Financial Planner Q&A: Should I Use Income Based Repayment for My Student Loans?

The federal government offers a number of different ways to pay back your student loans. In this post we'll look at income based repayment plans, some of their qualification requirements and tradeoffs to consider. The offerings I'll mention here apply to government loan programs (not private loans).

How does it work?

An income based repayment plan generally works like this: You owe 15 percent of your salary and make monthly payments for 25 to 30 years. Then the loan balance is forgiven. You have to meet some criteria to initially qualify and each year you have to certify your income and family size. FinAid offers a very detailed explanation here.

Do I qualify?

Unfortunately, you won't know ahead of time whether or not you qualify. The government can change the rules at any time, so there is a level of uncertainty involved. Once you are out of college you can apply for the income based program. If you experience "partial financial hardship," then you qualify. Partial financial hardship is determined by a formula that takes your current salary into consideration, the amount of debt you owe and the number of members in your family. You can go the National Student Loan Data System website to view all your government student loans and "play" with their repayment calculators.

How do I decide whether to use income based repayment or not?

When choosing a repayment plan, that is best for you, the first thing to consider is whether or not you can afford the monthly payments. Tradeoffs between the income based plan and the standard repayment plan are as follows: Income based repayment has negative amortization. This means that because you are paying a lower amount and not covering interest, the loan balance will grow. You might end up paying considerably more over time with an income based repayment plan. You will have an outstanding loan balance for a long time and carrying debt can feel burdensome.

That said, this is a beneficial option to consider if you have a low income or high amount of student loans or both. Under this type of plan, if you work in the government or non-profit sector your loan balance can be forgiven sooner (10 years). Under current legislation public service loan forgiveness isn't taxable; however, income based repayment forgiveness for someone who doesn't work in public service will be taxed. The tax bill in that year could be substantial.

Create a strategy to pay off your debt including student loans. There are a number of options available and details that are beyond the scope of this post. Do your research and check that your loans qualify for the strategy you choose so that you are able to pay off your debt and SaveUp!

This post was written by SaveUp's personal finance contributing writer, Catherine Hawley, CFP®.