Student loan repayment plans: Your right to affordable payments

Learn more about repayment options on federal student loans.

Many people are struggling to pay back their student loans and as a result the federal government has created a number of repayment plans that many do not know about or are not utilizing. To decrease financial stress, repayments plans might be the answer to meet the obligation of paying back student loans that is affordable. One thing to remember is that these repayment plans only apply to federal loans. Unfortunately, private student loans do not have a set repayment plan. The borrower would need to go directly to the lender who provided the private loan to see if an affordable repayment plan is available. 

There are currently four repayment options for federal student loans: Income-Contingent Repayment (IRC), Income-Based Repayment (IBR), New IRB and Pay as You Earn (PAYE). 

ICR is designed to assist students who may pursue jobs with lower salaries, such as public service employment. The monthly payments are determined by income, family size, and amount borrowed. You must reapply yearly with new income and/or family size. The payments would be the lesser of the following two possibilities: 20 percent of discretionary income. Any debt remaining is forgiven after 25 years of qualifying payments. Balance forgiven will be taxed as income. 

IBR is the most widely available repayment plan and began in 2009. The monthly payments are determined by income and family size and the borrower will need to reapply yearly with new income and or family size. Any borrower who makes less than 150 percent of the poverty line pays $0. Anyone who makes more, pays 15 percent discretionary income. Any debt that remains after 25 years of qualifying payments will be forgiven as well. Again any balance forgiven will be taxed as income. 

In July 2014, the New Income-Based Repayment plan was introduced for new borrowers (as of 2014). The monthly payments are still determined by income and family size. They are adjusted annually based on income. Similar to IBR, any borrower who makes less than 150 percent of the poverty line pays $0. The only difference with this plan is that it is more generous with only using 10 percent of discretionary income. Also instead of the balance being forgiven after 25 years, the amount is forgiven after 20 years of qualifying payments. Any balance forgiven will be taxed as income. 

PAYE is the newest federal student loan repayment option available to those with newer loans. In order to qualify for PAYE, a person would have needed to borrow their first federal student loan after Oct. 1, 2007 and/or borrowed a Direct Loan or a Direct Consolidation Loan after Oct. 1, 2011. With this repayment plan the monthly payments are capped at 10 percent of discretionary income. Compared to the IBR, the payments will be two thirds less with PAYE. After 20 years of monthly payments, any remaining student loan balance is forgiven. It is 25 years for graduate loans. Any balance forgiven will be taxed as income. 

To apply for these repayment plans go online and you can apply for free. Be aware of agencies that charge to do this service for you. 

Michigan State University Extension offers a number of educational programs including programs on financial management and housing education. Visit the  MI Money Health website where there are a number of educational materials and resources available for free. 

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