How Income-Driven Repayment Plans Can Save Your Budget (and your sanity!)
We’d all like to step out of our graduation robes and into six-figure employment, but life doesn’t work out like that for many of us.
According to the Society for Human Resource Management, the average American college graduate will earn $52,569 in their first year of post-university professional employment.
If you are thinking “I’d love to be making $52,569 right now,” then note that phrase “professional employment”—70 percent of new graduates who responded to a recent survey reported that they were either unemployed or working in a full-time non-professional job just to make ends meet.
On top of rent, car payments, utilities and all the other grown-up bills, student loan debts can be overwhelming for graduates. So overwhelming in fact there have been some startling statistics on how student loan monthly payments are affecting our society. There has been a 30% drop in entrepreneurship in the millennial generation directly correlated to student debt. As well as the median age for home buying is shifting from the early 30’s to late 30’s with experts believing student loans playing a huge part in that shift. Young people with this debt are scared to start families, start business, and buy houses. Can you imagine what will happen to this country’s economy if this continues to be the case?
Then there is the most frightening statistic yet to date. 40% of all student loans borrowers (roughly 20 million Americans) are not paying their student loans at all, which means they are either delinquent or in default. What happens across our great nation when most people run into financial troubles is they stop paying their student loans first. For the simple reason that most people know you can’t repossess an education. For most in trouble, these loans get put on the back burner with food, clothing, and shelter becoming priority.
That is why Income-Driven Repayment (IDR) plans had to become an option for borrowers. They were first introduced in the mid 90’s, although almost no one knew about them. Then our past President, Barack Obama, expanded these programs greatly starting in 2009. He did this for two reasons:
1) So that people could find relief from their student loan debts by paying what was affordable; and
2) So the government (a.k.a. the lender) could get something instead of nothing without having to rely on debt collectors and garnishment tactics to secure their return on investment.
Since 2009 the IDR plans have had many adjustments and alterations, making them even more attractive for borrowers with some of the newest changes just instituted at the beginning of 2016.
These plans can provide much needed breathing room in a monthly budget, but they’re not for everyone. I’ve been working with these programs for a long time, and where I see them fall short is in a couple of areas. For instance, if a borrower owes a relatively small amount (say under $20,000 dollars), then these plans might not be right for them, since they will end up paying much more in interest over the life of the loan and most likely see almost no forgiveness.
Other situations are if they are one of those hell-bent freaks who wants to pay this loan off as fast as humanly possible or they just flat out make too much money for the loan amount they have, then it won’t make sense.
However, every person’s situation is unique. I have talked to people with very low debt and low payments who just couldn’t afford it and IDR plans fit them perfect until they got back on their feet. And I would definitely, always, always, always look at IDR plans before going into deferment or forbearance.
Let me take the time to clear something else up. Although the IDR plans are frequently referred to as “Income Based Repayment (IBR)” plans, that term only technically applies to only one specific plan with that name. So, when people say “I’m in an income based repayment plan,” it actually makes things a little more muddled. Income-Driven Repayment is the blanket term used to describe all the plans.
There are technically 5 different IDR plans.
1) Income-Contingent Repayment Plan (ICR Plan). This one came first, way back in the day, and it is pretty much the worst of the 5 by comparison.
2) Income Based Repayment (IBR). This plan came second, and it is the most likely known of all the plans hence the confusion.
3) Pay As You Earn Repayment Plan (PAYE Plan). In my opinion, this is the best plan, but it’s also one of the hardest to get into
4) Revised Pay As You Earn Repayment Plan (REPAYE Plan). This brand spanking new plan was created to fix a couple of problems that the PAYE plan had. Remember how I said PAYE was hard to get into? That problem is what REPAYE is intended to fix.
Now you may be thinking “I thought you said there were 5 plans.” Well you’d be right….
5) IBR for New Borrowers. This plan is so new that I doubt you or anyone you know can even use it. It basically has all the same terms as PAYE (which means its great), except it is even harder to get into (which means it’s not great). Only for people who had no student debt before July 1st, 2014 can get into it—that basically means it will be great for people in the future.
See all the differences between the plans here.
Eligibility for Income Driven Repayment plans is based on…wait for it… your income! Hahaha, ok all joking aside, IDR plans work by capping payments at 10 to 15 percent of your discretionary income, which is calculated by taking the difference between your adjusted gross income and 150 percent of the annual poverty line for a family of your size in your state (however, this formula gets thrown out the window when it comes to ICR—that plan is calculated using a formula only understood by NASA scientists).
Oh, and here is a secret about the state you live when it comes to the formula above: all 48 mainland states get treated the same. They only treat Alaska and Hawaii any different when it comes to all the calculations.
Be mindful that only Federal Student Loans are eligible for Income-Driven Repayment. Private Student Loans are not eligible, making them the most difficult loans to deal with by far.
Also, Parent Plus Loans are eligible for IDR but only under the ICR plan and only after consolidation. Be careful never to consolidate Parent Plus Loans with your own school loans if you have your own loans, and you took some out for your child. Likewise, if a parent has loans and he or she took out loans for you, then NEVER consolidate those loans together. (If you need help on this, please reach out)
If you are reading this, then thank you. But also thank yourself, because only about 10% of the 44 million Americans with student debt have taken advantage of these programs. There are two simple reasons for this.
1. The biggest one is awareness: people simply don’t know these programs exist. If they hear anything about them, they say, “oh it sounds too good to be true.” Trust me, I hear it all the time. Not to mention the fact that our federal government, courtesy the Department of Education, has not made the effort needed to make borrowers aware that these programs exist and are real. As if they don’t know how to communicate with the American people.
2. The second reason so few take advantage of these programs is that the programs are inherently confusing. Everything about them is confusing, because everything reads like tax law, which understandably turns most people’s brains to mush. Not to mention all the misinformation on the internet. On top of that there is the fact that calling the student loan servicing companies or the Department of Education and asking them how to save the most money on your student loans is kind of like calling the IRS and asking them how to save the most money on your taxes. If you don’t believe me on that, then read this article. Here is a direct quote: "There is no expectation that the servicer will act in the interest of the consumer." That is straight from mouth of the CEO of Navient, the biggest student loan servicing company in the country. I could go off on this all day, but I won’t. Let’s stay positive.
Income-Driven Repayment is an absolute godsend for many people in our nation… especially when you couple IDR plans with student loan forgiveness. I will go in depth about forgiveness and how it works in a later article.
Whether you’re considering taking out a loan or already trying to pay one off, I can help you sort through the requirements and differences in IDR plans to find the plan that’s right for you and your situation. I take a holistic approach looking at what will help you most today and in the future. Let’s work together to get you on a plan that fits your budget.