What is income-based reimbursement? | The bank rate

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Income-based repayment plans are an option for federal student loans that calculate your monthly payment amount based on your income and family size. Since monthly payments are dependent on your income, payments become more affordable during times of financial crisis.

You may want to consider an income-based repayment plan if:

  • You cannot afford the monthly payment on your long-term federal student loan.
  • You took out loans when interest rates were high.
  • You have recently become unemployed or have reduced income.
  • You want to continue delivering civil service loans.
  • You are at the start of your student loan repayment period.

What is income-based reimbursement?

Income-based repayment plans are a federal student loan repayment option that sets your monthly payment at an amount that is supposed to be affordable based on your income and family size.

While income-based repayment plans have different repayment periods, most terms are 20 or 25 years. At this point, any remaining loan amount will be canceled. In the past, the amount canceled under an income-based repayment plan could be treated as taxable income, although the US Department of Education recently revoked this requirement for any loan amount canceled up to in 2025.

How it works?

Income-based repayment plans set your monthly loan payment as a percentage of your discretionary income. The exact percentage depends on the specific plan, but typically ranges from 10 to 20 percent of your discretionary income.

Discretionary income is the difference between your annual income and 100 to 150 percent of federal poverty guidelines, depending on your repayment plan, family size, and location.

Keep in mind that some income-driven repayment plans, like REPAYE, have what is often referred to as a marriage penalty. “This is when the loan payments are based on the common income of the married borrowers, thus increasing the loan payment,” says Mark Kantrowitz, editor of PrivateStudentLoans.guru. To avoid this, you’ll need to sign up for a plan like PAYE, which will only use your income if you and your spouse file separate federal income tax returns.

Why is this important?

Income-driven repayment plans are important for federal student loan borrowers who need a lower monthly payment on their loans. Since these plans base your monthly student loan payment on the amount you actually earn, the amount you pay may be only a fraction of what you would pay with a standard 10-year repayment plan. Depending on your income and the size of your family, you may not have a monthly payment at all.

Income-based repayment plans are also a requirement if you plan to pursue Public Service Loan Remission (PSLF) with qualified employment in a public service field. With PSLF, you only need to make 10 years of payments (or 120 payments) on your income-based repayment plan before you see loan balances written off. The amount remitted is not considered taxable income.

Types of income-based repayment plans

You can apply for five types of income-based repayment plans:

Plan name Payment amount Repayment period Eligible loans Best for
Pay as you earn (PAYE) 10% of discretionary income 20 years Direct loans; FFEL loans and Perkins loans if consolidated If your income shouldn’t increase
Review of compensation as you earn (REPAYED) 10% of discretionary income 20 years for undergraduate loans, 25 years for graduate loans Direct loans; FFEL loans and Perkins loans if consolidated If you have graduate student loans
Income Based Refund (IBR) 10% or 15% of discretionary income, depending on the loan disbursement date 20 or 25 years, depending on the loan disbursement date Direct Loans, FFEL Loans; Perkins loans if consolidated If you do not wish to combine FFEL Loans
Income Based Reimbursement (ICR) The lesser of 20% of discretionary income or what you would pay with a 12-year fixed repayment plan, adjusted for your income 25 years Direct loans; parent loans, FFEL loans and Perkins loans if consolidated If you have parental loans
Income Based Repayment (ISR) 4% to 25% of gross monthly income 10 years FFEL loans If you want a short repayment term

How to calculate the refund based on income

Loan managers will set payments based on your discretionary income. All loan services use a standard formula to determine this amount, so it’s easy to calculate yours with some basic information.

To determine your discretionary income, find the difference between your Adjusted Gross Income (AGI) and 100 to 150% of the federal poverty line for your family size and where you live.

Here’s an example based on 150% of the federal poverty line: Imagine your adjusted gross income is $ 40,000 and you live in Indianapolis, Indiana. You have $ 45,000 in eligible federal student loans.

According to US Department of Education, 150% of the 2021 poverty guideline is $ 19,320 for a one-person family in Indianapolis. The difference between your AGI and this amount is $ 20,680. It’s your discretionary income. If you paid 10% of that amount under an income-based repayment plan, you would pay $ 2,068 for the year and $ 172.33 per month.

But the math changes if you have three kids. If you are a family of four, 150% of the 2021 poverty line is equivalent to $ 39,750. The difference between this amount and your AGI is only $ 250. If you owed 10 percent of that amount on an income-based repayment plan, you would only pay $ 25 on your student loans for the year. It’s only $ 2.08 per month.

How to Apply for Income Based Refund

The first step in applying for an income-based repayment plan is to contact your loan officer to find out about the options available. Your choices will depend on the type of federal loan you have and when you borrowed the money.

The next step is to submit a Income Based Repayment Plan Application. This request can be submitted online or in hard copy. Hard copies of the application can be obtained from your loan officer.

The app allows you to select the specific repayment plan based on the income you want, which you can determine using the US Department of Education program. loan simulator. You can also ask your loan manager to identify the most appropriate income-oriented plan (or plans) for your individual situation and ask the manager to suggest the income-oriented plan that offers the most monthly payment. affordable.

If you have loans from more than one agent, you need to repeat this process with each of them. Also keep in mind that when submitting an application you will need to provide income information. These details will help the repairer assess your eligibility for the various programs and calculate your monthly payments.

It usually takes a few weeks for the service agent to make a decision on your income-based refund request. Continue to make your regular payments until you’ve been officially approved for an IDR plan.

Alternatives to income-based reimbursement

If an income-based repayment plan doesn’t work for you, or if you’re not eligible, there are other options to lower your monthly loan payments. These include:

  • Progressive repayment plan: Under this plan, loan repayments start low and increase every two years. Payments are made for up to 10 years on most loans (up to 30 years on consolidation loans).
  • Extended repayment plan: This approach implies a longer repayment period, which reduces the monthly payment but ultimately increases the total interest paid over the term of the loan. Payments are made up to 25 years.
  • Student loan refinancing: While refinancing your federal student loans with a private lender eliminates federal benefits, such as the option of income-based repayment plans or loan cancellation, it may be worth getting a rate of. much lower interest.

Final considerations

Before deciding to pursue an income-based repayment plan, verify that you have the right type of federal student loans. Subsidized Direct Loans and Unsubsidized Direct Loans are eligible for all income-based repayment plans, as are Direct PLUS Loans and Direct Consolidation Loans.

Other types of loans do not qualify for income-based repayment plans, although you may qualify if you consolidate them with a direct consolidation loan. If you go for consolidation, make sure you are not consolidating direct loans that are already eligible for income-based repayment. You will lose credit for any payments that you have already made that will count towards the loan cancellation based on income.

You can find out more about the US Department of Education website.

Income-Based Refund FAQs

Does the income-tested refund include the spouse’s income?

Whether or not your spouse’s income affects your income-based repayment plan depends on the plan you choose.

ICR, IBR, and PAYE only use borrower’s income as long as the borrower deposits separately. REPAY, on the other hand, bases loan payment on common income, regardless of whether the borrower and his or her spouse have filed separate or joint tax returns.

What is the maximum income for an income-tested reimbursement?

There is no explicit income threshold when it comes to qualifying for income-tested repayment plans. The loan payments will simply increase as your income increases. However, if your income grows enough, your income-based payback may be more than what you would pay with the standard 10-year plan.

How many people get forgiveness through an income-based refund?

A recent report from the National Consumer Law Center found that only 32 student loan borrowers have had their loans canceled thanks to income-driven repayment plans in the program’s 25-year history. However, this shouldn’t put you off looking for these programs. The report says the plans themselves are not the problem, but rather a failure on the part of loan officers to adequately inform borrowers of their options.

If you believe you are eligible for an income-based refund, contact your service agent directly to request access.

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