If you take out student loans, you’ll be asked to start repaying them once you graduate from college. This is a daunting task for most graduates. Thankfully, there’s a six-month grace period before you’ll have to start making these payments after graduation. This gives you time to hopefully, find a job and a place to live and settle into your new, adult life before you have to start paying back your loans.
If you’re reading this while you’re still in school, good for you! You don’t have to wait until you graduate to start paying off your student loans, and the sooner you start, the better.
Whether you’re a student trying to get an early start on repayment, or a recent graduate preparing for the next steps, here are some tips on figuring out your repayment plan.
Not all student repayment plans are the same.
Unless you log in to your account and enroll in one of the various repayment plans that are available, you may be stuck with a massive monthly payment. It could easily be more than you can afford since your first job out of school is probably an entry-level position.
That’s why there are payment plans designed to help you out. One of the most widely used plans and the one we’ll focus on is the income-based repayment plan.
How income-based student loan repayment works.
The basic idea behind Income-Based Student Loan Repayment is simple. The payments are scaled according to your income. The repayment plan will automatically scale your payments up over time, operating on the assumption that your pay will increase. In ten years, your loan will be paid in full.
The main benefit here is that the payments start off fairly low since the assumption is you’ll begin with an entry-level job. Over time, they’ll increase considerably to ensure that you can still pay off the loan in ten years.
Typical loan repayments use the exact same monthly payment throughout the life of the loan. This is often easier to budget for, and it has the advantage that, as time goes on and your pay increases, the monthly loan payment becomes less and less of a burden.
For most student loan borrowers, though, the benefits of the lower payments right now outweigh the cost of rising payments as time goes on.
How much will I pay on an Income-Based Repayment Plan?
The Income Based Repayment plan sets your monthly payment amount to 10% of your discretionary income. It stays at that percentage unless that amount would exceed the monthly payment in the standard 10-year repayment plan.
What is my discretionary income?
Good question! Discretionary income is defined differently, depending on who you’re talking to, so the Department of Education has come up with its own definition for the purposes of student loan repayment.
Your discretionary income is the difference between your annual income and 150% of the poverty guideline for your family size and the state you live in.
So, let’s say you’re single and you earn $50,000 per year.
If the poverty line in your state for a single adult is set at $20,000 per year, then your discretionary income would be $30,000. 10% of that is $3000, which means your monthly payment on your student loans would be $250.
Will my payment ever increase?
If your income increases, your payment will increase as well. Since the payment is based on your income, it can change from year to year. Each year, you will need to recertify your annual income for your loan servicer, so they can ensure your payment is still accurate.
If your income changes before the annual recertification deadline, you don’t have to wait. If you lose your job or if you have a child, you can recertify your income immediately to lower your payment or enter forbearance.
Takeaway.
Income-based repayment is a great way to pay back your student loans without placing too much of a financial burden on yourself. It provides a lot of flexibility and is generally a very affordable method of payment for most borrowers.