Student loan debt can quickly become more than you can afford.
Going to college is an expensive endeavor, and sometimes it can create a mountain of debt. If you are struggling with student loan debt, several programs, including income-based and income-contingent repayment programs, can help you with your student loan payments. These programs can help you avoid defaulting on your loans, and the subsequent negative blemishes on your credit that such defaults create.
Income-Based and Income-Contingent Repayment Plans Explained
An income-based repayment plan sets your loan payment according to your income. If your income increases, so does your loan payment, if it is lower than the normal payment. If your income decreases, your payment can decrease as well. This ensures you can still make payments on your student loans and not create a significant burden for your finances. An income-contingent repayment plan is based on whether you have income with which to repay your student loans. Based on your income, your loan payments could decrease, or you could enter forbearance and not have to pay on your loans at all for a period of time. After a period of time, your finances are reviewed, and based on your new financial status, your repayment status will update, and you will either start repaying your loans or continue in forbearance.
Eligibility Requirements
To qualify for a income-based repayment plan, you must prove partial financial hardship. Partial financial hardship exists if the total of your annual student loan payments is greater than the difference between 15 percent of your Adjusted Gross Income and 150 percent of the federal poverty line based on your family size and state. Income-contingent repayment plans do not require proof of financial hardship because they are based on the borrower's annual income, family size, total amount owed and the interest rate. Income-contingent loans can receive a repayment extension of up to 25 years, with a longer extension decreasing the monthly required payment.
Loan Exclusions
Federal Parent PLUS loans or Federal Consolidated loans that include PLUS loans in the consolidation are not eligible for an income-based repayment plan. These loans can qualify under income-contingent repayment plans if they were entered into repayment after July 1, 2006. All other loans are eligible for both programs.
Considerations
Income-based repayment plan payments are usually lower than income-contingent payments, due to the financial hardship elements, so if you have the choice between the two plans and can only afford a smaller payment, an income-based repayment plan could work well for you. However, with either plan, the interest on your students loans will continue to accrue, so although you will have a lower payment than with a traditional 10-year repayment plan, the payments stretch over a longer period of time.
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