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.
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.