Pros and Cons of an Income-Sensitive Repayment Plan

Income-sensitive repayment

If you’ve never heard of Income-Sensitive Repayment, you’re not alone. This little-known option for student loans can offer relief if you’re struggling to keep up with your loan payments.

Income-Sensitive Repayment applies only to loans issued under the Federal Family Education Loan (FFEL) program. While it offers some great benefits, this plan also has some limitations.

If you’re interested in lowering your monthly student loan bills, read on to learn if the Income-Sensitive Repayment plan is the right solution for you.

What is Income-Sensitive Repayment?

If your monthly student loan bills are overwhelming, you could reduce them through the Income-Sensitive Repayment plan. It caps your monthly loan payments at four to 25 percent of your gross monthly income.

What’s unique about the Income-Sensitive Repayment plan is that you can choose your monthly payment. As long as you pay more than or equal to the interest accruing every month, you have the freedom to choose how much you pay.

That being said, you only have this option for five years. Since the Income-Sensitive Repayment plan doesn’t extend your repayment period, you’ll likely end up with a bigger monthly bill down the road. You would need to increase your payments later to pay off your debt by the standard 10-year deadline.

If you’re unable to increase your payments after the five years are up, you could switch to another type of income-driven repayment plan. Income-driven plans such as Income-Based Repayment and Income-Contingent Repayment extend your repayment to 20 or 25 years, resulting in smaller monthly payments.

Because it only lasts five years, the Income-Sensitive Repayment plan is typically best for borrowers who need short-term relief. With it, you’ll pay less now but shell out more in the future to pay off your debt in the usual 10-year period.

What loans are eligible for Income-Sensitive Repayment?

One reason Income-Sensitive Repayment gets overshadowed by other income-driven plans is its limited scope: It only applies to loans made under the FFEL program. These federal loans were disbursed by private lenders and guaranteed by the government. Some lenders who disbursed FFEL loans included Sallie Mae, Citi, and Wells Fargo.

Since this loan program was discontinued in 2010, more recent borrowers can’t qualify for Income-Sensitive Repayment. If your loans were issued in 2010 or earlier, you could be eligible.

FFEL program loans include the following:

  • Subsidized Federal Stafford Loans
  • Unsubsidized Federal Stafford Loans
  • FFEL PLUS Loans
  • FFEL Consolidation Loans

If you’re not sure whether you have FFEL loans, contact your loan servicer to find out.

What are the main benefits of an Income-Sensitive Repayment plan?

One major benefit of Income-Sensitive Repayment is that it applies specifically to FFEL loans. Most other income-driven plans exclude FFEL loans unless you consolidate them first.

Income-Sensitive Repayment may also be appealing to borrowers who want short-term relief while maintaining a 10-year deadline for paying off their loans. Other income-driven plans extend your loan terms to 20 or 25 years; while that offers you smaller monthly payments, you’ll have to deal with payments for many more years and pay more in interest over time.

Remember, you’ll have to start paying your loans off more aggressively after five years with Income-Sensitive Repayment. However, this plan could help borrowers who need relief now but expect their income to rise in the future.

What are the drawbacks?

Income-Sensitive Repayment may not be so useful for borrowers who need long-term relief. If you need a longer repayment term, research other income-driven plans and find out how to qualify for them.

The Income-Sensitive Repayment plan also doesn’t offer loan forgiveness. Other income-driven plans may forgive your remaining balance after 20 or 25 years of repayment.

Another downside of Income-Sensitive Repayment is that it can cause interest to build up. If you reduce your payments, you could end up paying more interest on your FFEL loans overall.

Finally, the full details of the Income-Sensitive Repayment plan may vary somewhat from lender to lender. You’ll have to work with your loan servicer to learn the exact terms of your plan.

Other repayment options to consider

As mentioned earlier, other income-driven plans are more common than Income-Sensitive Repayment. There are four income-driven plans you may qualify for:

  • Revised Pay As You Earn Repayment (REPAYE) Plan
  • Pay As You Earn Repayment (PAYE) Plan
  • Income-Based Repayment (IBR) Plan
  • Income-Contingent Repayment (ICR) Plan

To be eligible for most of these plans, you would need to consolidate your FFEL loans by taking out a Direct Consolidation Loan.

These plans lower your monthly student loan payments, but they also add years to your repayment. On these plans, you could be in student debt for 20 to 25 years.

Should you get on an Income-Sensitive Repayment plan?

If you’re burdened by FFEL loan payments, an Income-Sensitive Repayment plan could help. But make sure you understand it’s a temporary solution.

You can only lower your monthly payments for five years. If you still need relief after this time, you’ll need to consolidate your FFEL loans and switch to another income-driven plan.

Assess your situation to figure out the best option for you. If you need long-term relief, you might be better off choosing a different income-driven plan.

But if you can stick to a 10-year repayment plan, consider the Income-Sensitive option. Immediate relief on your student loan payments might be just what you need to get your finances under control and back on track.

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