student loan repayment options

What are the differences between IBR and ICR repayments?

We talked quite a bit about Income based student loan repayment and Income contingent student loan repayment options in our previous articles. In this article let us take a look at the differences between the two.

The first level difference between these two programs is the underlying loans for which they are eligible.  The IBR is offered as an option to those that have had both Direct Loans as well as Federal Family Education Loans (FFEL) whereas the ICR program is only available for those with Direct Loans.  It is also important to note that in order to obtain approval to participate in the IBR program you must meet a standard of financial hardship.  This hardship is defined when the IBR calculated payment is greater than your standard payment under traditional repayment or if you are married and your combined required IBR payment is greater than your standard combined traditional payments.  This is a low standard for hardship because it in essence states that if the payment under IBR is less than your standard payment, you qualify.

With the IBR repayment program the overall debt owed in student loans is not considered as a part of the payment owed calculation.  The payment is strictly restricted to using overall family income in relation to the federal poverty level for a family of that size.  The ICR on the other hand does incorporate the total amount owed into its calculation.  This can be helpful for those with low income and it can make it so the payment is even higher than the payment under the traditional repayment plan for high income earners.  This is of course as it should be.  A high income earner with low debt should stick to the traditional repayment plan and not avail themselves of special payment programs.

In addition to the above, another primary difference to the two programs is that under ICR, if your payment is less than the accrued interest for that month, the interest is added to the principal of the loan until it reaches a 110% cap.  Under IBR the interest is not added to the principal as long as it is determined you are eligible for the program and you continue to have a financial hardship.  This is especially important when it comes to the 25 year and loan cancellation.  Should you reach the 25th year under these two special programs and the loan is canceled, you would likely be better off with the lowest unpaid balance between the two.  In order to plan for this possibility it is always best to discuss the tax implications of each plan with a tax professional.

The primary similarities between the two programs are that they are options that have been designed specifically with the low income borrower in mind.  Both plans have built in “fail safes” where if a high income earner wishes to participate, if qualified, their actual payment would be higher than if they did not participate in the program.  Both programs are not allowed under the Parent PLUS plan, and both programs do qualify for the ten year public service forgiveness program.  This is not to be confused with the 25 year cancellation pr gram that applies to both programs.  The final similarity is that under both IBR and ICR, the monthly payment for the borrower will be adjusted annually dependent upon their income and continued qualification.

What is Income Based Repayment?

Income based repayment (IBR) for student loans is just as the name implies, a repayment plan that is based on your income.  There are various types of repayment plans that are offered for each type of student loan, the income based repayment plan is primarily designed for those at a low level of income or for those that are having difficulty making their payments.  For those that are not having difficulty making payments or are at a high level of income, there are other repayment plans that they can utilize.

The IBR program that is available for federal student loans is available for the Federal Family Education Loan (FFEL) programs and all of the Direct Loan programs including the graduate PLUS program but not the parent PLUS program.  In order to qualify for this program the loan must not be currently in default.  This does not mean that it was never in default, it simply means that the payments must be current at the time of application.

How are the payment amount calculated?

The biggest factor within the IBR program is the way in which your payment is calculated.  The IBR program uses your income, your debt, and your amount owed in student loans to determine a specific payment plan given your overall financial situation.  For very low income earners, those below 150% of the federal poverty level, that select this repayment option the payment will be zero.  For those that are making more than 150% of the federal poverty level will have a payment that will be no greater than 15% of the amount of money that they make over the 150% of federal poverty level.  This payment is adjusted every year and can change relative to changes in your underlying income.

The IBR plan does allow for a consolidation analysis for those that are married and it does allow all of the federal poverty income calculations to be based on the total income for the family.  For special hardship considerations both spouses need to qualify for that hardship.  There are many factors that need to be considered when applying for the IBR plan when you are married.  The way in which you file your taxes and if you should consolidate your application or not can affect the resulting IBR payments.  It is best to seek counseling and advice of how applying under different circumstances will affect the analysis and your resulting payment.

For all loans that are issued prior to July 1, 2014 the loan will be completely discharged if the borrower makes payments within the IBR program for 25 years.  For loans issued after that date they will be discharged after IBR payment for 20 years.  When a loan is discharged it is different than if the loan is payed for you or forgiven.  Under this program if the debt is discharged or canceled it will have an impact on your taxes for the year of discharge.  For more information on how this may impact your tax return you should seek the advice of a tax professional.  You should also be prepared for ways in which this discharge may affect any other low income programs that you are qualified under.

We have talked about Student loan repayment quite a bit. Some of the articles that come to mind are the student loan employment repayment, Perkins loan repayment amongst many others. In this article, let us look at what your repayment options are when it comes to student loans. Looking at your repayment options might be especially helpful when it becomes difficult to make those loan payments and a default is staring at you in the face.

As with all types of loans it is best to work with your lender on repayment options prior to having missed any payments.  Stepping forward and not only taking responsibility for the situation but also showing the lender that you are planning ahead and are foreseeing a problem.  This shows them that you are responsible and that you intend on following through with any agreements you make.  Prior to default your repayment arrangements are made with a department within the lender that wants to work with you and is focused on customer service.  After default you are always forced to work with the lender’s collections department and the collections department is not as friendly nor are they willing to “help” in any way.  The collections department simply wants to collect payments.

The following is a brief summary of  federal student loan repayment options.  It is important to note that if you have a Perkins loan or a private loan that there are different options that relate to each of these.  To make some of the options and exceptions consult this outline:

1. Direct Loan
   1. Same as the options available for the Federal Family Education Loan (FFEL).
   2. The Exception is the Direct Loan Income Contingent Repayment Program (ICR).
   3. Public service forgiveness program is available.
2. PLUS Loan
   1. Similar options to other loans with some exceptions.
   2. Primary exception is the income based” options such as ICR and income based repayment (IBR) cannot be used with Parent PLUS loans.
   3. ICR & IBR are available to Graduate PLUS Loans.

Traditional Repayment

This is also referred to as the standard repayment plan.  This is the default plan should you fail to select another option.  Under this plan the loan can be amortized at a term between 5 and 10 years.  This is also the payment option that is automatically applied to all FFEL loans should you not respond to their request for you to select a repayment plan within 45 days of their requesting you to make a repayment plan selection.  Under this plan you will pay off the loan faster than any other available option but you will also have a payment that is higher than the other options.

Extended Repayment

This student loan payment option allows you to amortize your loan over a longer period of time than traditional options.  The extended repayment option allows the term of the loan to go up to 25 years.  It is only offered to those that owe over $30,000 in any one particular type of loan.  Borrowers that have a FFEL, a Direct Loan, or both you need to have an outstanding balance of $30,000 or more in each type of loan in which you wish to utilize the extended repayment option.

Graduated Repayment

This option is designed to be used by those that expect to have an increase in earnings over time.  The loan payment amount is increased every two years for the life of the loan.  The maximum term for a traditional graduated repayment option is ten years.  If you owe more than $30,000 and you qualify for the extended repayment option you may be able to use the graduated repayment option in conjunction with the extended repayment option.

Perkins Repayment

The Perkins loan has its own set of rules with regard to repayment.  With the Perkins loans the minimum payment is listed in the law that allows for Perkins loans.  As a result, the school that offered the loan is limited in the repayment options they can use.  There are special circumstances that qualify for special repayment treatment such as for those that are sick, unemployed, or are considered low income.  For Perkins loans it is best to seek counseling from the issuer in order to determine all of the available Perkins Loan Repayment options.

Income Based Repayment Options

There are two primary Income Base options when it comes to student loans.  The first is the Income Based Repayment option (IBR).  With this option your payment will be relative to your income.  This is particularly useful for those that have a low income.  If you are a high income earner, the resultant payment for this option can exceed the traditional repayment option.  Though it does allow a lower payment for those at a high income that also have high debts.  This option was designed for those at lower income levels.

The second income based option is the Income Contingent Repayment options (ICR).  This option is only available to Direct Loan borrowers.  Under this program your payment will never be more than 20% of the amount of income that you are earning above the federal poverty guidelines.  This program is designed for those that have a low income.  If you pay this low payment for 25 year, the remaining loan balance will be forgiven.

What is Student Loan Employer Repayment?

There are two things that people are searching for when referring to student loan repayment.  The first is the specific programs offered by employers that will pay off or pay down your student loan and the second is those that want to know the repayment options available for a borrower when they are paying off their own loans.  This page covers both of these topics.

Private Sector Employer Repayment

When it comes to employers many have incentives that they can give prospective employees in their compensation plan that includes the repayment of their student loans.  These compensation packages are common for highly competitive industries where there is a shortage of workers or where there is high competition to attract the best and the brightest.  There is no limitation on the amounts that a private sector employer can offer to a job candidate as part of their overall compensation plan.

Public Sector Employer Repayment

These programs are not limited to the private sector, in fact the federal government offers more student loan repayment programs than any other employer.  The federal program allows different federal agencies and departments to payoff or pay down the federal student loans of the individuals that they are trying to recruit.  Oftentimes this repayment is tied to a particular employment contract or commitment of service.  The maximum amount of student loan repayment that can be offered by a federal agency or department is $10,000 per year of employment up to a maximum of $60,000 for a single person.

Borrower Repayment

If you are paying the loan back yourself, as the borrower, then you should know that your first payment normally starts six months after you leave school (for graduation or other reason) or reduce your class load to less that half that of a full time student if you have a federal direct or Federal Family Educational Loan.  If you have a federal Perkins loan then your first payment will start nine months after the conditions above are met.  For private loans the time between graduation or leaving school and your first payment varies, you need to consult your lender and your loan documentation.

For graduate and professional studies students under the Federal PLUS student loan program the first payment is due 60 days after the final reimbursement for the loan is made.  Even though payment is due, the PLUS student can apply for a payment deferment as long as they are still attending school.  The loan will still continue to accrue interest, but no payment will be due until the student leaves school, graduates, or reduces class load to less than half the load that is considered full time for their particular field of study.

Repayment Strategy

There are many different strategies to payoff student loan debt.  These strategies include loan forgiveness programs such as those offered by the Peace Corps and certain occupations such as teaching as well as loan credits that are offered for working through numerous non profit agencies such as AmeriCorps.  If your strategy is to pay the loan yourself be certain to take advantage of loan consolidations and refinances that offer lower interest rates.  The key to refinancing to lower rates is that you want to make certain that you make a payment that does not extend the term of the loan.  Even if the loan refinances to a full term, you need to make a payment that will amortize that loan in a shorter period of time.

Consolidating your private student loans or any student loans for that matter can make financial sense if you get a better rate of interest and your term of the loan remains unchanged or better is reduced. This is a crucial factor in deciding if consolidating your loans is worth it and if it makes financial sense.

If however your consolidating company offers to lower your monthly payments but increase your repayment term then purely from a financial perspective this does not make it a good deal for you. You don’t know have to know much about loans to understand what this means – the longer you stretch your repayment, the more interest you pay on your loan.

For the sake of argument, let’s assume that you are hoping to consolidate $30,000 of private loans that will enter a 10-year repayment at 8.9% interest. Right now, you would be looking at 120 payments of $378.41 a month. Consolidate that $30,000 into a 20-year loan at the same interest rate, and your payment drops to $267.99 a month – a savings of $110.42 a month. I’m sure you could put that extra $110 to good use.

But here’s the catch – over 10 years, your total payments will be $45,408.36. How’s that compare to 20 years, where your total payments will be $64,318.53?

What’s the privilege of cutting your monthly payment by $110 going to cost you? $19,000. Wow, that’s the list price on a Honda Civic, a Mini or a Pontiac G5.

Make that same deal on your government loans, and you’re looking at another $15,000 in extra interest. That’s quite a lot to pay. Before you consider consolidation, take a look at your lender’s other options, including Income Contingent Repayment, extended repayment, graduated repayment, and the brand new Income-Based Repayment. Do the math, and see which of these might make the most sense for you.

Don’t be in a hurry to consolidate or consolidate for the sake of it, there are several options available to you and unless you do your due diligence, it will prove to be a very costly decision.