Pros and Cons of Income-Driven Student Loan Repayment Plans

Student loans are by far some of the biggest issues most students are facing today when it comes to finances. To get the kind of education you want, you will probably need to take out a student loan to pay for the studies – and then spend years if not decades paying back such loans.

What could be even worse is having to pay more every month than you can actually afford to pay back. Luckily, students have the option of taking out income-driven student loans though these can also have their downsides. Hence, here are the pros and cons of income-driven student loan repayment plans you need to consider.

#1 Pro: Good for Unemployed Individuals

The first thing you should know is that having an income-driven student loan repayment plan is great for unemployed individuals. It’s also good for borrowers that have exhausted their eligibility for economic hardship deferment, forbearances, and unemployment deferment. Such repayment plans could be a good choice for when your payment pause is over, or your interest waiver expires. Because the payments you make are based on your income, you could even end up having to pay $0 (but more on this later).

#2 Con: You Might Not Qualify

Perhaps the biggest downside of income-driven student loan repayment plans is that the eligibility criteria are quite strict and you can simply end up not qualifying. Most of the time, such loans are limited to federal student loan borrowers which means most private student loans don’t offer an income-driven plan. Federal Parent PLUS, for example, are not directly eligible for such payment options. However, they can become eligible for ICR if you include the Parent PLUS loan into the Federal Direct Consolidation Loan.

#3 Pro: Lower Monthly Payments

As teenagers grow older and become adults, they try to find ways to already earn their first money which is why it’s important to start building credit when you turn 18. Saving money is also crucial, which is why the benefit of lower monthly payments on income-driven payment plans can be so helpful. Because your payments depend on your income, you could be paying much lower monthly payments. If your total student loan debt at graduation exceeds your annual income, you’ll likely qualify for lower payments.

#4 Con: Your Total Balance Could Increase

Though your monthly payments could become lower, your total balance could actually increase. Your loan could be negatively amortized under such income-driven plans which is what happens when your monthly payments are less than your new interest during the month. Such a situation leads to your loan balance increasing. If you do eventually qualify for loan forgiveness, such an increase won’t matter much. However, it’s still something to keep in mind when deciding to take an income-driven student loan.

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    #5 Pro: You Might Qualify for $0 Payments

    As mentioned earlier, you might qualify for $0 payments. This is, of course, not the most common occurrence, but if you’re a low-income borrower, your monthly payments could amount to $0. To put it simply, if your adjusted gross income is less than 100% or 150% (depending on the type of loan you get) of the poverty line, you might have payments of $0. Moreover, even if your monthly payments are zero, these payments will still count towards the loan forgiveness you could get afterwards.

    #6 Con: Married Borrowers Might Need to Pay More

    When you’re on your own, you’ll probably need to manage your fear of spending money. When you are married, there are way more issues you could encounter financially–and one of such issues could be the fact that married borrowers might need to pay more on income-driven student loans. If you get married and your spouse has a job, your monthly payments will obviously increase. This is especially true if you previously filed a joint return which means your payments will be based on your combined income rather than just yours.

    #7 Pro: Remaining Balance Is Forgiven

    As mentioned earlier, your remaining balance could be forgiven after you have been repaying the student loan for 20 or 25 years (depending on the type of repayment plan you have). If you have an ICR or an IBR loan, then the term will be 25 years. But if you have a PAYE, then the term will be 20 years. Under REPAYE, it’s a bit different. If you have graduate school loans under it, then the term is 25 years. And, if you only have undergraduate loans, then it’s 20 years.

    #8 Con: You Pay Taxes on Forgiven Balance

    That being said, there is still a downside to having your remaining balance forgiving which is that you may still be paying taxes for it. If your student loan is forgiven after 20-25 years of repayment, then your forgiven balance will likely be taxable. The forgiveness is considered like a smaller tax debt for student loan debt–you have several options how to deal with this tax debt. One option is to ask the IRS to forgive the debt, another is to propose an offer in compromise, and yet another one is to aim for a payment plan of up to six years. It is important to talk to your tax professional to help you consider how a forgiven student loan will impact your taxes.

    #9 Pro: Interest Paid on Subsidized Loans

    Some students could be concerned about how existing debts impact your credit score, but there are some other things that could make it easier to worry about such things. For instance, the federal government would be paying all or some of the accrued interest on income-driven student loans. This applies to unpaid interest. The federal government could be paying 50% or 100% (depending on the loan type) of unpaid accrued interest on subsidized loans during the first three years. For the remaining period, it could be either 50% or paid by the borrower (depending on the loan type).

    #10 Con: It Can Be A Confusing Process

    Last but not least, getting an income-driven student loan could be a very confusing and time-consuming process which not many people are willing to go through. There are too many plans to choose from and too many tasks to do which you might not be able to complete on your own. This could lead to even more expenses as you try to find qualified people to help you. So, it’s really important to consider whether the endeavor is actually worth it.

    Final Thoughts

    To sum up, there are definitely many pros and cons to taking out an income-driven student loan. But you should still consider all of the upsides and downsides to doing so before you make the final decision to take out a loan like that. Use these tips to get you started and then make the best choice for you. 

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