payments for a number of reasons including the birth of a child, getting demoted at work, getting treated for an illness or injury, or losing your job. In some cases, the monthly payment can be as low as $0.
- You become eligible for forgiveness after 20 or 25 years, depending on when your loan was issued.
Disadvantages of IBR
Some disadvantages are:
- Since the repayment period can be anywhere from 20 to 25 years, you are likely to pay more towards interest compared to a standard repayment plan.
- The loan amount which is forgiven after the mandatory repayment period is taxable.
Is IBR the Right Choice for You?
IBR can be a good option for anyone who is struggling with student loan debt. It is, however, not the only option available for you.
There are several other ways in which you can tackle your debt and improve your financial situation. If you want to learn how you can pay off your debt faster, you should speak to us.
Get answers to your debt questions here. Our debt specialists are waiting to hear from you. Get in touch with us now.