The burden of college tuition is a heavy one for many students, and tackling this debt can feel overwhelming. One of the options available to borrowers is income-driven student loan repayment plans. However, there are important considerations to keep in mind lest you make a costly mistake. Read on to find out what to avoid.
1. Don’t Be Undereducated About Income-Driven Repayment
Income-driven repayment plans are intensely helpful for those struggling to make their student loan payments. It is important to understand how this repayment plan option may work best for you. To make sure you are not ‘undereducated’ on the subject, here is the breakdown of what you need to know:
- What exactly is an income-driven repayment plan?Simply put, this plan is designed to match your student loan payment to your income. It is an affordable plan that helps ensure your loan payments don’t do much damage to your budget.
- Who is eligible?Any federal student loan borrower but not private loans. Additionally, you must provide proof of your income to qualify.
- What are the different plans available?There are four income-driven repayment plans to choose from: Income-Based Repayment, Pay As You Earn Repayment, Revised Pay As You Earn Repayment, and Income Contingent Repayment.
On top of this, you may be able to get your loan forgiven after a certain period of time. This is not a guarantee, but is something you can look into once you have enrolled in an income-driven repayment plan. With all this to consider, understanding the ins and outs of the process is essential to making sure you are making the best decision for your repayments.
2. Avoid the Traps of Income-Driven Repayment Programs
Income-driven repayment (IDR) programs can help ease the burden of monthly student loan payments by linking them to your income. The plans can reduce payments, stretch terms up to 20-25 years, and offer loan forgiveness. However, there are potential drawbacks as well.
- Increased Interest: The longer repayment period often results in more money paid to the loan servicer; meaning more time for interest to accumulate. If your payments don’t cover the full amount of interest each month, the remaining balance is added to your loan principal, thus increasing your total loan balance.
- Taxable Loan Forgiveness: After the repayment term ends, you may be eligible for loan forgiveness. Though you’ll be relieved of the debt, the loan balance left unpaid is considered income and may be subject to taxes.
Enrolling in an income-driven repayment program can be beneficial, but it’s important to consider the impact of these programs before enrolling. An IDR plan should be evaluated from multiple angles as one size doesn’t fit all. All aspects should be taken into account in order to select the best option to keep you from defaulting on your loan.
3. Don’t Miss Out on the Benefits of an Income-Driven Plan
Income-driven repayment plans are a great way for borrowers to get the most out of their student loan debt. These plans can lower your monthly payments, save you money over the life of the loan, and even qualify you for loan forgiveness. Don’t miss out on these key benefits:
- Lower monthly payments: Most income-driven plans can lower your student loan payments to 10-15% of your discretionary income. This helps to make your loan payment more manageable.
- Repayment terms: The repayment plan can last up to 20-25 years. The time frame depends on your loan type and payment plan. Plus, taxpayers may qualify for loan forgiveness after 20-25 years.
In addition to the repayment help, income-driven payment plans may also help you improve your credit score. Making on-time payments and paying off the loan can demonstrate responsible borrowing to credit bureaus. You may even be able to access other financing options in the future.
4. What to Do If You’ve Already Fallen Into an Income-Driven Repayment Mistake
If you’ve already stumbled into an income-driven repayment mistake, it may seem like it’s too late to make things right. But there are still options to mitigate the adverse effects of errors.
The first thing you need to do is get an understanding of the current situation: when repayment deadlines are, the current loan balance and interest, what repayment plan is currently in use, and any other pertinent information. That way, you can see the whole picture before you decide whether or not you need to take action.
Once you know where you stand, it’s time to take action. Here are a few steps you can take to undo the mistakes you’ve made:
- Check your documentation: Look through any documentation you received from your loan servicer. This can help you identify mistakes that have been made along the way.
- Make a plan: Create a repayment plan that is tailored to your specific needs, like adjusting your payment amount or switching to a different repayment plan.
- Request a Loan Review: If you find any errors in your documentation, contact your loan servicer and ask for a loan review.
By taking these steps, you can put yourself back on track and get the most out of your income-driven repayment plan.
Being aware of the common mistakes people make when using income-driven student loan repayment programs can prevent you from falling into the same traps. With the right mindset and preparation, enrolling in such programs can benefit you and help you stay on top of your student loan payments. So don’t miss out – make sure you understand and use these plans to your advantage.
