If you are a cash-strapped graduate or parent, you can see the obvious temptation of getting on an income-driven repayment plan. There are certainly benefits to taking this strategy, but also some reasons why you should think twice. Below, we have outlined the biggest pros and cons of signing up for an income-driven repayment plan on your student loans.
- More affordable monthly payments. If you are having trouble making ends meet, or need a little more wiggle room in your budget, income-driven repayment may be able to help reduce your monthly payment amount. When you enroll in an income-driven repayment program, your payments are set based on a percent of your discretionary income. There are several federal income-driven repayment programs: PAYE, REPAYE, Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR). Trying to navigate through the differences can be a bit overwhelming. Which plan(s) you qualify for will depend on the types of loans you have and when they were made. To estimate your payments on a federal income-driven repayment plan and determine if enrolling in one of these plan would reduce your monthly payment, use their Repayment Estimator. If you have a non-federal education loan with RISLA, you can see if you qualify for Income-Based Repayment here.
- Loan forgiveness after 10 years for public service workers. If you work in the public sector, you may qualify for Public Service Loan Forgivness (PSLF) after 10 years of repayment while you pay on an income-driven repayment plan. Learn all of the details of this program here.
- Loan forgiveness after 20-25 years for others. If you aren't a public service employee, you still may qualify for loan forgiveness after 20-25 years of repayment (the length depends on the type of income-driven repayment plan you are enrolled in) if you still have a remaining balance at the end of your repayment term.
- Longer repayment term. Typically, when you enroll in an income-driven repayment plan, your term is extended out to as much as 20-25 years. On a federal direct student loan, that is 10-15 more years of repayment. If you can manage to pay the standard payment amount, you may be happier in 10 years when you have paid off your loan instead of having another 10-15 years ahead of you.
- You may pay more in the long run. When you extend your term, it means you are accruing interest on your balance for a longer period of time, which can have a significant impact on the amount of interest that is charged. You loan could end up costing a lot more in the long run if you choose income-driven repayment.
- Most students won't qualify for forgiveness. Studies show a lot more students think they will qualify for loan forgiveness than those who will actually be eligible.
- You may have to pay taxes on forgiven loan balances if you qualify for loan forgiveness. Under current Internal Revenue Service rules, you may be required to pay income tax on any amount that's forgiven if you still have a remaining balance at the end of your repayment period and that balance is forgiven.
Income-driven can be a great way to make ends meet and qualify for special programs (like PSLF), but remember to proceed with caution and understand how much it will cost you in the long run. If you decide it isn't for you - or you learn your loans don't qualify - but still want to reduce your student loan payment amount, you may want to look into refinancing, which could potentially lower your interest rate, reduce your monthly payment, or both.
Or learn more about refinancing with our Student Loan Refinancing Guide.