Income-driven repayment plans can be great resources for federal student loan borrowers. While these plans won’t necessarily help you pay off debt faster, the cap on monthly payments can ease the pain when your student loan payment is too high.
However, income-driven repayment plans may not be very helpful to those who make over a certain income. If your income is too high to qualify for such a plan, you can still lower your payments, as we will explore below.
Even high earners need help with student loans; some of the highest-earning degrees also come with the highest price tags. This chart highlights just how expensive some high-earning degrees can get:
Average Student Loan Balance By Graduate Degree (2015-2016)
|Medical doctorate (M.D.)||$246,000|
|Health science doctorate||$202,400|
|Master of Arts (M.A.)||$72,800|
|Master of Science (M.S.)||$62,300|
|Other master’s degrees||$75,100|
Source: The National Center for Education Statistics
If you’re a high earner, you might still be able to take advantage of income-driven repayment plans. These plans usually base monthly payments on a percentage of your discretionary income, which varies depending on the plan. There are four federal student loan repayment plans:
- Revised Pay As You Earn Repayment (REPAYE)
- Pay As You Earn Repayment (PAYE)
- Income-Based Repayment (IBR)
- Income-Contingent Repayment (ICR)
Anyone with federal student loans — except for parent borrowers — can use the REPAYE plan and Direct Plus parent borrowers can use the ICR plan if loans are consolidated; payments are based on your income and family size. However, with both plans, if your income is high, you may end up paying more each month than you would on the 10-year Standard Repayment Plan.
Payments for the PAYE and the IBR plans are also based on your income and family size. However, to qualify for these plans your monthly payment must be lower than the payment you would make with the 10-year Standard Repayment Plan. If it’s not, you won’t be eligible and will need to pay the 10-year-plan amount.
If these repayment plans don’t allow you to lower your student loan payments, read on to learn about another option.
When you can’t lower your monthly payments via income-driven repayment plans, refinancing might be your best bet. But proceed with caution, since refinancing with a private lender means you’ll forfeit access to some beneficial federal programs, including income-driven repayment and forgiveness. Refinancing, however, might offer you a chance to consolidate multiple loans, as well as possibly receive a lower interest rate from your lender. A lower rate coupled with a longer repayment plan could result in a much lower monthly bill.
Of course, you’re not obligated to extend your payment plan. If your refinanced interest rate is low enough, you could get a lower monthly payment without extending your repayment timeline. That means paying less per month while ensuring that you don’t stay in debt longer.
You can explore the option to refinance student loans with little risk to your credit score. That’s because many student loan refinancing lenders show you rates and repayment terms you might qualify for without pulling a hard inquiry. Collect a few of these offers from various lenders and then apply for your best offer.
Applying for student loan refinancing
Completing a refinancing application is fairly painless. You’ll provide information the lender asks for, such as income and employment information.
You’ll choose between a fixed and variable interest rate, plus the number of years you’ll take to repay your loan. When your new loan is approved, it will pay off your old student loans.
When shopping around for refinancing loan offers, check to see if the lenders provide deferment or forbearance options. Navy Federal Credit Union, for example, offers these options if you run into financial trouble.
With student loan repayment plans, income caps help borrowers manage high monthly payments. But if you’ve wondered, “What is the threshold for student loan repayments?” and found that even income-based repayment plans leave you with high monthly costs, look into refinancing to reduce your bill. Refinancing may allow you to bring your monthly payments down to a level you can handle, no matter your income.
Katie Gustafson contributed to this report.