The average student loan payment for borrowers is $351. If you’re a young graduate, that amount can eat up a lot of your salary, leaving little for rent, groceries, and other necessities. Many turn to income-driven repayment (IDR) plans to reduce their monthly bill and get more breathing room.
Under some plans, the government will cover a portion of the interest you owe on the loans. But that interest subsidy is not available for the entire length of your repayment. There are limitations on how long the government will help you with the cost.
Find out more about the federal interest subsidy and how it relates to IDR plans.
Income-driven repayment plans
If you can’t afford your federal student loan payments on a standard 10-year repayment plan, an income-driven repayment plan may be a smart solution. With IDR, the government looks at your discretionary income and family size to determine your monthly payment. They also extend your repayment term to 20 to 25 years, depending on your loan.
Those changes can result in a significantly lower minimum monthly payment. For borrowers struggling to make ends meet, an IDR plan can provide much-needed relief.
However, under an IDR plan, interest continues to accrue. Because the repayment term is longer, interest has more time to add up and you can end up paying thousands more over the duration of your loan.
Federal interest subsidy
Depending on your income, your monthly payment under an IDR may not be enough to pay off the accrued interest each month. This is called “negative amortization,” meaning your payments are unable to cover interest charges.
Under certain IDR plans, the government provides assistance to borrowers. Depending on which plan you’re on, they may cover all or a portion of your interest charges. That’s a huge help; defraying the interest charges can save you hundreds or even thousands of dollars.
Types of eligible loans
Only certain types of student loans are eligible for income-driven repayment plans and the interest subsidy.
Federal loans that the government distributes to students are eligible in most cases, but there are a few exceptions. FFEL PLUS Loans are only eligible if you consolidate them into a Direct Consolidation Loan.
While the Federal Perkins Loan program came to an end in September, 2017, old Perkins Loans are still eligible for income-driven repayment plans as long as you consolidate them into a DIrect Consolidation Loan first.
You cannot access the interest subsidy if you have private loans or federal loans made to parents.
IDR plans and interest
Only REPAYE, PAYE, and IBR plans are eligible for a federal interest subsidy. How much the government covers varies from plan to plan.
Revised Pay As You Earn (REPAYE)
Under a REPAYE plan, you have 20 years to repay your loans if you took them out to pay for an undergraduate program. If you borrowed money to pay for graduate school, you have 25 years to repay the debt.
But if you are on a REPAYE repayment plan and your minimum payment doesn’t cover the interest charges, the government will pay all of the interest on your subsidized loans for up to three years. After three years, they will cover 50 percent of the interest fees.
The government will pay half of the remaining interest on your loans if you have unsubsidized federal loans.
For example, if you have a subsidized loan on a REPAYE plan that accrues $40 in monthly interest but your payment only covers $25, the government will help. For the first three years, they will pay the entire $15 difference for you. After three years, they will pay half, or $7.50.
Pay As You Earn (PAYE) and Income-Based Repayment (IBR)
For both PAYE and IBR plans, you have 20 years to repay your debt. If you have loans in a PAYE or IBR plan, the federal interest subsidy works differently.
When your minimum payment does not cover all the interest that accumulates on your subsidized loans, the government will pay your interest fees for three years.
If you have unsubsidized loans, the government will not cover any of the interest fees. The lender will tack on interest charges to your balance and you will be responsible for repaying it.
Income-Contingent Repayment Plan (ICR)
For borrowers on an ICR plan, your loans are not eligible for the federal interest subsidy. When your payment does not cover the full interest charge each month, the government will add the fees to the principal balance.
Understanding your loan terms
Managing your student loans, particularly when you’re on an IDR plan, can be confusing and overwhelming. Understanding the terms of your loan and repayment plan are essential to paying off your debt.
The federal interest subsidy can provide aid to those struggling to keep up with their payments. When the government chips in for interest charges, borrowers can save money and free up more cash flow. Before choosing an IDR plan, evaluate all of your repayment options and choose one that best fits your financial situation.
For more information about IDR repayment options, see if an income-driven repayment plan is right for you.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
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1 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 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% 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 Month/Day/Year, 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 08/21/18. 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.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
3 Important Disclosures for SoFi.
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.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
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|2.47% – 5.87%1||Undergrad & Graduate||Visit Earnest|
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|2.51% – 8.03%4||Undergrad & Graduate||Visit Lendkey|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.57% – 8.17%6||Undergrad & Graduate||Visit Citizens|