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Student loan repayment plans: Which type is the best deal?

Student loan repayment plans selection is left entirely up to the borrower. It’s important to understand which repayment plan is best for you.

By Qiana Chavaia, Christian Science Monitor

Student loan repayment plans

In recent years, the U.S. Department of Education has implemented a flexible solution to help borrowers with financial difficulty repay their federal student loan debt, also known as income-driven repayment plans. These plans calibrate monthly payments based on the individual’s income. Most applicants will qualify for at least one of the three types of repayment plans. However, selecting a plan type is entirely up to the borrower, which makes it critical to understand the differences before entering into a binding agreement.

Read: Going to College With Kids At Home 

PAYE vs. IBR

The two most popular repayment plans are Pay As You Earn (PAYE) and Income-Based Repayment (IBR), because in most cases, the monthly payment will be lower than the Income-Contingent Repayment (ICR) plan. Under PAYE, borrowers make payments of 10% of their monthly income, and any remaining debt is forgiven after 20 years. Meanwhile, IBR sets payments at 15% of monthly income and forgives remaining debt after 25 years. During years when you’re unemployed (or beneath the poverty threshold), your monthly payments are zero.

Each plan determines your monthly payment based on your family’s size and household income. To qualify, your adjusted payment amount must be less than it would be under the standard repayment plan based on a 10-year repayment period. 

So, given that PAYE seems like the more generous option, why would anyone choose IBR?

Simple: The Pay As You Earn plan stipulates that only “new borrowers” qualify. You are considered a new borrower if your loans were disbursed on or after October 1, 2011, or if you had no outstanding loan balances on or after October 1, 2007.

The Income-Contingent plan is also open to any borrower with federal loans. There is no income requirement. But, payments will be slightly higher than Pay As You Earn and IBR plans. In some cases (such as years in which you make a high income), your monthly payment could be higher than it would be under the standard repayment plan, because they are calculated based on your annual income.

Their key differences are:

  • Any borrower with eligible federal loans qualifies for the ICR plan.
  • Monthly payments for Pay As You Earn and IBR plans are lower.
  • Borrowers must meet additional requirements to qualify for Pay As You Earn.
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