Income Based Refund: Is It Worth It?
An income-based repayment plan is a type of federal repayment plan that reduces your student loan payments to a percentage of your income. If you’re having trouble repaying your federal student loans, an income-based repayment plan may be right for you, although there are a few caveats to keep in mind before signing up.
What is income-based reimbursement?
Income-based repayment plans are repayment options offered by the federal government for federal student loans only. With these plans, you will pay a percentage of your discretionary income for a set period of time, after which your remaining balances will be canceled.
The four most common federal repayment plans are Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), Income Based Repayment (IBR) and income-dependent reimbursement (ICR). Students with federal direct loans may be eligible for all plans, although parents are only eligible for ICR, and only if they consolidate those loans.
Each of the four income-based repayment plans has its own monthly payments and terms.
|Plan||Monthly payment||New repayment period||Eligible loans|
|Pay as you earn (PAYE)||10 percent of your discretionary income||20 years||Direct loans granted to students; FFEL loans if consolidated; Perkins loans if consolidated|
|Review of compensation as you earn (REPAYED)||10 percent of your discretionary income||20 years for undergraduate loans, 25 years for graduate and professional loans||Direct loans granted to students; FFEL loans if consolidated; Perkins loans if consolidated|
|Income Based Reimbursement (IBR)||10% of your discretionary income if you are a new borrower as of July 1, 2014, 15% of your discretionary income if you are not a new borrower as of July 1, 2014||20 years if you are a new borrower from July 1, 2014, 25 years if you are not a new borrower from July 1, 2014||Direct loans granted to students; FFEL loans granted to students; Perkins loans if consolidated|
|Income Based Reimbursement (ICR)||The lesser of 20% of your discretionary income or the amount you would pay on a 12-year fixed payment repayment plan||25 years||Direct loans granted to students; FFEL loans if consolidated; Perkins loans if consolidated; Direct loans to parents if consolidated|
Pros and Cons of Income Based Repayment Plans
While it may seem like an income-driven repayment plan is a no-brainer for struggling borrowers, it’s important to note both the pros and cons before applying.
- More affordable payment: The average student loan payment is $ 393, according to Purify, a student loan refinancing platform. If your budget can’t keep up, an income-based repayment plan can make your life easier. Low income borrowers could have payments as low as $ 0.
- Potential for forgiveness: If you still have a balance at the end of your new repayment term, it will be returned to you.
- No impact on credit score: No credit check is required to subscribe to an income-based repayment plan. The same is not true if you are trying to get a lower monthly payment by refinancing with a private lender.
- Your balance may increase: If your monthly payment ends up being less than accrued interest, that interest could be added to your overall loan balance. This may not seem like a big deal if loan cancellation is on the horizon, but if you leave your income-based repayment plan, you may end up with higher payments than you had to pay. ‘origin.
- You must reapply each year: The Department of Education requires that you recert your annual income and family size each year to stay on your income-based repayment plan. If you go past the deadline, you will be put back on the standard repayment plan and your payment will increase.
- Complex eligibility: If you have Federal Family Education Loans Program (FFEL) student loans or have taken out a parental loan, you will need to consolidate your loans before you can apply for most income-based repayment plans. There are also other limitations that could affect your options such as when your loans were disbursed whether or not you are married etc.
Is An Income Based Repayment Plan Right For You?
Paying for income isn’t for everyone, but here are a few situations where it’s worth considering:
- Your student loan repayments are high relative to your income. Since income-based repayment is based on your actual income, you could save hundreds of dollars each month by switching plans.
- You are eligible for the Public Service Loan forgiveness program (PSLF). Income-based repayment plans are a requirement for the PSLF, which waives remaining student loan balances for workers in public service jobs after 10 years.
- You recently lost your job or saw your pay drop. Income-based repayment plans require you to recertify your income each year, so your payments can go up or down depending on what you actually earn.
- You are near the start of your student loan repayment plan. Income-based repayment will allow you to start a new repayment plan that typically lasts 20 or 25 years. If you only have a few years left or you have a low balance on your student loans, it might not be a good idea to extend that period.
Think carefully about your situation and your goals before you decide to go with an income-based repayment plan or any other type of student loan repayment plan.
How to Apply for Income Based Refund
Before you begin the application process, consider contacting your loan officer to discuss your options. A representative can help you determine which plan is best for you.
Once you are ready, you will complete a income-based repayment plan request, which you can do online or in print – you can get the form from your loan officer. You can either select the repayment plan you want or have your carrier manage the numbers and place you on the plan with the lowest monthly payment.
In the app, you will provide income information that your agent can use to calculate your monthly payment. Depending on the situation, this could be your tax return or a recent pay stub. If you are not currently earning income, this step is not required.
Note that if you have more than one student loan manager, you will need to apply to each of them. After you submit your request, it may take a few weeks for your request to be processed. During this time, he may choose to put your loans on forbearance – but forbearance is not guaranteed, so consider asking if you need immediate payment assistance.
The bottom line
Income-driven repayment plans are a great benefit for federal student loan borrowers, and if you need them, it can seem like a lifeline. Before jumping into an income-based repayment plan, however, it’s important to understand the differences between each plan, potential limits, long-term costs, and other factors.
Once you’ve done your due diligence, you’ll be in a better position to determine if an income-driven repayment plan is right for you.