The burden of student loan payments can often feel insurmountable and confusing, leaving borrowers unsure of what solutions are available. However, amidst the maze of repayment options, there is one particular avenue that may initially sound too good to be true: $0 payments on income-driven repayment plans. This perk is available on ICR, IBR, PAYE, and the newly created SAVE plan.
Today, we will explore how these zero-dollar payments work, who qualifies for them, their advantages, disadvantages, and more.
Paying $0 Per Month on Your Student Loans
The idea of receiving a bill for zero dollars from your student loan servicer may raise eyebrows, but it’s a real option thanks to income-driven repayment plans. These plans determine the payment amount based on what borrowers can afford to pay, rather than their outstanding loan balance. While there are limitations, a $0 payment can be a beneficial choice for many borrowers.
How do I get a Zero Dollar Payment?
To begin, it’s important to note that a $0 payment is available only for federal student loans; private loans do not qualify. Eligible borrowers need to sign up for an income-driven repayment plan. IBR, PAYE, ICR, and SAVE all will work. These plans require payments ranging from 5 to 15% of a borrower’s discretionary income. If the government’s calculation determines that a borrower has no discretionary income, their monthly payment will be $0.
Payments on income-driven repayment plans are recalculated annually, adjusted for inflation and changes in income.
Sherpa Tip: This article treats all of the federal income-driven repayment plans similarly because qualifying for $0 payments and the pros and cons are all identical.
However, it’s worth noting that there are some important differences between these plans.
For starters, if you qualify for a $0 per month payment, REPAYE/SAVE and its generous interest subsidy is often the best choice.
$0 Student Loan Payments vs. Forbearances and Deferments
Qualifying for a $0 payment differs considerably from a forbearance or deferment.
While forbearances and deferments have time limits and usually do not last a year, there are no such restrictions on zero-dollar payments. Borrowers making $0 payments on income-driven repayment plans can continue to do so year after year.
Furthermore, $0 payments can count towards student loan forgiveness. Borrowers on income-driven plans can have their loans forgiven after 20-25 years, and those working in public service can use their $0 payments to qualify for the 120 payments required for public service loan forgiveness.
Downsides to Understand
Despite the benefit of not making monthly payments, it’s crucial to understand that the student loan interest does not vanish.
The loan balance increases with each passing month due to accruing interest. Borrowers should be aware of capitalized interest, where the additional interest is added to the loan balance, leading to interest being charged on the increased amount.
To avoid unnecessary capitalization of interest, borrowers should make sure not to miss any income certification deadlines.
Submitting $0 Monthly Payments
When borrowers have $0 payments, there is no need to send a check or complete additional paperwork each month.
However, for loans without a required payment, borrowers still must remember to certify their income before the lender-imposed deadline.
Are $0 payments too good to be true?
Given the prevalence of student loan scams and unreliable information from loan servicers, skepticism is natural when it comes to $0 payments on income-driven repayment plans like IBR, PAYE, and REPAYE/SAVE.
Fortunately, one of the advantages of federal student loans is the availability of income-driven repayment plans based on borrowers’ income rather than their loan balance.
If the Department of Education determines that a borrower cannot afford monthly payments, they will owe $0 per month. Even unemployed borrowers can be eligible for income-driven repayment plans, with most qualifying for $0 monthly payments. The Department of Education considers factors like family size and location to determine affordability, calculating payments based on the Adjusted Gross Income (AGI) reported on tax returns.
IDR Enrollment Process
While not every borrower can qualify for a $0 payment, anyone can apply for an income-driven repayment plan.
The process may take a few months to complete, but the initial paperwork can be filled out in approximately 10 minutes. Borrowers can apply through studentloans.gov or submit a paper application to their loan servicer.
Frequently Asked Questions
No, $0 payments are only available for federal student loans.
It depends on the repayment plan selected. On IBR, PAYE, and ICR, interest will continue to accrue.
However, by enrolling in REPAYE/SAVE, borrowers get a subsidy that covers 100% of the unpaid interest each month.
No, there is no need to send checks or set up automatic payments for $0 payments. However, borrowers must remember to certify their income before the yearly deadline.
Yes, by applying for an income-driven repayment plan, borrowers can transition from forbearance or deferment to $0 payments if eligible.
Understanding $0 payments on income-driven repayment plans can help borrowers make informed decisions about managing their student loan debt.
While the concept may seem too good to be true, it is a legitimate option for eligible borrowers with federal student loans. By taking advantage of income-driven repayment plans, borrowers can benefit from affordable payments, loan forgiveness opportunities, and a path toward financial stability.