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The U.S. Department of Education offers several options to student loan borrowers who cannot afford a standard 10-year repayment plan. Retention Repayment is a plan to lower monthly payments based on income and family size, and is the only available income-driven repayment plan for parents and borrowers.
Repayments that depend on income can make monthly payments more manageable for many borrowers, but that’s not the right choice for everyone. For planning, below is whether it is best for student loans.
What is income-dependent repayment?
Continued income repayments is one of five income-driven repayment plans that you can apply to lower your federal student loan payments. This plan takes into account income and family size and adjusts monthly payments accordingly.
In an income-dependent repayment plan, or ICR plan, the amount you pay is as follows:
- 20% of discretionary income.
- The amount paid on a 12-year fixed repayment plan adjusted based on your income.
The payment period under the ICR plan is 25 years. If there is the balance remaining in between, that is acceptable.
Who is eligible for income organization repayment plans?
You can qualify for an ICR plan if you have the following eligible federal student loans:
- Loans with no direct subsidies and subsidies.
- Direct integrated loans.
- Direct Plus Loan (photographed by alumni or professional students).
Additionally, you may be able to participate in an ICR plan if you first integrate non-qualified loans, including Parent Plus Loans, FFEL Program Loans, and Perkins Loans into your direct loan. However, if you have a private or federal student loan with default status, you are not eligible.
It is worth noting that continuing income repayment is the only relief plan available to parents and loan borrowers (after consolidation of eligible student loans). Other income-driven repayment plans do not accept direct consolidated loans that pay off the loan with the parent.
How to calculate repayments for income dependencies Monthly payments
For many borrowers, monthly payments under the ICR plan amount to 20% of their discretionary income.
With an ICR plan, you can calculate your discretionary income using the following formula:
Annual Income – 100% of state and family size poverty guidelines = discretionary income
Next, calculate 20% of your discretionary income to determine what your monthly payment size should be.
Payments may also change if income or family size changes. You will need to recertify your income that you plan to do every year. Additionally, ICR plans repayment periods last for 25 years, so there are many opportunities for change. However, your payment cannot exceed the amount you pay under a fixed repayment plan (based on your income) over a 12-year loan term.
Repayments vs. income-based repayments for income groups
Income-based repayment plans, or IBR plans, are another popular student loan relief option. There are several similarities between continuing income repayments and income-based repayment plans, but it is important to understand the differences when trying to figure out which option is appropriate.
| Repayment of income dependent | Revenue-based repayment | |
|---|---|---|
| Monthly payment amount | Less: 20% of your discretionary income, or what you pay on a plan with a fixed payment for 12 years (adjusted to income size) | 10% or 15% of discretionary income (depending on when you took the loan) |
| Repayment period | 25 years | 20 or 25 years (depending on when the loan was taken out) |
| Recognize your income | Every year | Every year |
| Eligible loans | Direct subsidized loans, direct subsidized loans, grade plus loans, direct integrated loans (including those that repay parents and loans, FFEL loans, and Perkins loans) | Direct subsidized loans, direct subsidized loans, grade plus loans, FFEL loans for students, direct integrated loans that do not repay the loans made to parents |
| It’s perfect for | parents | Borrower with FFEL loan |
Is a continuous income repayment plan correct for you?
An income repayment plan is one of the most common income-driven repayment options as it pays a majority of your discretionary income each month than most other plans. However, if parents are searching for low payments, the ICR plan is the only income-driven repayment plan that accepts parents and loans (once they are consolidated).
Student loan servicers can help you calculate numbers and determine which income-driven repayment plans are the most affordable, but it is wise to do research and calculations as well. Compare multiple options using the Federal Student Aid Free Loan Simulator tool.
If an income-driven repayment plan doesn’t seem to be a good idea, alternative solutions can be considered. For example, refinancing a student loan may be worth looking. Refinancing your student loan with a private lender will cost you valuable federal student loan benefits. Still, if you can qualify for a lower interest rate, it may save you money.
Conclusion
Income dependent plans require you to spend more of your discretionary income on your payments than an income-based repayment plan. But it may be the best plan to meet your needs. If you want to pay off your loan as quickly as possible and you can’t afford to buy a standard plan, continuing earnings play may make the most sense. It is also the only income-driven plan available to parents and people with loans.
