While millions of Americans are eligible to apply for student loan forgiveness, many more still need to pay off any remaining balance on their student debt. One option available to borrowers are income-driven repayment (IDR) plans. However, studies have shown that few borrowers use IDR even if they qualify for it. Many more never learn about the option, and borrowers who enroll in IDR plans often fail to remain in them.
If you have never heard about IDR, now is the time to familiarize yourself with this repayment option. Here’s how IDR repayments can help borrowers repay their student loans.
What Are Income-Driven Repayments?
Income-driven repayment plans are affordable payment plan options for federal student loans. Cecil Staton, CFP and president of Arch Financial Planning, said IDR plans base your monthly payment on income and household size rather than your student loan balance.
An income-driven repayment plan can help individuals and families experiencing financial hardship create low monthly payments. For those with low enough incomes or family sizes, your payment amount could be $0 per month. This keeps loans out of default. IDR plans, Staton said, also offer forgiveness options through PSLF and IDR forgiveness.
Why Don’t More Borrowers Choose Income-Driven Repayment Plans?
If borrowers could potentially lower their payment amounts to a more affordable sum, why don’t they sign up for an income-driven repayment plan? This is often due to a lack of available information.
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Dave Schiller, CFP and managing partner at Aegis Wealth Partners, said some of the factors when determining IDR eligibility include the type of loan a borrower has, the loan date, and whether a particular IDR plan requires what is called partial financial hardship. Schiller said loan servicing companies will recommend forbearance over an IDR plan.
This isn’t always a helpful option for borrowers. “Forbearance causes interest to continue accruing, which adds to the amount owed,” said Schiller.
You May Be Missing Out on the Biggest IDR Benefit
An IDR can be extremely beneficial to borrowers experiencing financial hardship or struggling to make their standard repayments. Beyond lowering their monthly payment to a manageable level, Schiller said a significant benefit of enrolling in IDR plans is the potential to receive loan forgiveness.
“Current IDR plans range in length from 20 to 25 years and any remaining debt is forgiven upon successful completion of the plan,” said Schiller. “Some borrowers may qualify for forgiveness if they work for a qualified employer and they make 120 qualified payments. The borrower should understand ahead of time whether the debt they seek to have forgiven is considered taxable or not taxable and plan accordingly.”
In the event a borrower decides to use an IDR plan to pay off student debt, remember an IDR plan requires annual recertification. Staton said many borrowers certify their payments with their prior-year tax return. Those experiencing sudden hardship may use alternative documentation of income to prove a sudden decrease in income to lower payments.
Do not forget to submit this information in a timely manner. “Remaining in an IDR plan will keep you on track towards forgiveness and help avoid your loans going into default,” said Staton.
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