Welcome back to Day 8 of the CommonBond Student Loan Boot Camp! In Day 7, we learned how certain jobs in public service could lead to your federal student loans being forgiven. Today we'll discuss how to reduce your student loan payments regardless of whether you have federal or private student loans.
Day 1: Average Student Loan Debt and Student Loan Refinancing
Day 2: Principal Versus Interest
Day 3 What Is Capitalized Interest?
Day 4: What Are Grace Period, Deferment and Forbearance?
Day 5: Student Loan Refinancing Versus Student Loan Consolidation
Day 6: Why Should You Refinance Private Student Loans?
Day 7: What Is Public Service Loan Forgiveness?
Day 8: How to Reduce Student Loan Payments
Day 9: How to Use a Student Loan Payoff Calculator
Day 10: Should You Pay Off Your Student Loans Early?
There are several options to reduce your payments on your federal and private student loans. Here is a quick description of each:
Income-driven repayment plans allow borrowers to pay only a certain percentage of their income on their student loans each month rather than what they owe under a standard 10-year repayment plan.
The Department of Education offers four types of income-driven repayment plans: Income-Based Repayment (IBR), Income-Contingent Repayment (ICR), Pay As You Earn (PAYE) plans and Revised Pay As You Earn (REPAYE).
All income-driven repayment plans are based on "discretionary income," which is the income you have to spend after you cover living expenses. Some income-driven repayment plans calculate income differently. For IBR, PAYE and REPAYE plans, discretionary income is the difference between your income and 150 percent of the poverty guideline for your family size and state of residence. For ICR, discretionary income is the difference between your income and 100 percent of the poverty guideline for your family size and state of residence. You can find the poverty guideline for your family six and state of residence here.
The types of federal loans that qualify for income-driven repayment plans are: Direct Loans, Federal Stafford Loans, PLUS Loans to students and Consolidation Loans. Parents who consolidate their Parent Plus Loans into a Consolidation Loan can use an Income-Contingent Repayment (ICR) plan to repay that loan.
Here's how the four income-driven repayment plans compare to each other based on payment amount and repayment period:
Under IBR, if you borrowed on or after July 1, 2014, you pay 10% of your discretionary income, but never more than the 10-year standard repayment plan amount. If you borrowed before July 1, 2014, you pay 15% of your discretionary income, but never more than the 10-year standard repayment plan amount.
Under IBR, if you borrowed on or after July 1, 2014, you can have a 20-year repayment period. After this period, the loans are forgiven. If you borrowed before July 1, 2014, you can have a 25-year repayment period.
Under ICR, payment is the lesser of the following: 20% of your discretionary income OR what you would pay on a repayment plan with a fixed payment amount over the course of 12 years, adjusted according to your income. (If you have Parent Plus loans, the only income-driven repayment plan you can use is the ICR plan.)
Under ICR, you can have a 25-year repayment period, after which the loans are forgiven.
Under PAYE, you pay 10% of your discretionary income, but never more than the 10-year standard repayment plan amount.
Under PAYE, you can have a 20-year repayment period, after which the loans are forgiven.
Under REPAYE, you pay 10% of your discretionary income, which can be more than what you would pay under the 10-year standard repayment plan.
Under REPAYE, you have a 20-year repayment period if all loans you're repaying under the plan were received for undergraduate study. After the 20-year repayment period, the loans are forgiven. You have a 25-year repayment period if any loans you're repaying under REPAYE were received for graduate or professional study. After the 25-year period, the loans are forgiven.
Note that the forgiveness of the remaining balance of your federal student loans under income-driven repayment plans is considered taxable income. That is not the case with Public Service Loan Forgiveness program.
You can lower the payments of your federal student loans by simply extending the repayment plan. You must have more than $30,000 in outstanding federal loans. You can extend your federal student loan payments for up to 25 years. You will pay more interest on your student loans, but your monthly payments will be lower. For example, if you had $50,000 in federal student loans at 5.84%, you would pay $16,131.23 in interest under a standard, 10-year repayment plan, but you would pay $45,183.47 in interest under a 25-year repayment plan.
Use the federal Repayment Estimator to calculate how your federal student loan payments will be under an extended repayment plan.
Another option for reducing your loan payments is through refinancing your student loans (federal AND private) with a private lender, like CommonBond. Refinancing can enable you to reduce your student loans payments with a lower interest rate or by extending the repayment periods of your loans to lower your monthly payment or, in some cases, both.
Income-driven repayment plans, extended repayment plans and student loan refinancing all have the potential to reduce your federal student loan payments. But only student loan refinancing can reduce the payments of both your student loans from both federal and private lenders.
On Day 9 of the CommonBond Student Loan Boot Camp, we'll learn how to use online calculators to determine your student loan payments.