It seems all too often that federal student loan borrowers stick with the standard repayment plan until they reach a point of desperation. It could mean being delinquent, or it could just mean that they fear not being able to make their payment in a few months. At that point, they finally consider an income-driven repayment plan.
The reality is that income-driven repayment plans are the best choice for many more borrowers. Even if you can afford your monthly payments on your current student loan plan, you might be in better shape signing up for an income-driven plan
1. Income-Driven Plans let you pay down high interest debt first.
Being able to afford your monthly student loan payment does not mean that you are on the right repayment plan. Monthly student loan payments are most effective when you can attack the highest interest rate student loans first. If you pay down high interest loans first, you spend less on interest in the long run.
Lowering your monthly payments on your federal loans frees up money to pay down high interest private loans. Even if all of your loans are federal, it allows you to apply a higher percentage of your monthly payment towards your high interest loan(s).
Signing up for an income-driven plan allows a borrower to take a more active role in their repayment and to defeat their debt sooner while spending less.
2. Income-Driven Plans can help you get a mortgage.
Home ownership among millennials is low, and student loans are a big part of the problem. Earlier this year the mortgage underwriting standards changed in a very significant way. Income-driven payments can now be used as the basis for calculating an individual’s ability to buy a home. Using these lower monthly payments, borrowers debt-to-income ratios improve. This can increase the odds of a mortgage approval and help qualify for better interest rates. It also can increase your borrowing power.
3. Income-driven plans could lead to your debt being forgiven.
Even if you expect to pay off your loans in full, you never know for sure what the future holds. A great opportunity may become available with the government or a non-profit. If you are already on an income-driven plan you can start working towards public service loan forgiveness right away. If you are on the standard plan, you may miss out on the first few months while your paperwork for the new plan is being processed.
Borrowers who never end up in public service can also have their loans forgiven. While the standard forgiveness program takes 20 to 25 years, depending upon the Income-driven plan selected, unexpected changes could make paying off the loan in full impossible. If you are already on an income-driven plan, your clock has already started.
A warning about income-driven repayment plans
The one danger with income-driven repayment plans is that you could have a very low minimum payment. If you just make the minimum payment, your balance might actually grow due to the interest.
The flexibility of an income-driven repayment plan is great, but if you are not taking advantage of the low payments to attack high interest debt, it could cost you in the long run.
Should I switch to an income-driven repayment plan?
There are many potential benefits for signing up for an income-driven repayment plan. Ultimately, the only way to know the potential benefits is to find out what you might be expected to pay each month. The federal student loan repayment estimator is a great tool provided by the Department of Education that can help any borrower find out what their payments would be on the various plans.
Deciding between IBR, PAYE, and REPAYE
If you decide that an income-driven repayment plan is right for you, choosing the best income-driven repayment plan is the next step.
Income Based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE) all have unique advantages. For most borrowers, picking the best plan is fairly simple once you understand the basics of each one. Learn how to pick the best income-driven repayment plan based upon your circumstances.
Income-driven repayment plans are a federal student loan resource that many borrowers do not utilize. Even if you are not in a desperate situation, they still can be a great option.