Student Loan Income-Driven Repayment Programs Explained

Many student loans are based on income driven repayments – that is you don’t have a set payment based on the size of you loan, but a payment amount that varies with your income. This is designed to make sure your repayments are comfortable for you and your lifestyle, but it means that calculating your required repayments can be confusing!

What is ‘Discretionary income’?

The first confusion is that repayments aren’t based on your actual income, but your discretionary income. Theoretically, this is the income you have left over after you pay for the bare necessities, but what does that actually mean? Studentaid.ed.gov defines discretionary income as:

“For Income-Based Repayment, Pay As You Earn, and loan rehabilitation, discretionary income is the difference between your income and 150 percent of the poverty guideline for your family size and state of residence. For Income-Contingent Repayment, discretionary income is the difference between your income and 100 percent of the poverty guideline for your family size and state of residence.”

Poverty guidelines are defined by the U.S. Department of Health & Human Services and vary based on your location and family size.

Repayment Plans

There are four different income-driven repayment plans, and they all come with slightly different payments terms.

REPAYE (Revised Pay As You Earn) Plan

A REPAYE loan repayment will generally be worth 10% of your discretionary income. For an undergraduate loan this will generally take 20 years to pay off, though for a graduate loan or professional studies it can take 25 years.

PAYE (Pay As You Earn) Plan

A PAYE loan will be 10% of your discretionary income, but under this plan your will never pay more than the 10-year Standard Repayment plan. This loan will also take 20 years to pay when making minimum repayments.

IBR (Income Based Repayment) Plan

Income based repayment plans have change in the last few years. If you were a new borrower on or after July 1 2014 then your repayments are 10% of your discretionary income, and will take 20 years to repay. If you had borrowed before July 1 2014, then your repayments were 15% of your income (never more than the standard 10-year repayment rates) but would take 5years longer to pay the full amount.

ICR (Income Contingent Repayment) Plan

Income contingent repayment plans have 2 options, either 20% of your discretionary income, or the same payment as a fixed 12-year loan, adjusted for your income. You will pay on whichever rate is less and it generally takes 25 years to pay your loan.

So which is best?

Great question! Tthe answer is – how long is a piece of string? Different loan types have differing requirements, and in some cases, you can only apply if you can clearly demonstrate that regular repayment plans are outside of your affordability.

Rather than jump through a million hoops and read all the eligibility criteria statements, you can crunch the numbers a student loans calculator. Enter either your loan requirements or take an estimate based on your study length and whether you are going to private or public schooling. Once you add in your income, family size and state of residence, the calculator will return your monthly repayments, total payment over the life of the loan and let you know what type of loan you are eligible for. You should note that if you have refinanced your student loans, you are not eligible for income-driven repayment plans.

 

What Are the Benefits of Student Loan Refinancing?

After years of studying you’ve finally made it, you’ve graduated. Now you have a massive debt hanging over your head with just a few short months to find a job and get your finances in order before you have to start paying back your loans. Maybe you’ve just started paying back your loans, maybe you’ve been paying them forever. Whatever your situation, student loans are a burden everyone would like to be rid of sooner rather than later.

Typical repayments

Depending on the size of your loan and the length of it, your payments may vary wildly. Many people have multiple loans with different organizations. Different types of loans with different organizations will have different rates and repayment terms, but there are a few things you should now.

If your required monthly repayments are more than you can handle, you can apply for an income-based repayment plan to ease your budget. In the case of federal loans, you may be able to suspend payments for a short time, say if you are between jobs or on medical leave. In both cases your loans will keep accruing interest, so delaying payments may mean you end up owing more.

Refinancing your student loans

You can refinance your student loans with a new lender to improve your situation. While you might lose access to income-driven repayment plans and various federal loan forgiveness programs, you can dramatically lower the interest rates on your loans.

As a student, many people sign up for a loan without reading the fine print. Even if you did you may have noticed that the rates on a student loan are often quite high. Rates on student loans reflect the market at the time the loan was taken out, so if you took out a loan in 2007 you would be paying 6.8% interest. SoFi is currently quoting their highest rate for student loans as 6.54%, with a low of 2.615%.

Switching a 10-year loan to a private lender like SoFi could save you almost $3,500 on a $25,000, while also lowering your monthly repayments $30. Refinancing to a shorter term (e.g. 5 years) would increase your monthly payments, but save you over $7,000 on the life of the loan.

Think before you switch

While refinancing can lower your overall payments, as well as month to month payments there are risks involved. You will no longer have access to any income-driven repayment plans, meaning if you take a pay cut or are without income for a period of time, you will still have to pay your loans.

There are also programs in place such as the Public Service Loan Forgiveness Program, which will allow you to wipe the slate clean of any remaining debt after working for a qualifying public service for 10 years. Switching to a private lender removes this option.

However, if you want to pay off your loans quickly, and have no concerns about future income, switching to a private lender could be your savior. The shorter term you set, the lower the rate you can expect to be offered. Once you are free of your student loans you’ll have plenty of breathing room, and spare cash, to consider your next adventure.

Navigating the Confusing World of Student Loans

In today’s post-secondary education climate, student loans are becoming a necessity for a large number of students. While scholarships and money from jobs are enough for some, the cost of four or more years of college education continues to rise.

Luckily, student loans are available through both government-subsidized programs and from private lenders. Of the two, government loans are much more attractive than private loans. Because they are funded by the government, these loans accrue interest at much lower rates than private (for-profit) loans.

It is generally advised that an individual only uses government loans to pay for school and that private loans only be taken after all other avenues have been exhausted. Government-backed loans are taken much more often than private loans due to the better terms, and this post will be focusing on the types of government loans.

Subsidized Stafford Loans

Stafford loans are loans that are funded directly by the Federal Direct Student Loan Program but can vary significantly depending on whether they are subsidized or unsubsidized. Subsidized loans are preferable because they do not begin accruing interest (that you are responsible for) until after you graduate. However, the subsidy is not available to everyone. Generally, it is reserved for those that demonstrate financial need (reported via the required FAFSA form) and not available to those coming from incomes in excess of the $50,000-60,000 range.

While your school is ultimately responsible for determining the amount you are awarded, the program caps freshmen at $3,500 for the year, sophomores at $4,500, and each year of undergraduate studies after that at $5,500. The total amount that a borrower can take in Subsidized Stafford Loans is capped at $23,000. Interest rates on Stafford Loans are subject to change, but those loans issued between July 1,

While your school is ultimately responsible for determining the amount you are awarded, the program caps freshmen at $3,500 for the year, sophomores at $4,500, and each year of undergraduate studies after that at $5,500. The total amount that a borrower can take in Subsidized Stafford Loans is capped at $23,000. Interest rates on Stafford Loans are subject to change, but those loans issued between July 1, 2016, and July 1, 2017, typically carry a rate of 3.76%.

Unsubsidized Stafford Loans

Unsubsidized Stafford Loans are much like their subsidized counterparts, except that the borrower is responsible for paying interest that accrues while they are still in school. However, the payments are usually deferred until the student graduates. Additionally, all students are eligible for the unsubsidized Stafford, regardless of income. The loan availability amount ranges between $5,500 and $20,500 depending on income status, dependent status, student grade classification, and whether or not the student is a graduate student. Graduate students and financially independent students are eligible for larger dollar amounts per year, usually increasing slightly as their grade classification progresses. While these usually loans carry the same stated rate of 3.76% for undergraduate students, the actual amount owed will often be higher than subsidized due to the accrual of interest during the student’s tenure in school.

Stafford Loans – Grace Period

One of the most important features of federal (public) loans is the grace period. For Stafford loans, this period is six months after graduation, dropping out, or after going below half-time enrollment. Institutions may vary widely on what they consider half-time, so it is best to check at your individual institution to see what restrictions may apply. During this six-month grace period, a borrower is not required to make payments on their student loans. This allows students to find a source of income before becoming swamped with debt.

Perkins Loans

Although the Perkins Loan program will come to its end on October 1, 2017, it is still possible for a student to be awarded a Perkins loan before that date, though unlikely. Perkins Loans offered fixed interest at 5% and, like Subsidized Stafford Loans, deferred interest until leaving school. Another major feature of Perkins loans is the 9 month grace period usually attached to them.

Parent PLUS Loans

PLUS loans are loans to graduate students or to parents helping their children pay for college. The most noteworthy feature of PLUS loans is that there is no hard cap to the amount a borrower can take. Instead the cap is effectively the cost of attendance at the student’s school, if no others factors are present. PLUS loans are less preferable than Stafford loans because they have a higher interest rate. For 2017, the rate is 6.31%.

In summary, public loans are far less predatory and costly than private loans. Along these lines, the more subsidized, the better. Subsidized Stafford loans offer the lowest interest, rates and deferred interest, but have income restrictions on eligibility. Unsubsidized Stafford loans have the same low rate, but do not defer interest and have no income restrictions. Perkins loans, though on the brink of extinction, offer the next lowest interest rate and a grace period of nine months (three months longer than Stafford). PLUS loans are only available to assisting parents and graduate students and are effectively capped at the cost of attendance for a given school, however they carry the highest interest rate of public loans.

How to Make Your Case and Win Scholarships

With the ever-rising costs of college tuition, many students are reliant on scholarships to be able to go to college. This has led to increased competition for the limited number of scholarships and other financial aid. However, there are a few tricks that you can use when writing scholarship essays or responses that can substantially improve your odds for success when writing scholarship essays or responses.

Unfortunately, the prompts for scholarships can vary widely, but some of the most common are a variation of the following:

  • Where do you see yourself in 5 (10) years?
  • Explain why you are a good candidate for this scholarship.
  • How will your collegiate studies contribute to your life goals?
  • How have you demonstrated leadership (or another ability) in your life?

You may have noticed that the common theme is a probing question asking you, in one way or another, how you stand out from other candidates. The prompt is usually quite straightforward, but it is important to avoid sounding bland and falling into the same traps as other candidates. An ideal essay will highlight a candidates academic achievements, extracurricular activities, financial need (if applicable), and personal drive.

Know Your Audience

Before diving into your essay, it is critical to know to whom you are writing. If you are writing to an individual or a family, it may be beneficial to Google them and find out what they do in an attempt to relate to their experiences and it is likely that hard work or financial need are some of the most important factors to them. If they are alumni of your school, be sure to mention the school.

If you are writing to someone unnamed, it is probable that it will be a committee in the scholarship office or someone from the department that houses your major. In that case, it is usually more beneficial to talk about the school and the department, invoking the school’s motto or creed if possible (without seeming forced).

The most important rule for knowing your audience is knowing how formal or informal to be. Generally stay as formal as you can, but if the addressee is an individual that you can relate to personally, it is usually worth the risk of going informal. Remember, you have to stand out.

Avoid Typos and Unimaginative Descriptors

One of the most common mistakes that disqualify a candidate for a scholarship is poor grammar or sloppiness.

This makes sense.

Why would a committee award a scholarship to someone who didn’t take the time to proofread an essay?

It doesn’t exactly scream academic excellence. Additionally, it is generally a good rule to avoid any contractions (hence, you should replace “don’t” with “do not” and can’t with “cannot”), as they are seen as a more informal form of writing. The same holds true for weak adjectives and adverbs. Avoid using bland words like “great” and “very”, opting instead for “tremendous” or “incredibly”. Readers will feel more sincerity and stay more interested in essays that avoid weak descriptors.

At the very least, it is a good idea to write your essay in Microsoft Word or a similar program. This allows you to catch more typographical and grammatical mistakes. Additionally, if you find you have used a weak descriptor, you can right-click and select synonyms for an idea on some potentially stronger alternatives. Finally, you should have someone you know read your essay for suggestions. It can never hurt to have a fresh set of eyes look at your work.

Explain What Winning the Scholarship Would Mean to You

At the end of the day, those in charge of giving scholarships want their decisions to have positive impacts. It is usually a good idea to mention the impact that scholarship money will have on you. If a scholarship means less you have to take in student loans or relieving hardship on your parents, who are helping you pay for school, be sure to emphasize that.

Your essay should clearly demonstrate your need and gratitude to the reader. Sincere flattery can go a long way, but insincere flattery could backfire, so be sure to mean what you say and clearly articulate when telling your audience what the scholarship would mean to you.

While these steps might not apply to all prompts, they can be broadly used in almost all cases. Showing awareness, drive, and sincerity can be as important as anything else you might say in a scholarship essay and will certainly help your chances of being selected for the award.