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When is it time to give up on Income-Driven Repayment Plans like IBR, PAYE, and REPAYE?

Income-driven repayment plans are usually the best option for federal borrowers, but some circumstances justify a change in strategy.

Written By: Michael P. Lux, Esq.

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Income-Driven Repayment plans like IBR, PAYE, and REPAYE are the gold standard for repayment flexibility. Borrowers make payments based upon what they can afford, rather than what they owe. Unfortunately, these highly regarded plans are not always the best option for student loan borrowers.

Even though IBR, PAYE, and REPAYE are the best repayment plans, some borrowers may find a strategy using other options that more quickly eliminates student debt. It might be time to move on from income-driven repayment when you get married, get a raise, or want lower interest rates.

Exiting an Income-Driven Repayment plan can result in substantial savings in the long run, but it is a decision that comes with significant risks. Borrowers should have a firm grasp on both the pros and cons of their choice to leave IBR, PAYE, or REPAYE.

Should I even consider quitting Income-Based Repayment?

Before we jump into the reasons a borrower might want to leave income-driven repayment, it is important first to point out two important reasons to stick with these plans: payment flexibility and forgiveness.

The three most popular income-driven repayment (IDR) plans are IBR (Income-Based Repayment), PAYE (Pay As You Earn) and REPAYE (Revised Pay As You Earn). Though there are fundamental differences between these plans, the basics are the same: borrowers pay either 10 or 15 percent of their discretionary income towards their student debt, and after 20 to 25 years, the debt can be forgiven. All IDR plans are also eligible for Public Service Loan Forgiveness.

Borrowers who think that student loan forgiveness is a possibility should usually stick with one of the IDR plans. Borrowers who want to have IDR available in case they lose their job can change repayment plans, as it is possible to switch back, but they cannot refinance with a private lender as there is no way to undo a private refinance.

Giving up on student loan forgiveness

Federal student loan forgiveness can be a great deal for many borrowers. For others, chasing after forgiveness can end up costing more money in the long run.

Even though qualifying for Public Service Loan Forgiveness isn’t as hard as the reported 99% rejection rate makes it sound, many borrowers are rejected due to an incurable issue with their application. Denied borrowers may decide that it is time to pursue an alternative path to debt elimination.

The borrowers who have given up on student loan forgiveness may opt to aggressively pay down their debt to spend as little on interest as possible, or they may choose to refinance the loans with a private lender to lock in a lower interest rate.

Going after lower interest rates

Even though federal loans are objectively the best student loans, they do have some flaws. One of the more noteworthy flaws is the interest rates.

Some federal loans have interest rates above 7%, while private lenders currently offer rates just over 2%. Refinancing can slash interest spending and speed up repayment. Refinancing also means a new lender and new loan terms. Borrowers who opt to go with a private company forgo the perks that come with federal student loans, but the new loan terms might be worth the trade.

The big danger in refinancing with a private company is that there is no way to undo the process. Once the old federal loans are eliminated and replaced with a new private loan, the federal perks and protections are lost forever.

Increased Income

Getting a raise at work or starting a higher-paying job means higher payments on the income-driven repayment plans.

The idea with the IDR plans is that the increased monthly payment should be manageable due to the borrower’s larger salary. Unfortunately, this isn’t always the case.

Many borrowers want to pay the minimum possible on their student debt each month to pursue other goals such as: saving for retirement, buying a house, or paying off high-interest debt. A jump in income can help achieve these goals, but student debt will be a bigger obstacle.

Some federal repayment plans, such as the graduated and extended repayment plans, are designed to stretch payments out over a longer period. These plans are not eligible for most of the student loan forgiveness programs, but they may offer lower payments to IDR borrowers who have seen an increase in their salary. The federal student loan repayment estimator is an excellent resource for evaluating the expected monthly payments on these alternative repayment plans.

Getting Married

One of the sad realities of student debt in the United States is that there is a marriage penalty for borrowers on IDR plans.

All of the Income-Driven Repayment plans use spousal income for purposes of calculating how much a borrower should pay. Borrowers on PAYE and IBR do have the option of filing taxes separately to get a lower student loan payment, but it will mean a larger tax bill each April. The REPAYE plan uses spousal income regardless of filing status.

By the time borrowers get married, they may realize that paying the debt off in full is the best way to handle the student loans. This could mean living with the higher IDR payments, or it might mean refinancing with a private lender.

The risk of leaving Income-Driven Repayment

While there are circumstances where borrowers might benefit from leaving the IDR plans, exciting comes with serious risks.

The most common issue with quitting IBR, PAYE, or REPAYE is that borrowers will no longer be working towards student loan forgiveness.

A less common issue is that switching federal repayment plans can cause interest capitalization. Many borrowers have IDR payments that are smaller than the amount of interest that the loan generates each month. When this happens, the loan balance is going up with each passing month. However, the extra interest isn’t immediately added to the principal balance, which is good for borrowers because it means they do not have to pay interest on the interest. Unfortunately, changing repayment plans is an event that will trigger interest capitalization.

Remember to focus on the big picture

Too many borrowers make the mistake of focusing on monthly payments rather than debt elimination.

Getting a lower monthly payment on student loans is a good thing because it leaves more cash available each month to strategically attack high-interest student loans.

If borrowers pursue lower monthly payments and only make minimum payments, the debt will last longer, and more will be spent in the long run. When evaluating repayment plans, all borrowers should consider their approach to knocking out the debt entirely. Choosing the repayment plan that most efficiently eliminates debt will be the option that saves the most money in the long run.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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