By Bria Overs | Word In Black

Credit: Brandy Kennedy / Unsplash

(WIB) – When students initially take out a loan, knowing the minimum monthly payment without an online calculator is nearly impossible. Typically, people don’t find out until they get closer to the end of the six-month grace period for subsidized loans.

It’s even harder to know whether they’ll be affordable. 

Once the bill finally arrives, borrowers look for payments that meet their current income and allow them to stay financially afloat.

That’s where Income-Driven Repayment Plans (IDR Plans) come in. The plans can help borrowers pay their loans in full within 20 to 25 years — longer than the standard repayment plan of 10 years — with low- to no-cost monthly payments. In some cases, these plans are another avenue to loan forgiveness. 

According to the Student Borrower Protection Center, nearly half of all Black people with federal student loans enrolled in IDR Plans. And those who didn’t finish their higher education are more than twice as likely to become delinquent on their loans without them.

After a three-year pause on payments and interest, for many, the money that would have gone to student loans is now going toward purchases and loans, such as a mortgage, car loan, or other types of debt. That makes these plans a necessary resource. 

Eligibility, qualification, and amount are determined by adjusted gross income, family size, and other factors. Low-income borrowers may be eligible for payments as low as $0. 

There are four types of income-driven repayment plans:

  • Revised Pay As You Earn (REPAYE)
  • Pay As You Earn (PAYE)
  • Income-based Repayment (IBR)
  • Income-contingent Repayment (ICR)

“You can see right out the gate why people would be confused,” says Lauryn Williams, Certified Financial Planner (CFP) and Certified Student Loan Professional (CSLP) at Worth Winning. “They all sound exactly the same, but they work very differently.”

Williams is right. For example, under the REPAYE plan, the monthly payment is about 10% of a borrower’s discretionary income. But, the IBR plan can be 15% for those who took out loans after July 1, 2014.

And, after the Supreme Court’s decision blocking President Biden’s student loan forgiveness program, the Department of Education will replace the REPAYE plan with the Saving on a Valuable Education (SAVE) Plan. Set to take effect this summer and next year, the replacement comes with major changes to income requirements and interest.

“I think this plan makes it increasingly likely that borrowers, especially those who went for undergraduate only, went to a trade school, or community college, will be less incentivized to pay down their loans and aim for forgiveness,” says Brenton Harrison, CFP and CSLP at New Money New Problems.

Before considering which plan is best, he also says borrowers need to know their loan type. Direct Loans or Federal Family Education Loans (FFEL) are the only kind eligible for these programs.

Even that is complicated, according to Harrison, because private banks may own some FFELs, instead of the government. 

“The safest thing to do if you have an FFEL loan is to consolidate it into a Direct Loan because then you know you’re going to be eligible,” Harrison says. And this consolidation would need to happen before the end of 2023.

Income-Driven Repayment Plans Might Be A Good Option

While payments are a great reason to utilize these plans, Williams and Harrison say there’s the other perk of a pathway to loan forgiveness. 

“It’s an umbrella of plans, but the premise of them is based on the type of plan and the type of loan you have,” Williams says. “Instead of paying off your loans, you have the ability to have your loans forgiven after anywhere from 10 years to 25 years worth of payments.”

Data from the Student Borrower Protection Center | Source: SBPC analysis of the Survey of Consumer Finances
Data from the Student Borrower Protection Center | Source: SBPC analysis of the Survey of Consumer Finances

But there’s a catch. After the forgiveness, Williams says, there’s a tax liability that could be 30% to 40% of the forgiven amount. However, this liability doesn’t apply again until the end of 2025.

Under the updated SAVE plan, borrowers will see a significant reduction in their monthly payments, and as long as they pay monthly, interest won’t accrue on the loans.

“President Joe Biden actually made some really, really good improvements to the system, but he did not sweep it all away,” Williams says. “And I think that’s going to be the thing that catches a lot of people off guard because that money has been allocated to something else. But you’re going to have to pay on these loans.”

Forgiveness is Still Possible

Since Biden became president, he’s worked with the Department of Education to make significant changes to the existing repayment plans

Harrison says this happened because servicers weren’t helping borrowers make informed decisions about these Income-Driven Repayment Plans that would have set them up with reasonable payments and avoided forbearance.

Some borrowers whose loans were in deferment or forbearance will receive credit toward forgiveness. Forgiveness is still in reach even for those not signed up for IDRP.

“Traditionally, in order to have your loans forgiven under those programs, you had to be paying and using those plans for the entire 10 to 25 years,” Harrison says. “What the government is saying is for a limited period of time, we are going to give everybody credit toward the 10, 20, or 25 years that they need for forgiveness, even if those payments were not made on income driven repayment plans.”

Williams and Harrison advise people to speak with a financial professional for more personalized advice and information as the timeline for repayment gets closer.

“There are other people that we work with who have already been on a payment plan for 20 years,” Harrison tells Word In Black. “And they’ve had their loans automatically forgiven. They thought they’d be paying off $100,000 for the next decade, and, all of a sudden, they just don’t owe anything.”