Income-Driven Repayment Forgiveness: Is It Worth the Wait?

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Income-driven repayment (IDR) plans — which cap your monthly student loan payments at a fraction of your disposable income — have gotten a lot more popular in recent years. According to a 2018 U.S. Department of Education report, the amount of Direct student loans being repaid through an income-driven plan increased 625% between 2011 and 2015.

Besides limiting the size of your payments, income-driven plans, such as Income-Contingent Repayment and Pay As You Earn, also have a maximum term of 20 or 25 years. This means that once the term is up, you could receive full forgiveness of your remaining student loan balance.

In fact, a handful of borrowers have already done just that.

16 borrowers have received loan forgiveness from IDR

The oldest IDR plan, Income-Contingent Repayment (ICR), started in 1995, about 24 years ago. Although ICR doesn’t offer loan forgiveness until 25 years have passed, the Department of Education had already discharged loan balances for 16 borrowers as of April 2019.

At the time these borrowers received loan forgiveness, they had moved to a different plan — the Revised Pay As You Earn (REPAYE) — which forgives loans after just 20 years. Since the REPAYE program didn’t launch until December 2015, these borrowers apparently started on ICR and switched to REPAYE years later, effectively shaving five years off their repayment term.

So why have only 16 of the millions of student loan borrowers received loan forgiveness from income-driven repayment so far? Alyssa Keil, founder of financial coaching website, FinanciALLY, attributes the small numbers to the fact that income-driven repayment wasn’t well-known when it was first introduced.

“Unfortunately there just wasn’t enough education back then to inform people about the programs,” Keil said. “Sad, but I doubt we’ll start to see forgiveness solely though IDRs [on a larger scale] for another five to 10 years.”

When did income-driven plans start?

If you’ve explored income-driven plans, you know there are four main options for student loan borrowers: Income-Contingent Repayment (ICR), Income-Based Repayment (IBR), PAYE and REPAYE.

ICR probably has the least appealing terms of the four, but it’s been around the longest and is the only income-driven plan for which Parent PLUS loans are eligible (and only if you consolidate them first).

This chart shows when each plan started and when it could start forgiving loans for borrowers who signed up in the inaugural year and stayed on the same plan since.

Is loan forgiveness through an income-driven plan right for you?

Although income-driven plans promise eventual loan forgiveness, most haven’t been around long enough to start paying out yet. And while income-driven repayment forgiveness might be tempting, there are a few downsides to keep in mind before signing up for an IDR:

You’ll be in debt longer and pay a lot more interest

While these plans can be helpful for lowering your monthly bills (since they adjust your payment to 10%, 15%, or 20% of your discretionary income), they’ll also require you to be in debt for two decades or longer. And being in debt all this time means you’ll pay a lot more in interest overall.

Let’s say, for instance, you owe $30,000 at a 5.0% interest rate. On the standard 10-year plan, you’d pay $8,184 in interest. But if you extend your terms to 20 years, you could end up paying $17,517 in interest if none of it gets forgiven (which can happen — see below).

To estimate your monthly payments on Income-Based Repayment, use our income-driven plan repayment calculator. This IDR tool takes your income, family size and other factors into account to reveal what your monthly payments might be.

Your payments could increase over time

Although your payments might decrease on an IDR today, they could increase if your start making more money. And if you get married, the Department of Education might also take your spouse’s income into account when calculating your monthly payment.

So your payments could actually increase over the years to the point where you wouldn’t have anything left to forgive after 20 or 25 years. If you’re looking for loan forgiveness sooner, you might consider the Public Service Loan Forgiveness program, which discharges loans after just 10 years of working at a nonprofit or government agency.

You could also look into loan repayment assistance programs, or even consider working for a company with a student loan benefit. Although income-driven plans can be helpful for lowering your bills now, it’s hard to predict what the future will hold for your finances.

Policies could change in the years to come

With politicians taking a closer look at the student loan policies in America, these programs could change in the years to come.

The current administration, for instance, proposed replacing these plans with a single income-driven option that would forgive loans after 15 years for undergraduates but 30 years for graduate students. And candidates like Elizabeth Warren and Bernie Sanders have proposed immediate student loan forgiveness on a mass scale. Yet at the same time, some lawmakers have proposed eliminating IDR forgiveness completely.

Hopefully, any qualifying borrowers on an IDR would be grandfathered in if the programs were to change or disappear. But you never know what could happen, so it’s important to have an alternate strategy for managing your debt, just in case.

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