Using Income Based Repayment

Income based repayment is one of the most common types of repayment plans for federal student loans. This type of repayment plan bases the amount of the monthly payment of your loan on a level that is affordable to your family, based on your monthly income and the size of your family. Some may wish to consider this repayment plan when they consolidate student loans as well.

Types of Student Loans Eligible

Stafford, Grad PLUS loans as well as others use an income based repayment plan. If the student loan was written under the Direct Loan program or the FFEL program, most federally consolidated loans may use this method. Both old and new income based repayment plan loans use this method, as well as educational lending for undergraduate, graduate and job training loans. The types of loans that do not use the income based repayment plan method include the parent PLUS loans, the consolidated parent PLUS loan, or any loan currently in default.

Becoming Eligible

Affordability of the monthly payment for the student determines the qualification to use the income based repayment plan method. Should your current student loan debt have a high monthly payment that is unaffordable for the size of your family, you may be allowed to enter this type of plan. Factoring in your personal information, loan specifics and which state you live in, usually performed by the lending department, will help determine if you qualify for this loan.

Should you qualify, and the calculated new income based repayment monthly payment is lower that what you are currently paying on your eligible loans, you may repay your debt using this new method at the lower amount. The loan must also be a standard repayment and have a term of ten years. After all calculations should your monthly payment be higher than the amount using the income base method, you will be allowed to use the lower payment plan.

Benefits Of An Income Based Repayment Plan

There are several reasons why this repayment plan works best for some individuals. The monthly payment is less than it would be under a traditional repayment plan of ten years. However, the longer the repayment period is, the more expensive the loan will be (since there is more time for interest to compound on the principle borrowed.)

For subsidized Stafford loans, including Direct Loans and FFEL Loans, should the monthly payment of the income based repayment plan be calculated to be less than would cover the interest applied to the account each month, the unpaid interest will be paid by the federal government for a period of up to three years.

Any remaining balance that is not paid after twenty five years of repayments made on the income based repayment plan, including all principle and interest, will the be canceled. For those that have worked in an eligible public service job and have made at least 120 payments while working full time in that position, their debt will be canceled after ten years.

Is It For You?

For those who have qualifying students loans or who consolidate their student loans, the income based repayment plan is a good option. You will, however, be required each year to submit documentation showing your income and the amount of the payments sent. If documentation is not provided your loan will revert back to the standard repayment plan.

If you have questions about student loan refinancing, visit refinance student loans that gives you better understanding of how to consolidate student loans.