What is Income-Driven Loan Forgiveness?
Income-driven repayment plans allow for loan payments to be capped at a percentage of your discretionary income. This is the amount of money you have left after subtracting taxes, other mandatory fees, and essential living expenses from your income. The specific amount differs based on the plan:
– “Revised Pay as You Earn (REPAYE)” plan: Payments are capped at 10% of discretionary income.
– “Pay as You Earn (PAYE)” plan: Payments are capped at 10% of discretionary income and will never exceed the monthly payment under the standard repayment plan over 10 years.
– “Income-Based Repayment (IBR)” plan: Payments are capped at 10% of discretionary income and cannot exceed the amount due under a standard plan for borrowers who first took out a loan after July 1, 2014. Payments are capped at 15% of discretionary income for those who borrowed before that date, but they still cannot exceed the amount due in the standard plan.
– “Income-Contingent Repayment (ICR)” plan: Payments are capped at the lesser of 20% of discretionary income or the amount due in a 12-year fixed payment plan based on income.
It’s important to consider the pros and cons of different plans before choosing one. You want to ensure that the plan helps you repay your student loans rather than increasing your debt instead.
How to Obtain Income-Driven Loan Forgiveness
You must take several key steps to be eligible for loan forgiveness under an income-driven repayment plan:
– Apply for an income-driven repayment plan through StudentAid.gov or directly from your loan servicer.
– Provide the required information, including family size and marital status, which are used to determine your eligibility for an income-driven repayment plan and calculate your monthly payments.
– Make the required monthly payments for the necessary number of years.
– Recertify your eligibility and income each year, even if nothing has changed.
This forbearance period counts toward the number of required payments if your loan payments are frozen due to financial hardship. These months also count toward the time needed for forgiveness if your payment is set to $0 for some months based on your available income.
What Can Exclude My Loan From Forgiveness?
You must recertify your eligibility and income each year while on an income-driven repayment plan. The consequences of failing to do so differ by plan. You will be removed and placed on an alternative plan if you are on the REPAYE plan. Your monthly payments will increase to the amount you would owe under a standard 10-year repayment plan if you are on PAYE, IBR, or ICR plans.
Failure to recertify also means that any unpaid interest will be added to your loan balance. This process is known as capitalization. You will pay interest on this newly increased principal in the future, increasing the total cost of your loan over time.
Leaving (or removing) an income-driven repayment program also means that your payment may significantly increase, and you will not be eligible for forgiveness unless you return to an income-driven repayment program.
You may be eligible for forgiveness for any remaining loan balance after 10 years of payments on an income-driven repayment plan if you are also working toward forgiveness under the Public Service Loan Forgiveness (PSLF) program.
Income-Driven Forgiveness vs. Public Service Forgiveness
Public service loans are an alternative to forgiveness under an income-driven repayment plan. They are similar in some ways, but there are key differences:
– Income-driven forgiveness: includes eligible loan types such as subsidized and unsubsidized direct loans, PLUS loans for graduate and professional students, consolidated federal family education loans, Perkins loans, and Parent PLUS loans that were consolidated into a direct consolidated loan (ICR only).
– Public service forgiveness: includes direct loans, federal family education loans, and federally funded Perkins loans that were consolidated into a direct consolidated loan.
– Standard repayment plan: can be any income-driven repayment plan.
– Employment requirements: there are no work-related requirements. You must work full-time for a qualified public service organization: government, school district, non-profit organization, public hospital.
– Forgiveness timeline: 20 to 25 years of repayment, depending on your plan.
You can qualify for forgiveness of your loans in half the time (or less) compared to forgiveness based on participation in an income-driven repayment plan, if you remain eligible for public service forgiveness. Payments made while on an income-driven repayment plan will count toward forgiveness under income-driven forgiveness if you do not remain eligible for public service forgiveness, possibly because you moved from local government work to the private sector.
Source: https://www.thebalancemoney.com/income-driven-repayment-plan-loan-forgiveness-5112527
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