Student Loans: What You Should Know About Income Driven Repayment

While my wife and I chose the approach of aggressive student loan repayment, this isn’t the only feasible option for paying loans. Our decision was made for both our financial and mental health. The bulk of our decision came from the freedom we felt leading a debt-free life could provide. A great deal of the stress in our daily lives came from managing our debt. We decided to track our monthly food costs, eat out less regularly, cut back on unnecessary material purchases and avoid new debt (such as a car) despite an increase in salaries.  Although we chose an aggressive payment strategy, we know that’s not an option for everyone.

The alternative to refinancing a loan and aggressively tackling debt is taking advantage of government sponsored income-driven repayment plans. They allow for substantially more freedom on a month-to-month basis with uniquely manageable monthly payments. Here’s what you need to know about each of the repayment plans, how they’re structured, and which one might be best for you.

Each plan is differentiated by a couple of factors including: the monthly payment amount, the repayment period and interest benefits. While there are some additional nuances between each of the plans here are some of the basics:


Determining Monthly Payments

What should be noted is the calculation of monthly payment is determined by a percentage of discretionary income. This is the defined by U.S Department of Education as the difference between Adjusted Gross Income (AGI) and 150 percent of the U.S. Department of Health and Human Services Poverty Guideline amount for family size and state.

For the 48 contiguous states of America and the District of Columbia in 2018:

Here’s an example of calculating a monthly payment:

Given a 2-person household in one of the 48 contiguous states with an AGI of $200K. Based on the table above, discretionary income is the difference between AGI and 150% of the Poverty Guideline calculated as $200,000 – ($16,460 x 150%) or $175,310.

If repaying under REPAYE or PAYE plan, 10% of discretionary income equals $17,531 for the year or payment of $1460.92 per month. Calculations for IBR or ICR plans may be made depending on whether 15% or 20% of discretionary income. However, keep in mind these numbers will fluctuate annually depending on the number of people in the household, the Adjusted Gross Income and the published Poverty Guidelines each year.

 

Other Perks of Income-Driven Repayment

In addition to loan forgiveness at the end of a repayment term, another unique benefit of income-driven plans is related to accrued interest payments. For REPAYE, PAYE and IBR plans, if the monthly payment does not cover the full amount of accrued interest, the government pays the difference on subsidized loans for the first 3 years. For REPAYE plans specifically, the government also pays half of the difference of accrued interest on unsubsidized loans for the entire loan period. This means that if after a monthly payment the interest accrued is $2K, the government is responsible for $1K.

Because the majority of federal student loans for dentists are unsubsidized direct or PLUS loans, the interest benefits may be better in the REPAYE plan.

 

Important Considerations
  • Borrowers are required to recertify for income-driven repayment plans every single year
  • Projected loan forgiveness at the end of the total repayment term is considered TAXABLE INCOME by the Internal Revenue Service
  • Created in 2007, no person has actually had a loan forgiven under the income-driven repayment plans YET

 

What It All Means For Me

Below is an estimated breakdown of what my payment structure would look like if I were to pursue a repayment plan provided by the federal government. Higher monthly payments and short repayment periods mean less total amount paid whereas lower monthly payments and longer terms result in higher total amounts paid over the life of the loan. In our case, REPAYE would result in a higher total amount paid and less projected loan forgiveness, making this a less desirable plan.

Ultimately, there are merits to every repayment plan and strategy. Borrowers simply have to choose what they feel works best for them. We personally chose to pursue a more aggressive route of action: refinance the loan and make the highest possible monthly payments. We did so because that was the decision my wife and I felt best suited our goals.

 

What loan repayment plan are you on? How did you decide and what criteria did you use in your decision process? Comment below!

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