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Understanding Income-Driven Repayment Plans

Income-driven repayment plans are designed to help federal student loan borrowers who are struggling to manage the standard repayment plan. These plans adjust your monthly payment based on your income, family size, and state of residence.

How Income-Driven Repayment Plans Work

Income-driven repayment plans allow you to set your monthly student loan payment to an amount that you can afford based on your earnings. Depending on the plan, your monthly payment will be 10%, 15%, or 20% of your discretionary income, which is calculated based on your household income, family size, and state of residence. These plans also extend your repayment term from 10 years to 20 or 25 years. If you still have a balance at the end of your repayment period, the remainder will be forgiven.

Types of Income-Driven Repayment Plans

There are four main types of income-driven repayment plans available for federal loan borrowers:

• Income-Based Repayment (IBR): Caps payments at 10% of your discretionary income if you received your loan before July 1, 2014, with forgiveness after 20 years. For loans received on or after that date, the payment is 15% of your discretionary income with forgiveness after 25 years.
• Pay As You Earn (PAYE): Reduces your monthly payments to 10% of your discretionary income and offers forgiveness after 20 years of repayment. Your payment will never exceed the 10-year standard repayment plan amount.
• Saving on a Valuable Education (SAVE) Plan: Formerly the Revised Pay As You Earn (REPAYE) plan, this plan sets your monthly payments at 10% of your discretionary income (5% starting July 2024). The repayment term is 20 years for undergraduate loans and 25 years for graduate loans.
• Income-Contingent Repayment (ICR): Your monthly payment will be the lesser of 20% of your discretionary income or the amount you’d pay on a fixed 12-year repayment plan, adjusted according to your income. The repayment term is extended to 25 years.

Pros and Cons of Income-Driven Repayment Plans

Income-driven repayment plans can provide relief for struggling borrowers, but they also have drawbacks. Here are some pros and cons to consider:

Pros

• Immediate relief from financial hardship.
• Helps avoid default, which can negatively impact your credit history.
• Potential for loan forgiveness after the repayment term.

Cons

• Annual recertification of income and family size is required.
• More interest paid over time due to lower monthly payments.
• Not all borrowers may qualify for the desired plan.

How to Apply for Income-Driven Repayment

If you’re considering applying for an income-driven repayment plan, follow these steps:

1. Contact your loan servicer to discuss your situation and get advice on the best plan for you.
2. Visit the Federal Student Aid website to apply online or download the paper application form.
3. Provide your personal information, including name, Social Security number, address, and contact details.
4. Choose a plan or request that your loan servicer put you on the plan with the lowest monthly payment.
5. Share information about your family size, marital status, and spouse’s details if applicable.
6. Submit income documentation, such as a pay stub, tax return, or tax transcript.
7. Complete the application and submit it to your loan servicer.

Remember, if you have multiple federal loan servicers, you’ll need to submit a separate application to each one. You’ll also need to resubmit this application annually to avoid potential issues.

Continue Making On-Time Payments to Build Your Credit Score

Regardless of whether you choose an income-driven repayment plan, it’s crucial to make your student loan payments on time each month. Late payments can negatively impact your credit score. As you make payments and take other steps to build your credit, consider using a credit monitoring service to track your progress and address any issues that arise.

For any mortgage-related needs, feel free to call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your financial journey with confidence.

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