The following is part one of a two-part series detailing the most important information federal student loan borrowers should know about income-driven repayment plans.
If you’re repaying federal student loans or will soon enter repayment and need a lower monthly payment, here is what you need to know about the federal student loan repayment plans that set your monthly payment as a percentage of your discretionary income.
Unless you’ve chosen otherwise, your federal student loans are automatically enrolled in the “standard” repayment plan — a fixed monthly payment paid over the course of 10 years. If the standard repayment plan is more than you can afford, then you may want to consider an income-driven repayment (or IDR) plan. IDR plans typically provide a lower monthly payment — in some cases as low as $0 per month.
1. What is IDR and is there a fee to enroll?
IDR bases your monthly payment amount on your annual discretionary income and family size. The type of federal student loan you have determines which IDR plans are available to you. For the most common IDR plans, your monthly payment will get calculated at either 10 or 15 percent of your discretionary income, which the U.S. Department of Education defines as the difference between your income and 150 percent of the poverty guidelines for your family size and state of residence. Congress and the U.S. Department of Education developed these programs and set the eligibility criteria that determine your payment amount. Federal loan servicers, like Navient, administer the program but do not have authority to make changes to the program or plan criteria.
Any federal student loan servicer can assist you in the IDR application process for free. You never have to pay for help with your federal student loans. At Navient, we help make it easier by telling borrowers how much they can expect their monthly payment to be in an IDR plan. Some third-party “document preparation” or “debt relief” companies may call, mail, or advertise with an offer to lower your payments or even forgive your student loans for a fee, but be aware these are the same programs your servicer can help you enroll in at no cost.
Because IDR is a government, taxpayer-subsidized program, only federal loans are eligible. As a reminder, federal loans are the loans you receive after completing the Free Application for Federal Student Aid (FAFSA). Today, the U.S. Department of Education provides these student loans under the William D. Ford Federal Direct Loan Program (Direct Loans). Prior to June 30, 2010, federal loans were also distributed by financial institutions in the Federal Family Education Loan Program or FFELP. Remember — the type of federal student loan you have determines the IDR plans you are eligible for.
Private education loans, such as those made by banks or other financial institutions where the interest rate is typically set according to your credit history at the time the loan is made, do not qualify for IDR. If you have a private loan and are struggling to make payments, call your servicer to see whether there are options available to you, and consult with your cosigner — who also signed up to be responsible for the loan — to see if they can help.
If you have federal student loans, here is a look at the standard plan and the three most common IDR plans:
Each IDR option has its own eligibility requirements based on the type of federal loan you have, when you took out your loans and unique monthly payment calculations and schedules.
Pro Tip: Check out another detailed chart that breaks down each plan.
2. How will enrollment in an IDR plan affect my outstanding balance and the amount of time it will take to pay back my loan?
When you lower your monthly payment amount through an IDR plan, you’ll likely extend how long you will pay on your loan past the standard 10-year repayment plan. With lower monthly payments, you won’t pay off the principal as fast and you’ll likely pay more interest than you would under the standard 10-year plan. The below chart provides a look at what this means for a borrower with $30,000 in federal loans and a starting salary of $30,000 under the three most common IDR plans.
The Department of Education offers a repayment estimator that can help determine what your monthly payments will look like and the overall cost of repaying your loans under each plan.
3. Which plan is best for me and how do I enroll?
It can be rather daunting to sift through so many plans with subtle differences and some with similar sounding names.
If you’re considering enrolling in an IDR plan, consider your financial goals, and ask yourself a few questions, such as:
- Is it more important for me to lower my monthly payments now, even if it means I’ll pay more long-term and need to pay for a longer period of time?
- Are there other ways I can increase my income or lower my expenses, so I can pay more now and less in the long run?
When considering which plan is right for you, keep in mind this general rule of thumb: the higher your monthly payment the faster you will pay off your loan and the less you will pay in interest costs. Conversely, the lower your monthly payment, the longer it will take and the more it will cost to pay off your loan.
If you decide to enroll in an IDR plan, you can apply online and import your tax information at the Department of Education’s website at studentloans.gov, or download a paper copy of the application from your servicer. If you’re a Navient customer, you can download the application from our website. To help borrowers, most servicers also offer an online tool to help you compare plans and payments. Your federal loan servicer can model monthly payment amounts under different IDR plans to help you decide which plan best meets your financial needs. If your objective is to secure the lowest monthly payment possible, you can also check a box on the application to enroll in the plan that offers the lowest monthly payment. (Navient has recommended ways to make the process easier for borrowers.)
Pro Tip: Make sure you pay careful attention to all directions in the application. Even a simple oversight, like a missing signature or date, can delay your application and delay you getting a lower payment.
Be sure to read part two where we cover how to enroll in IDR if you’re behind on payments, the annual recertification requirement and loan forgiveness. In the meantime, if you have questions on IDR plans, reach out to your federal student loan servicer or visit their website.
Angie Kamionka is the senior director of the Office of the Customer Advocate for Navient, a company that helps more than 12 million Americans successfully manage their student loans.