If you’re struggling to pay your student loans, Income-Based Repayment and similar income-driven plans can help. These plans can be the difference between affording your payments and defaulting on your loans.
Income-driven repayment plans adjust your monthly payments along with your income. Under these plans, your student loan bills never exceed a certain percentage of your pay.
As a result, you keep more of your paycheck for yourself and don’t have to worry about missing payments. Though income-driven plans are great for many borrowers, they also come with a few major drawbacks.
Before switching to one of these plans, make sure you understand the disadvantages. Here are five drawbacks to enrolling in the popular Income-Based Repayment plan and similar income-driven plans.
1. You’ll stay in debt longer
The government offers four income-driven repayment plans:
- Income-Based Repayment (IBR)
- Income-Contingent Repayment (ICR)
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
All of these plans cap your student loan bills at a small percentage of your income, but they also extend your repayment terms to 20 or 25 years.
You can pay less per month because you’ll be paying for a lot longer. Instead of being debt-free in the typical 10-year time frame, you’ll be dealing with student debt payments for two decades or more.
“Borrowers will be in repayment for up to 20 or 25 years, which means they will still be repaying their own student loans when their children enroll in college,” said Mark Kantrowitz, publisher of financial aid and college admissions website Cappex.
Before switching to an income-driven plan such as IBR, make sure you’re prepared to have student loan debt in your life for a long time.
2. You might pay more in interest
Like any other debt, student loans collect interest on a daily or monthly basis. The longer you have loans, the more interest you’ll accrue. If you extend your repayment terms on an income-driven repayment plan, you could end up paying a lot more in interest overall.
Let’s say you have $30,000 in student loans at a 6.80% interest rate. On a 10-year repayment plan, you’d spend $11,429 total in interest. Extend that to a 20-year repayment plan, however, and you’d end up paying $24,960 in interest.
Income-driven plans help you pay less toward your student loans in the short-term, but they also cause you to spend a lot more overall.
3. You’ll have to re-certify your repayment plan every year
To get on an income-driven repayment plan, you need to submit an application and provide proof of your income and family size. Every year, you’ll submit another application to update your information and re-certify your plan.
On the standard 10-year plan, you can pretty much set up auto-payments and forget about your loans. But with income-driven repayment, you’ll need to keep track of your documentation and apply year after year.
“One of the most significant disadvantages of income-driven repayment plans is the need for annual paperwork to remain in the programs,” said Kantrowitz.“The form is also excessively complicated.”
To maintain income-driven repayment, you’ll need to do more work than you would on another plan.
4. You could end up with higher payments
Each income-driven plan adjusts your monthly payments based on your income. As you read above, the plan will update on a yearly basis.
If you start making more money, you will end up with higher student loan payments. Fortunately, Income-Based Repayment (IBR) and Pay As You Earn (PAYE) never ask you to pay more than you would on the standard 10-year plan.
But Income-Contingent Repayment (ICR) and Revised Pay As You Earn (REPAYE) don’t place a limit on how much your student loan bills increase. If your income rises, you could end up with even higher monthly loan payments on these plans than you would have had on the standard plan.
And if you want to change to a different plan, you could see a sudden increase in your bills. “If a borrower wants to switch out of an income-driven repayment plan, there may be a cliff effect where the monthly payment increases significantly,” said Kantrowitz.
Instead of easing the burden of your student loans, ICR and REPAYE could leave you with higher bills than when you started.
5. You might get hit with a big tax bill
The four IDR plans eventually offer loan forgiveness. Depending on the plan, the government will forgive any remaining balance after 20 or 25 years of on-time payments. If you still owe money after all this time, you won’t have to keep paying it off.
That being said, you might still owe some money in taxes. Any forgiven balance is treated as taxable income. So if the government forgives a substantial debt, you could end up paying thousands of dollars in income taxes.
Before washing your hands of your student loans, prepare for the tax bill that could come your way.
Is Income-Based Repayment a good idea?
All of these Income-Based Repayment disadvantages don’t mean that getting on one of these plans is a bad idea. In fact, many borrowers reap huge benefits from adjusting their student loan bills based on their income.
If you’re struggling to make your payments or hovering near student loan default, any income-driven plan could offer the relief you need. But if you’re able to budget for your bills, it may be better to stick to the standard 10-year plan.
The decision to apply for any of the income-driven plans depends on your personal finances. If you truly can’t afford your student loan payments, the benefits of a plan like Income-Based Repayment could outweigh its disadvantages.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for SoFi.
2 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.54% APR (with Auto Pay) to 7.27% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of March 18, 2019, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 0318/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.5% effective February 10, 2019.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.54% – 7.12%3||Undergrad & Graduate|
|2.54% – 7.27%1||Undergrad & Graduate|
|2.67% – 8.96%4||Undergrad & Graduate|
|3.23% – 6.65%2||Undergrad & Graduate|
|2.69% – 7.43%5||Undergrad & Graduate|
|2.98% – 9.72%6||Undergrad & Graduate|